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Mortgage Lending

Floor Speech

Location: Washington, DC


Mr. GREGG. Madam President, I rise to talk about the same issue the Senator from Georgia has discussed. First, I congratulate him. This is a point we have been making on our side of the aisle. He has come up with a thoughtful and appropriate way to address what was one of the core drivers of our fiscal meltdown. If we look at what caused the financial crisis of late 2008, which has caused this significant recession, which has caused us to go through all these expenditures as a government and which has caused so many American people to suffer the consequences of the recession, there were three or four major events that generated this. One was money was too cheap for too long. That was a Federal Reserve decision. But right at the essence of it was the issue of underwriting, the fact that there was a decoupling of the people making the loan from the people who were responsible for the loan.

We had this whole service industry built up that was making money off of the fees for originating the loan and wasn't that concerned about the ability of the person to repay the loan or the underlying asset. What the Senator from Georgia pointed out--and the proposal he has brought forward is a very responsible way to address this fundamental problem, which is the failure of underwriting--is a point we have been making on our side of the aisle. We have a whole series of what we think are pretty good ideas as to how we can make financial reform work better. Certainly one of them is the idea of the Senator from Georgia.

I was impressed today to hear both leaders say they want to have a bill that is bipartisan, that is comprehensive, that is thoughtful, and that addresses the issues we confront in this regulatory arena.

Unfortunately, that is not the atmosphere around here that has been created. Regrettably, there has been a huge amount of hyperbole, especially in the last couple weeks. Most of it has not been directed at moving down the path of a thoughtful and mature and substantive approach to this issue. Most of it has been addressed at raising anecdotal events which then have been hyperbolized into single one-liners as to how you address them.

This issue of financial reform is far too complicated for one-liners. That is a fact. It is an extremely complex undertaking to make sure we accomplish what we need to accomplish in regulatory reform. Our goals should be two. First, we should do whatever we can to restructure the regulatory arena so we reduce, to the greatest extent possible, the potential of another systemic risk event. I will talk about what we need to do in that area in a second.

Second, while we are doing that, we have to make sure the regulatory environment we put in place keeps America as the best place in the world to create capital and get a loan for people who are willing to go out and take a risk, be entrepreneurs, and create jobs.

One of the great uniquenesses of our culture, what makes us different from so many other places in this world, what gives us such vibrance and energy as an economic engine, is that we have people who are willing to go out and take risks. We have people who are willing to be entrepreneurs. And we have a system of capital formation and credit which makes capital and credit readily available to those individuals at reasonable prices. So as we go down the road of regulatory reorganization, we have to make sure we do not suffocate that great strength of our Nation.

There are four basic issues before us today in regulatory reform, and none of them are partisan. Yet in the atmosphere around here, you would think they are all partisan, especially the President's recent speech, which was over the top in its partisan dialog.

First is how you end too big to fail. We cannot allow a system to exist where there is a belief out there in the markets that the taxpayers are going to back up a company that has taken too many risks and has gotten itself in trouble. Why is that? Because if that happens, if there is a belief in the market that the taxpayers will step in and back up companies that are very large and systemic when they have taken too much risk and put themselves in dire economic straits--if there is a belief that the taxpayer is going to step up and back up that company--capital will get perverted. Capital will not be efficiently used. Capital will flow in an inefficient way to companies which have proved themselves not to be fiscally responsible. That is not a good way for an economy to function--certainly a market economy to function. So we have to end too big to fail.

This is not a partisan debate. Senator Dodd has brought forward a bill which he thinks ends too big to fail. In my view, it has some serious flaws. It is a good attempt, but it does not get there. Senator Corker and Senator Warner, from two different parties, have actually put together a concept--we call it resolution authority around here--which actually does end too big to fail and does it the right way. It essentially says if a company, if an entity--which is a huge entity--gets out of whack, overextends itself, gets too much risk, is no longer viable, well, then, we are going to resolve that company. The stockholders will be wiped out, unsecured bondholders will be wiped out, and the company will basically flow into bankruptcy and will not be conserved. That is a good approach, and it is a bipartisan approach.

Another big issue: how you address regulatory oversight to try to anticipate a systemic event. Again, the Dodd bill makes an attempt in this area, but there are ways we can improve it. We need to have all the different regulators who have an important role in this sitting at a table, most likely led by the Fed, who take a look at the broad horizon of what is happening in the marketplace and saying: OK, in this area we have a problem arising. We have too many people doing too many things which are at the margin of responsibility here. We are going to empower the agency which is responsible for that--the FDIC or the OCC or one of the other regulatory agencies--to go out and make sure that activity ceases or is abated, and they are going to come back and report to us so you have some oversight here.

That is the concept. It can be fleshed out in better terms. It goes to this issue which is raised by the Senator from Georgia--we should have better underwriting standards as part of this exercise so in the marketplace, real estate especially--residential real estate--we get back to the approach we should have taken to begin with, which is that we know the asset value that is being lent to exists and that the person can pay the loan back as the loan is adjusted over the years.

Thirdly, we have the issue of derivatives. Derivatives are a huge part of the market--massive. The number is $600 trillion of notional value--something like that; massive numbers. What do they do? They basically make it possible for American companies especially to sell their products around the world or to take and put their products into the market in a way that they are able to address issues which they do not have control over.

For example, if you are Caterpillar equipment and you are selling something in China, you do not know if the currency value is going to change--well, you do with China; that is a bad example--if you are selling something in Brazil, you do not know if the currency value is going to change, you do not know if there is going to be a change in the cost of your materials you are building that tractor with, you do not know a lot of different factors you do not have control over. So derivatives allow you to ensure over that.

That is a simple statement of what derivatives do. But that goes to all sorts of different activities--from financial entities, all the way across the board to producers of goods. So there needs to be a regime put in place that makes these derivatives sounder, where we do not get an AIG type of situation where basically we are backing up what amounts to an insurance policy for a company with a name but actually no assets.

Senator Jack Reed from Rhode Island and I have been working for months--literally months--on a daily basis to try to work out such a regime. We think we are pretty close. We think it is going to be a good proposal. Nobody is going to like it, which we know means it is going to be a good proposal. But it is going to accomplish what we need to do, which is to get more transparency and liquidity and margin in the market. There will be the opportunity to have end users who are exempt, but there will also be a primary incentive to put people on a clearinghouse. To the extent you can move from a clearinghouse to an exchange, that will happen also, without undermining the market.

But the key here is to put in place a regime which does not force companies to go overseas to do their derivative activity. This is a very fluid event. If we come forward with an overly regressive approach and an overly bureaucratic approach--one which basically responds to a hyperbole of the moment, which is that all derivatives are bad and not transparent and therefore must be put on exchanges, something like that--we are basically going to push offshore the vast amount of derivative activity that is critical to our industry in America being competitive. As a very practical matter, if we can develop a sound market--and we can develop a sound market--we want to be the nation where most people go to develop their derivatives because it is a big industry and it is something we should keep onshore.

The fourth issue: consumer protection.

My time is up?

The ACTING PRESIDENT pro tempore. The Senator has used 10 minutes.

Mr. GREGG. Madam President, I see the Senator from Louisiana wants to speak. But the point here is pretty obvious. This is not a partisan issue. We can resolve the issue of financial regulatory reform if we sit down and do it in a constructive, thoughtful way, step back, be mature, and take an approach that is thoughtful versus wrapped in hyperbole and popularism of the moment. I certainly hope we will take that process and go forward.

I yield the floor.


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