Restoring American Financial Stability Act of 2010

Floor Speech

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Mr. CORNYN. Madam President, I want to speak on the underlying bill, particularly on the Sessions amendment to the bill, but let me just precede that with some more general comments.

I was very concerned when I read in the most recent publication of National Affairs comments from the inspector general of TARP--appointed to oversee that program that has now gotten completely out of control. More to the point, he says what has happened since September of 2008 is that we have seen further consolidation of the banking industry. Actually, he has said what has happened is that things have actually gotten worse as a result of the several mergers that have actually made banks larger. The implicit guarantee of moral hazard that we are not going to let these large institutions fail has contributed to them engaging in more and more risky conduct.

The problem with too big to fail and these large institutions, particularly large banks with assets of over $100 billion, is that they can actually borrow money cheaper than community banks in Texas or New York or Connecticut or elsewhere, and they actually represent a $34 billion subsidy to the largest 18 banks in America because this bill does nothing to eliminate the concept of too big to fail. Indeed, in many ways, it makes it worse. It institutionalizes the concept.

I want to address specifically the provisions in the Dodd bill--the underlying bill--which have to do with how we deal with these large financial institutions if they get into trouble. The underlying bill empowers the Federal Deposit Insurance Corporation--which previously has had no experience dealing with investment banks or other companies that engage in financial transactions, other than depository banks--to seize a vast range of financial companies based on nothing more than their impression that the institution is in ``danger of default.''

Of course, we know one of the reasons we have gotten into this mess--why Wall Street has gotten into the shape it has gotten into--is because either regulators were too close to the people they were supposed to regulate or they were asleep at the switch. If we empower the Federal Deposit Insurance Corporation now to take on this new role as megaregulator in the resolution authority, it literally is going to have to run these businesses--something they are not prepared to do, something they have never done before. It will actually encourage management at the institutions that are subject to this new expanded authority of the FDIC to foster stronger relationships with the regulators, further entangling the government with the fabric of the U.S. private sector.

This underlying legislation creates a resolution scheme for large complex financial institutions that allows the FDIC to serve in multiple capacities at once--as corporate management, as creditor to the corporation, and referee of the liquidation process. There is no question that in the underlying bill there are going to be enormous conflicts of interest on the part of the government agency itself when it is required to wear this many hats at the same time.

The underlying bill also provides the government--and here specifically the FDIC--the authority to discriminate among creditors of the same class. All we have to do is look at what happened when the Federal Government took over General Motors, where we saw the government's $15 billion gift to labor unions to the disadvantage of the bond holders. This is the same sort of abuse that is propagated and continued in the underlying resolution authority in the bill which needs to be fixed. It needs to be changed.

This underlying legislation also forces companies that are financially sound and that have done nothing wrong to contribute to a fund to bail out organizations and institutions--I should say companies--that have been irresponsible and done exactly the wrong thing.

I must say I really wonder why we are rushing through this legislation so fast when the very commission that Congress has created to report back to us--the Financial Crisis Inquiry Commission--is not supposed to report until December. So in the very complex and complicated area such as financial regulatory reform, we are going to be denied the very report that Congress commissioned, which is due in December, that will tell us, hopefully, how to get this done and get it done right.

I think it is a terrible mistake for us to give the FDIC this incredible authority and discretion which will just alter the relationship again between the private sector and government. We have seen a tendency over the last year and a half to grow government and to basically burden the private sector in ways that cause many people to wonder whether we are still committed to a free enterprise system or whether we are going to have one government takeover after another. This legislation--particularly this resolution authority--represents something that will provide for more government intervention in the private sector without making sure ``too big to fail' comes to an end.

AMENDMENT NO. 3832

I want to talk specifically about the Sessions amendment, as I said, because the Sessions amendment restores the rule of law to the resolution authority that would be granted under this bill. Under American bankruptcy law, we have an adversarial process. We have judges who are independent, we have a requirement that when you walk into bankruptcy court you actually have to swear under oath, under the penalty of perjury, that what you are saying is the truth, the whole truth, and nothing but the truth, so help you God.

