Restoring American Finacial Stability Act of 2010

Floor Speech

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Mr. MERKLEY. Mr. President, I am honored to rise to address the Volcker amendment, which I am pleased to be able to cosponsor with my colleague and friend who is now presiding over the Senate. I thank Senator Levin for the outstanding job he has done in shining the light on the need for financial reform through his Permanent Subcommittee on Investigations.

I also wish to thank Senator Dodd for shepherding this important financial reform and bringing such a significant and solid bill to the floor of the Senate, and I thank him for working with several of us to strengthen the approach proposed in the Volcker amendment. I look forward to having a chance to present that on the floor and appreciate very much Senator Dodd's support.

The goal of our financial system is to efficiently aggregate and allocate capital. That is sometimes done through banks that make loans, and that is sometimes done through pools of investors who put their money together and ask managers to find the highest return.

But these two functions of lending and high-risk investing, although both critical to the capital system of aggregating and allocating our dollars, are in fact very different. This Volcker amendment is all about creating the right balance between these two so they work collectively to make a more efficient, stronger financial system rather than working at odds with each other.

This bill has three components. The first is to get high-risk trading out of our banks on which families and small businesses depend. The second is to establish higher capital requirements for high-risk investing or hedge funds. The third is to eliminate conflicts of interest, conflicts of interest that have proceeded to undermine the integrity of our securities system.

I want to try to give kind of an analogy so we can all get our hands around these functions; that is, to try to imagine you are collecting fireworks. Fireworks are a wonderful thing, and you might want to have them for the Fourth of July or for New Year's. But you do not store them in your living room because, if they were to accidentally go off, you would burn down your house. The fireworks in this example is your high-risk investing, and your living room represents the lending depository banks that power up our economy by making their loans in our communities to our businesses and our families.

To continue that analogy, you would want those fireworks stored not only not in your living room but not in any of the bedrooms of your house or any of the other rooms. You would want them stored out in your shed, in this case outside the bank holding company, so if the high-risk investments do explode or go down you don't burn down your house. This leads to the second part of the Volcker amendment which says, while you are storing them in your shed, you should make it more fire resistant. Maybe that means putting in a sprinkler system or some other system. That is the second part. But the third part is to say those who design and sell the fireworks should not simultaneously be developing and designing fuses designed to fail and then taking bets that the fireworks would go off prematurely. This is a conflict-of-interest issue on which recent hearings have shined such a bright light.

Turning, then, to this high-risk trading and the challenges it presented to our financial system, what I am putting up right now is a chart that shows the impact of high-risk trading on the meltdown that occurred in 2008 and 2009. We have Lehman Brothers that lost $30 billion in trading; Merrill Lynch lost $20 billion in trading; Morgan Stanley over $10 billion; JPMorgan Chase over $10 billion, Goldman Sachs over $4 billion, and Bank of America over $7 billion. High-risk trading primarily on mortgage securities and derivatives of those securities blew a hole through almost every major Wall Street financial investment institution.

I do not think anyone should, in light of these facts, be able to say that high-risk investing has nothing to do with the current crisis. It has pretty much everything to do with it, and that is why the Government stepped in to provide financial relief to these firms--huge amounts of money. Lehman Brothers went down because we didn't step in to assist them. Merrill Lynch basically was saved by being purchased by Bank of America which had a tremendous bailout; that is, $45 billion. Morgan Stanley got $10 billion in TARP funds; JPMorgan Chase, $25 billion; Goldman Sachs, $10 billion; and, of course, the list goes on.

This high-risk investing does not belong in our lending depository institutions. A bank that has access to the discount window of the Fed, a bank that has access to insured deposits, deposits insured by Uncle Sam, that bank should not be diverting those funds into the temptation of high-risk investing. Similarly, they should not be proceeding to allow the high-risk investing to blow up the lending side of a financial organization.

The risk of an investment house going down is certainly higher during a recession. It is very high in a severe recession. That is just the time we need banks to be able to continue lending, to not let lending seize up.

