Ending Too Big To Fail

Floor Speech

BREAK IN TRANSCRIPT

Mr. WARNER. Mr. President, I also rise to discuss financial reform and, to be blunt, to try to set the record straight about some misleading statements that have been made on this floor about both the process and the substance of the bill that the Banking Committee reported out recently.

Under Chairman Dodd's leadership and working with ranking minority member Senator Shelby, I have worked hard, since coming to the Senate, to understand the root causes of the crisis we are only now beginning to emerge from economically but to recognize that we have to have a robust solution in place to make sure we are never again confronted with the type of crisis and the lack of preparation this Nation faced back in the fall of 2008.

I also come to this body, as you know, as someone who spent an awful lot of time around the capital markets. Quite candidly, I will put my free market, procapitalist credentials up against anybody's in this body. But I come to the floor as well as someone who has tried to recognize that the financial crisis--perhaps more than any other issue we have addressed--doesn't have a Democratic or a Republican root of origin, nor does it have a partisan solution set. We have to recognize that, perhaps on this piece of legislation more than ever, we have to have a bipartisan basis to establish a long-term financial framework for the next hundred years.

I am very proud of the fact that we have worked so far in a bipartisan way. I have particularly appreciated, over the last year, the partnership I have built with Senator

CORKER of Tennessee, where we both recognize that while we both have backgrounds in business and both have experience and exposure to the capital markets, there is a great deal of complexity in trying to rewrite the financial rules in the sense that it will be not only for this country but because the rest of the world will follow what America does, for the whole world. So it will require a great deal of humility and a recognition that we have more to learn.

Because of that, Senator Corker and I, starting early in 2009, began holding a series of seminars, in fact, where we brought in established financial leaders and invited members of both parties to come and learn with us as we tried to put in place rules and regulations governing the financial system. While I have been disappointed, particularly by the Republican leader's comments yesterday, I am not naive. I still believe there is a path to a bipartisan bill. What we need to do is to simply lower the rhetoric and do what is needed for the American people.

Let's put in place a robust set of rules and a robust regime of reform that will ensure that never again will the American taxpayer have to bail out firms that are too big to fail. While there were differences that we had on how we approached health care reform, this is one area where--whether it is a liberal blogger group or a tea party convention--there is a unanimity of opinion that never again should the taxpayers be put at risk because of the financial interconnectedness of large firms.

Soon, the Senate will consider the bill Chairman Dodd has put together. While there are bits and pieces that different folks will disagree with, this is a strong bill that vastly improves regulation and the structure of our financial markets. Let me repeat that Senator Dodd has put together a strong bill. One part of the bill Senator Corker and I have been particularly engaged in deals with systemic risk in ending the notion of too big to fail. That was the subject yesterday of some wildly inaccurate statements on this floor, which I am here to address.

I have to admit I am deeply invested in this section, and that investment comes in no small part because of the months of work Senator Corker and I put into this area. Let me acknowledge at the front end that there are parts of this section that both Senator Corker and I will want to change and amend. Those changes and amendments we would probably reach agreement on in perhaps 5 or 10 minutes, but the basic structure we set up is one I believe will lead to meaningful financial reform.

Now, let's go to what we are talking about. We recognized at the outset that never again could we allow the financial system and the interconnectedness of this financial system to come to the brink of crisis and, in effect, the regulatory system and the legal system have no recourse and rules on how we deal with an impending crisis.

One of the things we recognized at the outset was that in the past there was very little collaboration and coordination between different regulators. You might have a Prudential supervisor who is looking at the depository institution and having one view of an institution; and you might have the regulator looking at the bank holding structure and having another view. Because these complex institutions may also have security aspects, the SEC is over here. But there was no coordinated place where this collaborative view, beyond the stovepipes and beyond the silos, could all come together and recognize that while the institution's single actions in a single sector might not pose a systemic risk, that in toto these risks, when aggregated together, put our financial system in jeopardy.

So what do we propose? Along with Senator Corker and experts from the industry, we propose creating a Systemic Risk Council that would, in effect, be the early warning system for our overall financial system to spot these large, systematically important institutions and, in effect, put some speed bumps in their path.