I don't know why we should allow these big financial institutions that are covered by the resolution authority under the underlying bill a special set of rules. Why shouldn't they be forced to operate under the same rules--bankruptcy rules--that apply to every business that gets into financial trouble all across America today? Many scholars and policy analysts have argued convincingly that bankruptcy reform would be the most effective action Congress could take to protect against future financial panics and bailouts.

There is one note I would make of the Lehman Brothers bankruptcy. As the Chair and my colleagues know, there was a voluminous report written by the court-appointed examiner who dissected the Lehman Brothers bankruptcy for reasons why Lehman Brothers failed. This is a 2,209-page examiner's report which documents accounting gimmicks that were used to hide the extent of Lehman's indebtedness, which was not even known to the Securities and Exchange Commission because the Securities and Exchange Commission took the position it didn't have jurisdiction to do this very sort of regulation and very sort of oversight that might have detected and prevented the meltdown of Lehman Brothers and all across Wall Street.

Amazingly, Richard Fuld, chief executive of Lehman Brothers, when he was confronted with the examiner's report documenting the various maneuvers, including one known as Repo 105 transactions, said he had no knowledge of the accounting maneuvers that were used to take some of the financial obligations of Lehman Brothers off its books.

So I would ask my colleagues: Don't we want this sort of transparency and accountability that comes only out of a bankruptcy-type resolution authority? Don't we want that kind of information so we can hold the people who were responsible for these huge meltdowns of our financial system accountable? I would say we must insist on that kind of accountability. Unfortunately, under the authority given to the FDIC to conduct this resolution in the Dodd bill, there will be no sort of report by court-appointed examiners such as the one that exposed Lehman Brothers' accounting gimmicks and the complete abdication of responsibility of the chief executive officer for not knowing what kind of accounting transactions were taking place and which hid a lot of their liabilities not only from him but also from examiners. We would not have that kind of information.

That is another reason I believe bankruptcy provides a far superior way of handling this resolution rather than giving the FDIC--a sort of FDIC on steroids--the power to make these decisions without the kind of transparency and accountability we need.

Recently, in the Wall Street Journal, a couple of professors wrote:

If there were a silver bullet in financial reform, legislation would have been enacted a long time ago. There isn't, but removing the special treatment of derivatives in bankruptcy comes close. It could provide the basis for a sensible compromise on derivatives regulation while also addressing the bailout problem.

That is exactly what the Sessions amendment does. With a small tweak of bankruptcy law, we could assure that everyone is going to have to play by the same rules, and when any financial institution goes bankrupt the automatic stay, which protects the court's jurisdiction to be able to sort out the creditors and debtors, can be used in an appropriate way to deal with derivatives contracts. Currently, derivatives contracts are exempted from the automatic stay, which creates a very dangerous risk of a run on the bankrupt entity's derivatives book. This could lead to a cascade effect, exacerbating systemic risk. The Sessions amendments provides for timely court supervision over any stay on derivatives contracts. Other than that, the Bankruptcy Code would apply as it does every day in bankruptcy courts across this country involving businesses both large and small.

So I think the Sessions amendment provides much more transparency, much greater accountability, much more certainty, and certainly helps restore the rule of law to an otherwise discretionary authority over a Federal agency that has never exercised this kind of authority before, one that has the very real danger of perpetuating the kind of picking of winners and losers that we saw in the GM bankruptcy where the bondholders, who were supposed to be among the most secure creditors, if not the most secure, were forced to take a significant loss in favor of unions, which happened to be more active players in the political process.

So I would urge my colleagues to support the Sessions amendment, which makes bankruptcy a preferable alternative to dealing with future failures of financial institutions.

Madam President, I yield the floor.

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