I can tell you, back home in Oregon business after business has come forward and said: Our credit line was cut in half or we went to refinance a commercial loan and the bank said we will not do it because the value has dropped or we can't make any more loans in that sector or perhaps we can't make any more loans at all because we have reached our leverage limits.

Lending seized up in America, and it is a key factor in prolonging this recession. These are the reasons that, if you want to have high-risk investing with the money from pools of investors--that is an important part of the capital allocation but do it at a safe distance from the lending depository function.

The second piece of this--and back to my analogy that this is when you put the high-risk investing in the woodshed--is that you also make the woodshed more resilient, and that is enabling the regulators to say that as an investment house becomes more systemically significant those regulators
can raise or will raise the capital requirements necessary so that the leverage decreases as the firms become larger. This greatly reduces the chance that an investment house will go down during a recession or go down because of bad loans because they are putting up more capital against those investments.

I want to come to the third part, the conflict-of-interest provisions. They will also be addressed at greater length by my colleague. By the way, I ask unanimous consent Senator Levin be allowed to follow directly behind me.

The PRESIDING OFFICER. Is there objection? Without objection, it is so ordered.

Mr. MERKLEY. Mr. President, he will elaborate on these provisions, but I want to put up my third chart because at the hearings my colleague had focused attention on a real challenge. Through those hearings some have observed that Goldman Sachs has become an ``iconic image of bankers with conflicts of interest.'' Let me try to again address that.

If you are selling fireworks, you should not be in the business of designing bad fuses to put on those fireworks and then betting the fireworks will go off accidentally or, as another person has put it, if you are selling cars, you should not be selling cars without brakes and taking out insurance on the owners. That fundamentally undermines the integrity of the market, whether it is the fireworks market or car market. But those are analogies for our financial market.

Integrity is so important. International capital flows to systems with integrity. It was after the Great Depression that we established reforms on Wall Street that led to decades in which the international community saw the American markets as the best organized, best policed safe place--no scams or minimal scams--that they could put their money.

We want Wall Street to be able to continue to attract and aggregate and allocate that capital. That is an essential function.

I note that this group of three commonsense reforms on this chart, going back to these three pieces--getting the high-risk trading out of the banks, increasing the capital requirements for investment firms that become systemically significant, and ending the conflicts of interest in securities--these commonsense reforms have a lot of support.

In addition to Senator Levin, I thank 15 cosponsors who have jumped in to join this effort: Senator Brown, Senator Kaufman, Senator Shaheen, Senator Feinstein, Senator Casey, Senator Bill Nelson, Senator Burris, Senator Begich, Senator Inouye, Senator Whitehouse, Senator McCaskill, Senator Mark Udall, Senator Mikulski, Senator Sanders, and Senator Tom Udall. I encourage my colleagues on both sides of the aisle to consider jumping in to support these commonsense reforms.

I note also that the supporters for this amendment include Paul Volcker; they include John Reed, the former chair and CEO of Citibank; they include the Independent Community Bankers of America, who recognize that community banks do better if the Wall Street system has integrity in allocating capital. The Main Street Alliance of Small Businesses supports this amendment, the AFL/CIO supports it,

Americans for Financial Reform, and a dozen other organizations.

I also note that a group has solicited support online. Here I have 25,000 individuals from across the country, all 50 States, who sent this petition to the Senate. This is from the Progressive Change Campaign Committee, and these 25,000 citizens say:

The big Wall Street banks gambled away our money on a reckless housing bubble and then insisted we spend more money bailing them out. We need you to support the Merkley-Levin proposal to end this risky gambling and other conflicts of interest.

I conclude by saying we have a responsibility, following this great recession we are in now, to redesign the rules of the road for Wall Street, to increase integrity, to increase transparency, to decrease the conflicts of interest, and to make it work in the most efficient possible way. It is with that spirit these three commonsense proposals have been laid out.

It has been a privilege to partner with the Presiding Officer, Senator CARL LEVIN, in this effort.

I yield the floor. I suggest the absence of a quorum.

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