PAUL WELLSTONE MENTAL HEALTH AND ADDICTION EQUITY ACT OF 2008 -- (Senate - October 01, 2008)
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Mr. SPECTER. Mr. President, I am supporting this Federal economic aid legislation because the failure of Congress to take some decisive, substantial, action would run the risk of dire consequences to U.S. and world markets. The 777 point plunge in the Dow plunge on Tuesday, in the wake of the House's rejection of this legislation, demonstrates the potential for even greater problems if Congress does nothing.
My affirmative vote is made with substantial misgivings. It is a very unpopular vote, evidenced by constituents' calls and letters and personal contacts overwhelmingly against the plan. It is understandable that the American taxpayers are opposed to footing the bill for unwise speculation on Wall Street and federal officials who failed in the regulatory process. Congress should follow the teachings of Edmund Burke, the greatest philosopher, who said in 1774 that, in a representative democracy, elected officials should consider their constituents' views, but in the final analysis they owe their constituents their independent judgment as to what should be done.
From the outset, I cautioned against Congress's rushing to judgment. When the initial proposal was made, I wrote to Majority Leader HARRY REID and Republican Leader MITCH McCONNELL by letter dated September 21, 2008, urging we take the time necessary to get the legislation right. By letter dated September 23, 2008, I wrote to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke asking a series of questions which have not yet been answered. Then by letter dated September 27, 2008, accompanied by a floor statement, I made a series of suggestions to the executive and legislative negotiators. Again, there has been insufficient time for a reply.
The rush to judgment began in mid-September when Treasury Secretary Henry Paulson and Federal Reserve Chairman Bernanke warned of an imminent meltdown in financial markets which would threaten retirement funds, jeopardize the jobs of millions of Americans, and subject homeowners to more evictions. A few days later Secretary Paulson issued a three page economic rescue plan which has since grown to a 112-page bill before additional provisions were added.
Whenever we deviate from regular order which has been developed during more than 200 years of serving our country very well, we are on thin ice. On regular order, the legislative process customarily begins with a bill which members of Congress can study and analyze. Here, we were presented with a bill which Congress was asked to act upon within hours after completion. Customarily, after the legislation is in hand, there are hearings with proponents and opponents of the bill and an opportunity for members to examine, really cross examine, to get to the heart of the issues and alternatives. There have been limited hearings with executive branch officials, but not in the context of analyzing the finished bill or an opportunity for opponents or advocates of alternatives.
After the hearings, regular order calls for a markup in the committee of jurisdiction going over the language line by line with an opportunity to make changes with votes on those proposed modifications. Then the committee files a report which is reviewed by members in advance of floor action where amendments can be offered and debate occurs. The action by each house is then subjected to further refinement by a conference committee which makes the presentment to the president for yet another line of review.
The current process drastically shortcuts regular order. For example, there was no opportunity for members to offer amendments to substitute loans or a governmental insurance policy for the plan to authorize the Treasury Secretary to buy toxic securities which is problemsome because there is no market which establishes value. So the government, and then the taxpayers, may well be overpaying. If loans were made like the AIG model with senior secured provisions, the government might well pay less, as I suggested in my letter dated September 27. In that letter I further suggested that consideration be given to government insurance which would have eliminated the uncertain values in purchases and would have limited the government obligation to being an insurer of the specific commercial transactions which require governmental aid.
In my letter of September 27 I further raised the issue of exercising care to avoid running afoul of the Supreme Court decision in INS v. Chadha. It is uncertain whether the stipulation giving Congress the authority to reject the last installment of $350 billion would satisfy the Chadha standard.
In addition there has not yet been an adequate showing as to how the overall figure of $700 billion was determined. In my letter of September 27, I called for a detailed explanation for Congress as to how that figure was arrived at and the necessity for such a large sum. Similarly I sought justification for an initial expenditure of $250 billion.
We have been working against a backdrop that unless immediate or very prompt action is taken, there is an enormous risk of an economic collapse. In my letters, I expressed my judgment that this would not occur as long as it was seen that the Congress was determined to do something significant and was working as promptly as practicable to come up with remedial legislation. In fact, the market rose on September 25 and 26, when the Congress appeared to be moving toward a legislative solution. The Dow then dropped on September 29 when the House rejected the proposed legislation. Had the House not taken that negative vote when the vote count was not solid, there may well have been enough time to improve the bill without causing the market's collapse.
Even now, there has been a limited time for deliberation and Members have not had an opportunity to debate and vote on alternatives.