I may not even agree with some of the Members of my own side of the aisle that we ought to go out proactively and break up these institutions just because they are too large. Size, in and of itself, was not the problem. It was the interconnectedness of their activities and the fact that if you started to pull on the string of some of these activities, the effect that had basically collapsed the whole house of cards. It was not size alone, it was interconnectedness and recognizing how to spot that interconnectedness at the front end, and putting some speed bumps on these systemically large institutions that is important.

One of the things we found was that oftentimes the regulators did not have current, real-time data on the extent of these transactions and this interconnectedness. So a part of the bill that has received very little attention is the creation of the Office of Financial Research, which will aggregate, on a daily basis, all the status of transactions of all these institutions and allow us to have at least the transparency at the regulator level to know what is going on and allow the regulators never again to say: Well, the last piece of data we had was the last quarterly report. This information will flow up to the Systemic Risk Council, and the Systemic Risk Council will then be able to put in place what I call speed bumps on these systematically large institutions.

Increase capital. One of the questions that comes back time and again from financial experts, we need to increase the capital reserve levels of many of these large institutions. We have to look at their liquidity ability. In many cases the institutions that failed during the crisis were not insolvent but there was a rush because of fear in the system and the liquidity crisis this caused, so how do we be sure we use liquidity in a better way?

Leverage, traditional additional financial institutions--I look at our neighbors in Canada, about a 20-to-1 leverage ratio. We saw on some of the off-balance sheet operations not 10- or 20-to-1 traditional ratios, but 50- or 100-to-1 leverage ratios.

We put in place as well something that has been advocated by folks at New York Fed--it originally comes out of the University of Chicago--a whole new set of financial structure in these large institutions that will convert to equity in the precursor, before a crisis takes place. In effect, shareholders will be diluted by this contingent capital requirement, putting again more pressure on management not to make undue risks.

We believe these speed bumps, while they may not prevent any future crisis, will be huge impediments to these large systemically risky institutions taking undue risks and outrageous actions.

We have also put a new requirement in place, one that again has not gotten a lot of review. We will literally require the management of these large institutions to put in place their own funeral plans, their own plans on how they will unwind their institutions through an orderly bankruptcy process.

I believe there were large systemically important institutions in the fall of 2008 that in effect came to the regulators and in effect said we are so big and interconnected that we do not know how to unwind ourselves.

Never again should we allow that to happen. We allow the regulators to work, and in effect bless the funeral plans these systemically large institutions will put in place.

We think we have put in place these appropriate barriers that will restrict some of the unduly risky activities from these large institutions, but you cannot predict and cannot foresee every crisis. So what we need to do is set a framework on how we would address the crisis if these speed bumps and this early warning system does not fully function. I do not, actually, candidly, completely agree with my colleague from Delaware. I do believe we need a strong, robust bankruptcy process that gives predictability to investors so they know what will happen through the normal dissolution of a firm that has made mistakes in the marketplace. We need to ensure that bankruptcy becomes the normal default process. Again, as I mentioned, having these large firms write their own funeral plans, write their own bankruptcy plans that have to be approved by the regulators, will give us guidance on that path.

But we also have to realize when there may be a management team that does not see the handwriting on the wall or when a firm is, even with all of these checks, falling into the potential of its failure causing systemic risk, we still have to have the ability to act.

Let me state very clearly, the resolution process that was put in the Dodd bill, no rational management team would ever elect to choose because resolution will not lead to conservatorship, resolution will lead to receivership and extermination of the firm. The firm's common share equity will be wiped out, the firm's management will be wiped out--resolution will never be chosen as a preferred route. Bankruptcy will be the preferred route.

Even in that case, we still put additional protections in place so that no future administration, having seen the blowback from the public on using resolution in 2008--I cannot imagine any future administration actually wanting to use this mechanism, but to ensure, again--Senator Corker and I spent a great deal of time on this--that we have, again, protections so resolution is not misused, we put very strict criteria in before it can be implemented. We require three keys, in effect, to be turned simultaneously--in effect the nuclear option analogy of different keys being turned before this tool could be used.

