Emergency Economic Stabilization Act of 2008

Floor Speech

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Mr. NEAL of Massachusetts. Madam Speaker, I rise today in support of the Emergency Economic Stabilization Act of 2008. I want to applaud the work of my friend, Chairman BARNEY FRANK, in negotiating this agreement on behalf of the House. Compared with the proposal of a week ago from the Bush administration, this agreement has much improved.

I have already heard from a number of my constituents this morning who oppose the bill and I understand their opposition. I think it is clear that we are not done with this matter. There is more to do, and even under this bill, Congress will revisit the agreement in 5 years to determine whether the taxpayers are due some repayment from the industry saved by this bailout.

At this time, though, it is important that we proceed forward with this limited authority, which is only provided with substantial oversight. It is an appropriate balance and that is why I will support the bill.

But as I said, there is more to be done. John F. Kennedy said that victory has a thousand fathers, but defeat is an orphan. It is true that no one has stepped forward to claim responsibility for the economic quandary we find ourselves in. But if we simply look back to the last time the financial services industry teetered on the brink of disaster, we can see roots that lead to the crisis we confront today.

A decade ago, Long Term Capital Management, a billion-dollar hedge fund lost half its value due to sour derivative contracts and the Federal Reserve Chairman had to arrange a bailout. Complexity is the name of the game in the derivatives market, and that fact has not changed over the last decade. Derivatives are financial products with a value derived from an underlying asset, such as a stock or commodity. The accounting and tax rules regarding these products, though, are anything but clear and that part of the game has also not changed over the last decade.

I am concerned about one section of the bill we are considering today which would grant the SEC authority to suspend mark-to-market accounting. This accounting rule requires companies to declare the market value of assets. With financial products, this may differ from the purchase price. Plus, the value might be hard to determine until the contract expires some time in the future. However, in valuing derivatives, I believe it is important that there be transparency in the market, and mark-to-market accounting is probably the closest to the actual value and is therefore, an essential tool for investors. Think of it this way: if someone asked you for a loan and their only asset is their house which could be sold for $100,000, would you care that they had paid $200,000 for it a year ago?

Should we care about accounting rules for derivatives? Well, clearly yes. It would be easy to assume regulators are taking care of these issues, but recent events show us that is not the case. It would be easy for us to dismiss the threat of derivatives since only sophisticated investors hold them, but as Warren Buffet warned in 2002, "Derivates are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.''

In March, the Ways and Means Subcommittee on Select Revenue Measures, which I chair, held a hearing on the taxation of derivatives. At that hearing, I referred to the threat of AIG directly as one reason our hearing was timely. AIG had just the week before devalued its holdings by $5 billion because of one complex derivative--the credit default swap. I asked the Treasury Department, which appeared before my subcommittee that day, what guidance we might expect on the appropriate tax treatment of credit default swaps, since in their absence, investors were free to choose whatever seemed most convenient. Treasury said it was still under review.

Taxpayers and investors need clarity in the market with respect to these complex products. While some may blame mark-to-market accounting for the problems of individual companies, it merely exposed that these companies were holding worthless paper. And I believe news like that is better known earlier rather than later, and to all investors, not just insiders.

The global market for derivatives exceeds $500 trillion in notional value, according to the Bank for International Settlements. Hedging risks via derivatives is a normal practice of businesses, but the "Wild West'' trading in these products must be addressed by regulation and transparency. Of course, all businesses would prefer to choose whichever accounting method makes them look the most profitable to investors and the least profitable to the IRS. But we need consistent rules and a system of valuing businesses which is fair to investors, regulators, and the tax collector.

A decade ago, I stood on the floor lamenting the near-crisis that Long Term Capital Management had created. I chastised Congress for ignoring the request of the regulator, CFTC, which had asked for more oversight over derivatives. Since then, we have seen Enron collapse and now our current crisis. Will things be different this time? I certainly hope that is the case. But changing the accounting rules mid-game, I believe, is a move in the wrong direction. I hope that the SEC will take the long view on this and study the issue before reversing any current accounting rules meant to provide greater transparency.

In 1999, I filed legislation to strengthen the constructive ownership rules so that investors in a hedge fund via a derivative could not avoid current taxation on income earned. This legislation was directly aimed at Long Term Capital Management and based on legislation my colleague and friend Representative Barbara Kennelly had previously filed. In 2002, I filed legislation to end the game of corporations betting on their own stock via derivatives. The Tax Code does not allow corporations to claim gains or losses when trading in its own stock, but that provision can be avoided through derivative transactions. This year, I filed legislation to require current taxation on prepaid forward contracts, as investors had been taking the position that no taxation was appropriate until the end of the contract, which could be 30 years hence.

I will continue my efforts to bring transparency to these products and to end the tax game on derivatives. Further, this bill affords us the opportunity to implement a regulatory structure that will result in a healthier market. On both fronts, I hope we will see action.

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