Restoring American Finacial Stability Act of 2010 - Motion To Proceed - Continued

Floor Speech

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Mr. MERKLEY. Madam President, I thank the chairman of the Banking Committee for the time to address an issue that I think is essential in this bill and for all of the good work he has done to bring this reform bill to the floor of the Senate.

It is time that we have an open debate on the floor of the Senate about provisions that affect the financial foundations of our entire economy. I know the chairman has been working hard. We held the vote yesterday to try to proceed with an open debate. We will hold another vote today and one tomorrow to say let's have this conversation about reforming Wall Street.

Today, I wish to address a particular point, which is limiting the ability of high-risk investments to blow up our economy.

My colleague and friend, Senator Levin, did a monumental service to this institution today by holding a hearing with the executives of the large investment firm Goldman Sachs, discussing practices that misled clients and bundled huge risks into our financial system.

The SEC currently has an investigation underway. The courts will determine the merit of that case. But today I want to address what the SEC could not charge Goldman Sachs with: they could not charge them with the clear conflict of interest for holding a financial stake in a position completely opposite to the very security that they themselves put together and were selling to their clients. The reason the SEC could not address this issue is because there is currently no law that says such a conflict of interest is unacceptable.

This gets to the heart of what is wrong on Wall Street today. The executives at Goldman Sachs are insisting up and down that they were not making high-risk bets themselves; instead, they were only ``market makers'' underwriting these deals. Well, no matter how often someone repeats something, that doesn't make it so. As others have said, facts are stubborn.

Goldman was holding positions for its own benefit--large positions. They were betting the market would go one way or another. But that is not making a market, where you bring buyers and sellers together; that is proprietary trading, plain and simple.

Proprietary trading, or high-risk investing, cost investment firms and commercial banks billions of dollars in losses because they bet big on housing securities, and the bets went bad. Those losses were eventually covered, in large part, by the taxpayers through TARP. This isn't a side issue to the financial meltdown; it is a core issue. That is why we need to begin debate on Wall Street reform right now. We cannot let Goldman and other firms continue to pretend they weren't placing high-risk bets. We cannot let financial firms continue to get away with selling bad products to unsuspecting clients while betting against those products.

This issue goes to the heart of the integrity of the system, and integrity is essential for folks who have capital and want to put that capital at risk. They need to know they have a fair market into which they can invest that capital. This goes right to the core of the role of Wall Street in aggregating capital and allocating that capital to the places where it would have the highest return.

The bill before us is a very good bill. I think we can make it even stronger by including an amendment that Senator Levin and I have sponsored on high-risk investments and conflicts of interest. But to consider that amendment, we have to begin the debate; and that debate should begin now.

Let's not let lobbyists confuse the issue. They will try to argue that high-stakes investing was not implicated in this crisis, or that the sky will fall if we move high-risk investing outside of the banking system--I am talking about those banks that take insured deposits and make loans--but that is not the case.

I wish to read from a letter sent to me and Senator Carl Levin by John Reed. John Reed is former chairman and CEO of Citigroup. He speaks to those false arguments. This is what he wrote:

I write to support your efforts to rein in the high risk activities that helped cause the collapse of the world's financial system. The recent financial crisis demonstrated all too clearly the twenty year deregulatory experiment in combining critical commercial banking with equally critical, but riskier investment banking, failed.

In 2007 and 2008, losses from risky proprietary trades in the major financial firms quickly decimated the availability of credit and seriously damaged the economy far beyond the concrete canyons where those bets were made.

When a firm is focused on market gain through proprietary trading, it too often will employ every available device to achieve those gains--including taking advantage of clients and putting the firm at risk. As recent cases in the media demonstrate, risk management and conflicts of interest systems do not alone accomplish those goals.

John Reed, the former chairman and CEO of Citigroup, concludes with this:

I strongly support your efforts to put the provisions that Chairman Paul Volcker has advocated firmly into law. I believe that the PROP Trading Act (S. 3098) and your proposed Floor amendment based on that does that. The legislation provides reasonable exceptions for client-oriented services while including the necessary safeguards to protect against the dangers of high-risk assets and high-risk trading strategies. Putting these restrictions firmly into law will be good for our economy and good for our financial services industry--even though they may now argue to the contrary. Refocusing our financial firms on client services will help them restore the global leadership position that has been seriously undermined by the recent crisis.

Certainly, we need many other important reforms, including creating a strong consumer protection agency, imposing the duty of care to customers on financial providers, and reestablishing a well-regulated market for derivatives. But a strong Volcker Rule is one of the most important provisions to prevent ``too big to fail'' financial institutions, stop conflicts of interest, and support credit in our economy.

Madam President, I ask unanimous consent that the entire letter from John Reed be printed in the Record.

There being no objection, the material was ordered to be printed in the Record

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Mr. MERKLEY. Madam President, it is very helpful to have a former CEO of a company such as Citigroup weigh in on the challenges before us. John Reed, as former chairman and CEO of Citigroup, is in a position to reflect on the deregulation and the combination of the roles of lending banks and investment houses and how it contributed to creating the economic catastrophe that became the great recession.

I speak now to my colleagues to say that we need your help in creating a firewall between highly risky proprietary investments and the basic lending functions of banks. It is like storing fireworks in your living room. Fireworks are wonderful, and there is no problem with utilizing them on the Fourth of July or New Years. But you don't store them in your living room where they might end up burning down your house.

Second, we need clear conflict of interest rules that make sure that the investment houses maintain integrity with their customers, so that if they are promoting a security to their customers, they are not doing so while separately and secretly betting against it. These reforms are important. They are an important part of the financial rules of the road that will be healthy for Wall Street and for the foundation of our economy.

I yield the floor.

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