We require the Chair of the Federal Reserve, the FDIC, and the Treasury Secretary in consultation with the President to all agree that we have to act, to move a firm into resolution rather than going through bankruptcy.

But that, again, is not all. Senator Corker, I think rightfully, pointed out that we need, in case there were an overly aggressive administration, a judicial check as well. So we put an additional judicial check in place before resolution could be implemented--resolution only as the last resort, only as a path that makes sure that the parts of this systemically important firm can be transferred to some other existing entity, not preserved. The firm will be wiped out, but the functions that are important do not bring down the overall financial system.

One of the most curious comments of the Republican leader yesterday was the critique that, if you invoke resolution, the question becomes where is the money going to come from and who is going to pay for it? What I found very curious in the Republican leader's comments yesterday was that we--and this was by no means set in stone--put in place a $50 billion fund that would be prefunded by the industry; not the $150 billion that was in the House bill that could rightfully create moral hazard, but in effect a dollar amount up front. It could go down lower. That would basically keep the lights on at these institutions until the FDIC could go out and, in effect, borrow against the unencumbered assets of this firm to get the real dollars in place to keep the resolution process going in an appropriately functioning way.

Is $50 billion the right number? It may not be. Reasonable people can disagree; $25 billion might be the right number. There might be other paths. Senator Corker and I worked on the notion of a trust that could be created. But what I find curious is no one in the financial sector that we have spoken to thinks this dollar amount is a bailout. No one in the financial sector has said this will be an adequate amount of capital to resolve a whole crisis. The funding to resolve the whole crisis will come from the ability we give the FDIC to borrow against the unencumbered assets.

If there is a better way to get there, we are all for it. At least I can say for my side, I am willing to look at any other option. But what I find curious is, I believe if we had not put up this industry prefunded amount, in effect a bridge until we can actually get the FDIC process in place, we would hear criticisms, at least from some, saying not putting up any industry prefunding would allow taxpayer exposure. One of the things we want to make sure is that taxpayers, again, are never, ever exposed to the kind of risk that took place in 2008.

I would also add that whatever these prefunds, trust instruments, or even the funding that would come from borrowing against the unencumbered assets, we need to buy a little time so it is not done in a haphazard way so any of these funds will be ultimately recouped after the crisis from the industry based on those institutions that benefited, those institutions that also were part of the causation.

Again, let me stress all of these funds, whatever will be repaid--and again whatever funds that are invested in these institutions in the interim will not go in, as what happened in 2008, as common equity as an effort to, in effect, prop up the systemically important firms. But it will go in as, in effect, top in the creditor process, debtor-in-possession financing.

Did we get this perfect? No, perhaps not. There are ways, again, that we can improve. But the framework we put in place, the almost uniform response we have received, has been we have taken a gigantic step toward ending too big to fail in a rational, thoughtful approach.

I see my colleague, the Senator from Tennessee, has arrived on the floor. I again compliment him for his work, for the fact both of us said at the outset for neither of us was this religion. We just need to get it right. If we have to ruffle a few feathers on both sides of the aisle so that never again are the American taxpayers put in the position they were in 2008, then so be it.

I appreciate the good work of the Senator from Tennessee on this effort. I appreciate our working together on the preference toward bankruptcy, on the recognition that we have to have that judicial check, that we cannot go out and grab firms willy-nilly that are not depository, that are systemically important. I think we have taken giant steps forward.

I ask my colleagues from both sides of the aisle to lower the rhetoric a bit, to recognize this can and still should be a place where this Senate can work in a bipartisan fashion to put in place a set of rules so we can, with the appropriate speed bumps in our financial system for those firms that are systemically important--that we do put in financial rules of the road for the 21st century, that we do allow America to continue to be the financial capital of the world and the innovation in financial products capital of the world. I think we can still get there.

I look forward to work not only with my friend from Tennessee but colleagues from both sides of the aisle to get it right.

I yield the floor.

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