It is true that the proposed legislation is enormously improved over the first Paulson proposal, but it still grants enormous authority to the Treasury Secretary. The $700 billion is not to be authorized immediately, but instead there are installments of $250 billion, $100 billion at the request of the President and $350 billion more subject to congressional objection, although the latter phase may be unconstitutional under Chadha. For protection of the taxpayers, the proposal contains a provision that if the government does not regain its money after 5 years, the President would be required to submit a plan for compensating the Treasury ``from entities benefiting from the programs.'' While that provision is a far way from a guarantee or even assurances that such recovery legislation would be enacted, it gives some important comfort to the taxpayers' position.
There are also provisions for multiple layers of oversight including a Financial Stability Oversight Board comprised of the Chairman of the Fed, the Treasury Secretary, the Director of the Federal Home Finance Agency, the Chairman of the Securities and Exchange Commission, SEC, and the Secretary of Housing and Urban Development, HUD, that will meet monthly to oversee the program. The Secretary will be required to report to Congress on a regular basis on the actions taken, along with a detailed financial statement. These reports will include information on each of the agreements made, insurance contracts entered into, and the nature of the asset purchased and projected costs and liabilities. Additional oversight will be provided by the Comptroller General--reports to Congress--a new inspector general--audits and quarterly reports--a congressionally appointed oversight panel--market and regulatory review, and reports to Congress on the program and the effectiveness of foreclosure mitigation efforts--and by OMB and CBO--cost estimates. A report will be required from the Secretary of the Treasury with an analysis of the current financial regulatory framework and recommendations for improvements.
There are substantial limitations on having benefits for entities which created the problem and limitations on executive pay. The executive compensation and corporate governance provisions provide that Treasury Department would have to promulgate executive compensation rules governing financial institutions that sell its troubled assets.
In cases where financial institutions sell troubled assets directly to the government with no competitive bidding and where the government receives a meaningful equity position, the legislation states that, until that equity stake is sold, executives would not get incentives ``to take unnecessary and excessive risks'' and would have to give up or repay bonuses or other incentives based on financial statements that ``are later proven to be materially inaccurate.'' The bill also would prohibit ``any golden parachute payment to senior executives.''
The legislation is less stringent in provisions for financial institutions that sell their assets to the government through an auction. Such provisions would apply only to companies that sell more than $300 million in assets and would subject companies and employees to extra taxes. Corporations would not be able to deduct any salary or deferred compensation of more than $500,000, and top executives would face a 20 percent excise tax on golden parachute payments if they left for any reason other than retirement. In evaluating limitations on executive salaries, it is relevant to note that the Institute for Public Studies found that chief executives of large U.S. companies made an average of $10.5 million last year. That is more than 300 times the pay of the average worker.
The final proposal does provide for debt insurance, but leaves it to the Secretary of the Treasury to utilize that approach so it seems unlikely that it will be implemented in light of the fact that Secretary Paulson has bluntly stated his disagreement with it. Had there been floor amendments, Congress could have structured standards for utilization of debt insurance.
Had we followed regular order with an opportunity to propose amendments, consideration could have been given to my proposal, S. 2133, which would have authorized the bankruptcy courts to restructure interest and scheduling of payments. The so-called variable rate mortgages have confronted many homeowners with the surprise that original payments, illustratively, of $1,200 a month were soon raised to $2,000 which resulted in defaults. Individualized examination by the bankruptcy courts might show misrepresentation or even fraud to justify revising the interest payments and rearranging the payment schedule. Or consideration could have been given to Senator DURBIN's proposed legislation, S. 2136, which would have authorized the bankruptcy courts to reset the principal balance depending on the value of the home. I opposed that bill because I thought it would discourage future lending and in the long run raise the cost to homebuyers. But at least, following regular order, there would have been an opportunity to consider Senator DURBIN's proposal as well as my suggested legislation.
The legislation contains authority for the Treasury Secretary to compensate foreign central banks under some conditions. It provides that troubled assets held by foreign financial authorities and banks are eligible for the TARP program if the banks hold such assets as a result of having extended financing to financial institutions that have failed or defaulted. Had there been an opportunity for floor debate, that provision might have been sufficiently unpopular to be rejected or at least sharply circumscribed with conditions.
As a step to help keep borrowers in their homes, I proposed language found in Section 119(b) of the bill to address the concern that some loan servicers have been reluctant to modify home mortgage loan terms because they fear litigation from investors who hold securities or other vehicles backed by the mortgage in question. The loan servicers have a legal duty to the investors to maximize the return on their investments. In testimony on December 6, 2007, before the House Committee on Financial Services, Mark Pearce, speaking on behalf of the conference of State Bank supervisors, discussed a meeting with the top 20 subprime servicers. He explained that ``many of them brought up fear of investor lawsuits'' as a hurdle to voluntary loan modification efforts. Because the rescue legislation encourages the government to seek voluntary loan modifications, it is important to remove any impediments to such modifications. To that end, the language provides a legal safe harbor for mortgage servicers making loan modifications, if the loan modifiers take reasonable mitigation steps, including accepting partial payments from homeowners.
