Restoring American Financial Stability Act of 2010

Floor Speech

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Mr. WARNER. Mr. President, I wasn't planning on speaking today, but I have had the opportunity to preside for the last couple of hours. I heard my friend from Arizona earlier today make some comments about the financial reform bill. I rise to address them.

Before doing so, I commend the Presiding Officer for his comments this afternoon, comments with which I may not fully agree, but he makes a very persuasive and interesting case about how we get this right. Clearly, we have to make sure our goal is setting rules and regulations that will stand the test of time. We have to make sure we end the notion of too big to fail.

I know the approach of the Presiding Officer is to look at size. I think the committee's approach, which I share, is to look at interconnectedness, to give regulators the ability to unwind organizations if they can't prove they have a rational way to be unwound through a bankruptcy process.

Reasonable people can disagree, but we absolutely agree on the goal: making sure the American taxpayer never has to hear ``too big to fail,'' particularly too big to fail where the American taxpayer has to pay the bill.

I thank the Presiding Officer for his comments. I know the debate will continue.

Earlier today, my friend, the Senator from Arizona, spoke on the bill. As somebody who has been involved in portions of this bill for a number of months, the Senator from Arizona and I share common goals. We want to make sure that taxpayers are not exposed, that we end bailouts, and that we put rules of the road in place for the 21st century for the financial system. My hope is that in some of the workings between Chairman Dodd and Senator Shelby, they will find common agreement on titles Senator Corker and I worked on, where they might improve the initial draft.

What I hear time and again from all of our colleagues is a commonality of goals. My hope is that at the end of the day we will have legislation that has broad bipartisan support.

Let me go back to my colleague from Arizona. He had a strong preference for bankruptcy. His concern was that bankruptcy in every case can take care of every financial institution's unwinding, that bankruptcy provided predictability. He mentioned in passing a new concept called speedy bankruptcy and cited certain scholarly articles on it, speedy bankruptcy that had some portion of a certain aspect of the capital structure that would convert certain debt into equity in the event of this process. He made the comment that even having resolution in the process would always lead to bailouts. I respectfully disagree and want to take a moment to further explicate what Chairman Dodd's bill does in terms of how he approached these same issues in a bipartisan way.

First, we believe the default option should always be bankruptcy. Bankruptcy is a clear and established set of rules. It gives creditors, equity holders a predictability about what happens in the event of a firm getting into trouble, getting into potential insolvency, and gives a path toward going out of business. But what we have seen at least to date is that bankruptcy sometimes is neither speedy nor, at least in its current form, always able to take care of enormously large, complex financial institutions.

I believe it was at the end of last week that there was a story in either the New York Times or the Wall Street Journal that pointed out that the Lehmann bankruptcy process is still ongoing, with fees in excess of $400 or $500 million being charged to try to unwind this firm.

One of the things I have heard is, if a firm goes into bankruptcy, there are these dollars that will still be needed to unwind the firm in an orderly process. Those of us who drafted the bill said that this unwinding process, if we are going to use resolution instead of bankruptcy, should be prefunded by the financial industry itself, which would benefit. My colleagues believe that perhaps it would be better if the Treasury or some other institution borrows money that then is repaid from the financial industry itself. Again, reasonable people can disagree whether we prefund or postfund, but the facts remain. The unwinding of any firm takes time and resources. At the end of the day, we have to make sure the taxpayer is protected. That is Point No. 1.

Point No. 2. I agree with my colleague from Arizona when he says that a new tool we could use for these large, systemically important firms to make sure there was a price for them getting too large and there was an ability to make sure they could be unwound in a regular process would be the creation of a new form of debt in the capital structure, debt that, in the event of a crisis, would convert into equity, dilute existing shareholders--be, in effect, a check on management because they would also be diluted in this event.

I urge my colleague from Arizona to recognize that we have put that into the bill already. We have created a convertible debt component that all of the systemically important firms would have to build into their capital structure and, in effect, would allow this to be triggered even prior to a crisis point.

So rather than being used only at the moment of crisis, it could actually be used as a speed bump in advance as one of the early signs of a crisis coming.

Again, it is one of the reasons why we have created a Systemic Risk Council that allows for higher capital requirements, focused on leverage, focused on better risk management plans, putting this new contingent debt structure within the overall capital structure of the institution. And there are the funeral plans, or the plans where we are asking, again, for these large institutions to outline how they will unwind themselves through a bankruptcy process.

