Wall Street Reform And Consumer Protection Act Of 2009

Floor Speech

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Mr. LUCAS. Madam Chair, this amendment will most certainly not help those who it is designed to help. It will drive up the cost of loans, limit the number of loans that can be made, raise interest rates, and increase opportunities for abuse in the bankruptcy system.

I want to focus the House on another important problem that has not been discussed: how the bankruptcy laws and the accounting rules and treatments combine to do potentially substantial and lasting damage to the financial system.

Under existing accounting rules, any bankruptcy loss may be considered an indication of impairment. The term that is used by accountants is ``other than temporarily impaired,'' or ``OTTI.'' I want to make sure that the House understands the consequences of this problem in the real world. Even if a company took a small bankruptcy loss on one of the residential mortgage-backed securities, RMBS, that it owns, the amount of loss that would be recognized in that company's income statement is a full writedown to deeply depressed market values, not just the amount deemed to be a bankruptcy. Any loss of principal, current or future, requires this treatment no matter what term is used to describe the loss. If a judge can adjust principal, then a significant detrimental impact to the company will automatically follow.

The House must clearly understand that the losses which would be recognized by financial institutions in this situation are far greater than the amount of the bankruptcy losses. Any RMBS holder will have to record these losses in the same manner, and so the threat of bankruptcy ``cramdowns'' casts a huge shadow across the entire financial services industry. For example, if a company owns $5 million in RMBS with a current market value of $2,500,000, and there is a bankruptcy loss per the judge of $50,000 economic loss to the preferred RMBS traunch, the required financial statement loss under existing accounting rules would be $2,500,000. In this example, accounting rules require booking the financial statement loss at 50 times the actual economic loss.

This is a stark, but true, statement of the horrific impact that existing accounting rules are likely to have on the financial services industry in the event this legislation becomes law. It would only take a few of these kinds of losses to destroy the current year operating positions of any company and greatly impact its overall capital position.

This means that the cramdown amendment the House considers today carries with it a virus that threatens to consume significant parts of the financial services industry, particularly any company that is a significant holder of RMBS. The majority either does not understand, or has chosen not to deal with, this significant and looming problem. Likewise, there is a lack of understanding about the major role that accounting rules and treatments play in it, I earnestly hope that our colleagues in the other body will address this issue squarely, and understand that cramdown without accounting reform and strict limitations on the discretion of bankruptcy judges has the potential to create significant and unanticipated collateral damage to our financial system, as well as loss of credibility with financial services industry customers and widespread negative ratings from all rating agencies.

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