On reforms to prevent a recurrence of this crisis, we need to question whether the rating agencies adequately analyzed mortgage-backed securities before issuing investment-grade ratings. They appear to have failed, in July of 2007, when it became apparent that ratings issued by the big three rating agencies--Moody's, S&P and Fitch--could not be relied upon, I urged the relevant committees to look into the ratings that those agencies issued in recent years regarding mortgage-backed securities.
Financial institutions that issue asset-backed securities obtain ratings for such securities. The failure to issue reliable ratings misrepresented the facts and fed the ability of financial institutions to tout the value of securities even though their value was declining. Congress and the regulators need to take up the rating agencies issue, and consider whether ratings agencies that have utterly failed to detect and reflect the risks associated with the securities they were rating should be accorded any reliance or role in our financial system. Some have suggested they should be regulated and we may need to consider that.
In addition, Congress and the regulators should review ``off-balance sheet'' transactions and leveraging. There should be a close examination on whether banks are sufficiently transparent and providing accurate accounting that truly reflects risk and leverage.
Similarly there should be a review on credit default swaps, CDS, which are privately traded derivatives contracts that have ballooned to make up what is a $2 trillion market according to the Bank of International Settlements. They are a fast-growing major type of financial derivative. Many experts assert that they have played a critical role in this financial crisis as various financial players believed that they were safe because they thought CDS fully insured or protected them, but the CDS market is unregulated and no one really knows what exposure everyone else has from the CDS contracts. Consideration should be given to subjecting all over-the-counter derivatives onto a regulated exchange similar to that used by listed options in the equity markets.
Excessive overleveraging has been a contributing factor in the turmoil that now threatens our financial institutions. We have seen a massive expansion of the practice of leveraged financial institutions--banks, investment banks, and hedge funds--making investments with borrowed money. In turn, they borrow more money by using the assets they just purchased as collateral. This sequence is continued again and again. The financial system, in its efforts to deleverage, is contracting credit. They must guard against future losses by holding more capital. Deleveraging is leading to difficulty on Main Street for individuals seeking to get a mortgage or buy a car. If a financial institution is able to unload its toxic assets onto the government, it will again be able to resume its lending activities that are crucial for economic growth in the United States. Unfortunately, much of the financial crisis has arisen from miscalculations of the risks involved with purchasing large amounts of securities backed by subprime mortgages and other toxic assets. We now see a situation where we are not just talking about a handful of firms. This is a widespread problem that should be addressed by this package and in future reforms of our financial regulatory structure.
In addition, the package crafted by Senate leaders includes two notable changes from the version that was rejected by the House on Monday. It will include a tax package that was previously passed in the Senate by a vote of 93-2 on September 23, 2008, but has since been rejected by the House in a dispute over revenue offsets. It includes tax incentives for wind, solar, biomass, and other alternative energy technologies. It also includes critically important relief from the alternative minimum tax, which threatens to raise the tax liability of over 22 million unintended filers in 2008 if no action is taken. Finally, the package includes a host of provisions that either expired in 2007 or are set to expire in 2008, including the research and development tax credit, rail line improvement incentives, and quicker restaurant and retail depreciation schedules. I supported the Senate-passed tax extenders bill because it struck a responsible balance on the issue of revenue raising offsets.
The package also includes a provision to temporarily increase the Federal Deposit Insurance Corporation, FDIC, insurance limit to $250,000. Currently, the FDIC provides deposit insurance which guarantees the safety of checking and savings deposits in member banks, up to $100,000 per depositor per bank. Member banks pay a fee to participate. The current $100,000 limit has been unchanged since 1980 despite inflation. This approach is supported by both Senator MCCAIN and Senator OBAMA, by House Republicans, and by the FDIC Chairman Sheila Bair, who sent a request for this change to Congress on Tuesday. Raising the cap could stem a potential run on deposits by bank customers, particularly businesses, who fear losing their money. Such fears contributed to the collapse of Washington Mutual and Wachovia Bank in the past week. However, some economists warn that raising this limit creates a ``moral hazard'' where banks have less incentive to protect assets when there is a government backstop. The coverage amount reverts back to $100,000 after December 31, 2009.
Congress is now called upon to make the best of a very bad situation. We must pledge to our constituent taxpayers that we will learn from the mistakes which led to the brink and take corrective, vigilant, action to prevent a recurrence.
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