That process has to be approved by the regulators. It is a process whereby if the regulators do not approve it, they could actually come to the conclusion that there is no way to unwind this firm during bankruptcy and, consequently, they could actually do what the Presiding Officer requires and say: This firm then, consequently, has to be downsized--or certainly their international operations have to be split off or spun off because there is no appropriate way to unwind this firm in the event of a bankruptcy process. So again, I think the goal of my colleague from Arizona of making sure there is an orderly, planned approach through bankruptcy to unwind these large firms is in place. So we agree there.

The fact that there is the creation of this new debt structure within these large firms--that would be debt that would convert to equity--that is in the bill, and actually it is even better than what my friend, the Senator from Arizona, has proposed because it could be triggered even before a crisis.

Where I guess I differ from my colleague, the Senator from Arizona, is that while he and I strongly believe in the bankruptcy process and the preference toward bankruptcy, we believe that in certain extraordinary cases--and if we have done our job, hopefully, extraordinary cases that rarely, if ever, may happen--you still have to have an ability to have a resolution authority.

Why is this the case? Well, as we saw in the crisis in 2008, there were times when perhaps the balance of the industry realized that the firm was rapidly falling into insolvency, but as the firm went down this path toward insolvency, the management of the firm refused to recognize that, consequently potentially putting not only the firm in jeopardy but because of the fact that if that firm, in effect, fell fully insolvent, it could actually threaten the whole safety of the system.

So after conversations with folks from across the political spectrum, we thought in these extraordinary times there needs to be this kind of trigger of last resort in terms of using a resolution process. It is a resolution process to put appropriate guardians in place, requiring the Treasury, the head of the FDIC, the head of the Fed, to all act in concert, to put a judicial check in place so, again, no future administration might overuse this power.

As Senator Boxer's amendment will further reaffirm, resolution will mean the firm will go out of business, that equity will be toast, management will be toast, the unsecured creditors will be toast. This will be an effective death panel for a financial institution.

As my colleague, the Senator from Arizona, has pointed out, at least if a firm chooses bankruptcy, they may emerge on the other side, out of the bankruptcy process, at least semiwhole. If you go into resolution, you are not coming out the other end. This will be like: Once you check in, you never check out. Your firm is going out of business. There may be parts of that firm, because they are systemically important--a clearing process, or some other systemically important part of this institution--that may have to be redeposited elsewhere. And it has to be done in an orderly process. But the firm, as it was priorly construed, will no longer exist. Never again will we do what we did in 2008, where the American taxpayer came in and shored up these firms in their current status. Resolution will never be chosen by any rational management team or any rational group of shareholders.

I hope my friends, who want to make sure we end bailouts, who want to make sure we have an orderly process, will, again, recognize--and there may be ways to improve upon it--we have put together a bill that has a strong preference toward bankruptcy, that puts in place the requirement that the regulators have to bless this bankruptcy plan, no matter how complex you are, and if you cannot get that blessing then maybe parts of your institution need to be spun off in advance. We have already adopted the component of contingent debt that would convert into equity. Again, that threat of converting even in advance of a crisis will be a check on a management team that wants to take undue risk.

There will be no existing shareholders who will want to be faced with what could be significant dilution even in advance of a crisis if the Systemic Risk Council said: Hold on here, you have now gone over that tripwire. You are going to get converted. You are going to get diluted. Again, it is another check on the management team.

I do believe we have created a strong framework. But to ignore the fact that, as we saw in 2008, there may be times when either a management team fails to read the handwriting on the wall and declare bankruptcy or the crisis comes perhaps because of not even management malfeasance but because of a coordinated cyberattack or some other kind of catastrophic event that puts in jeopardy the system--to say never, ever could there be a time when we need an orderly resolution process to maintain the safety and soundness of the overall financial system, I believe, would be shortsighted.

I look forward to continuing to work with colleagues on both sides of the aisle to try to get this right in the coming weeks. I commend the chairman and the ranking member, Senator Shelby. I hope they are having those conversations even as we speak. I look forward to continuing the conversation with the Presiding Officer on how we, again, can prevent these kinds of actions from even taking place in the first place. How do we deal with his approach of actually downsizing these institutions with bright-line rules or our approach that tries to look, perhaps, more at the interconnectedness but still grants that ability to the Systemic Risk Council if there is no way for an institution to demonstrate how it will unwind itself through bankruptcy?

Again, reasonable folks can disagree. But none of us should disagree with the ultimate goal: ending too big to fail, making sure we no longer have even the potential of taxpayer exposure, trying to bring more transparency and fairness to this financial system, and, again, as the Presiding Officer and I have talked about before, making sure whatever comes out of this Chamber can stand the test of time so we can give the market the predictability it craves but also the security to the American people that we built ``financial rules of the road'' for the 21st century that will truly work.

With that, Mr. President, I yield the floor.

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