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Mr. CHAMBLISS. Mr. President, I come to the Senate floor this morning to talk about the current pending business before this body. This is an issue which obviously raised its ugly head a couple of years ago with the financial meltdown that occurred in this country, and I think all of us in this body agree it is imperative the Senate take action to try to make sure what happened to the financial industry in America never has the opportunity to happen again. I commend Senator Dodd and Senator Shelby for their work on this bill. We have had our disagreements. Yet we have had significant agreement on some areas.
We are now trying to take the base bill and make it a bill that all of us in this body, hopefully, will wind up being able to support because we improve the bill to the point where it addresses the real cause of the problem that arose during 2007, 2008, and on into 2009 and 2010.
There are some provisions in the bill that I have particular objection to, and there are some things that are not in the bill that I think should be in the bill. For example, one of the major causes of the problem--and I think it goes without saying--is the fact that the GSEs, Fannie Mae and Freddie Mac, have been authorized over the years to purchase mortgages from individuals who simply could not make their payments, and those mortgages have been bundled together and sold on the market, which has been one of the root causes of the problem. I am not by myself in thinking that. There are other individuals but, more important, people who know a lot more about the root cause of the problem who think that. Everybody in this body agrees that is a major issue that has to be addressed in any overall financial reform. To leave any reference to the GSEs, Freddie Mac and Fannie Mae, out of any additional regulation I think is a mistake. There are going to be amendments with respect to that, and I look forward to that debate.
Another issue is, there are no mortgage standards that are specifically set forth in the underlying bill. I can remember very well going in and buying my first house, making an application for a mortgage. I was as nervous as I could be. Even though my payment was going to be fairly minimal to the amount of money I was making, I had to pay 20 percent down, and it took me a couple of weeks to be approved by individuals in my hometown whom I knew very well. At the end of the day, they just wanted to make sure I was going to be able to pay that loan back. It is not that we need to go all the way in that direction but certainly we need standards in place that will ensure that people who are buying houses can afford to make the mortgage payments for which they are making application.
With respect to the Consumer Financial Protection Act, it appears that in the underlying bill, there is an umbrella that is cast out that is going to require the inclusion of more nonproblem areas of the consumer finance industry than are, in any way, potentially a part of any future financial meltdown.
I hope as we debate these amendments--and I know we will have a spirited debate on them--we can come to some agreement as to what is reasonable. Let's do what we need to do to provide our regulatory agency also with the additional oversight they need to make sure we give them the tools not to allow the situation that occurred in 2007, 2008, and 2009 to recur but that we don't go too far to where we overreach and exercise more control on the part of the regulators than what is absolutely necessary.
I wish to speak for just a minute about the derivatives section and some amendments we are going to have on that particular title. The Agriculture Committee has jurisdiction over swaps and derivatives by virtue of the fact that we have jurisdiction over the Commodity Futures Trading Commission, which in turn has jurisdiction over swaps and derivatives. There are some swaps and derivatives that are secured by securities themselves, and those securities--being regulated by the SEC--give the SEC some jurisdiction here. That has been part of the discussion and will continue to be as we go through the debate.
There are a couple of things I particularly wish to address which I think are faulty in the base bill and need to be corrected as we go through it. We are going to have a substitute amendment for the derivatives title that will do several things that are of primary importance to the industry that, today, is very unregulated, which will bring all the derivatives trades out of the shadows and into a totally transparent matter and make those trades available to the regulators so they can look not only at the trades themselves, to make sure entities that are entering into those trades are the right kind of entities that ought to be trading and that they are not creating systemically risky industries that will have the potential to create situations similar to what we saw in 2007 and 2008 but also that the agencies--the regulators--will have the ability to call into play additional margin requirements or other tools that they will have to ensure that those entities that are engaging in these practices don't ever reach that point of being systemically risky.
There are some specific provisions we need to look at. One of those is an expansion of what we call the end user provision. An end user is an individual--an entity, whether it is a manufacturing company or it could be an individual but, for the most part, it is a financial entity, usually a manufacturer of some sort that doesn't engage in the finance end of the economy of our country but does seek to hedge its own particular financial issues in the more productive, more conventional financial industry itself. For example, manufacturers such as John Deere or Caterpillar or Ford Motor Company or, for that matter, any manufacturer across the country that seeks to have stability in the marketplace with respect to interest rates because they don't look out 90 days or 120 days, they look at years into the marketplace to ensure that there is stability from an interest rate standpoint so they know how to purchase items, know how to purchase what they need to make their widgets or whatever it may be. Those manufacturers engage in the purchase of derivatives by hedging the interest rate that they are going to pay. They also hedge the purchase of metals. Ford Motor Company, for example, may hedge the purchase of steel in the steel market, so they can ensure themselves of stability in that market.
These are the types of derivatives we are going to be talking about and that we need to make sure--because they were not part of the problem that caused the financial meltdown. But if we are not careful, they are going to be overregulated to the point where the cost of an automobile will be increased, and that is an unintended consequence of this bill, I know. The cost of a John Deere tractor to one of my farmers will be increased. Again, that is an unintended consequence.
I wish to take a minute to read a portion of an unsolicited letter I got from a fairly new bank in Atlanta, which is a community bank that began in 2007. According to the chairman of the board, this bank:
..... has built an exceptionally strong balance sheet with superior asset quality, solid and stable deposit funding, and robust capital levels. At quarter end, our equity to assets ratio was 14.39 percent.
He also wrote:
The Bank received regulatory approval to offer and has been offering interest rate derivatives to our middle market and commercial real estate clients who are concerned about the effects of rising interest rates on their businesses. This affords our clients an opportunity to fix interest rates in what would otherwise be a floating rate environment which could work against them. The Bank will not take interest rate risk on these derivative contracts but instead will hedge all trades with one of our correspondent bank counterparties. In other words, the Bank will operate a matched loan-level hedging program. The Bank does not otherwise engage in any derivatives activities.
There are three key problems from our perspective with the regulation as drafted by the Senate Agriculture Committee [which is part of the base bill that we are debating now]:
1. The Bank would likely be considered a swap dealer (under section 50(A)(iii) of the proposed regulation) and would have to spin off or terminate its swap activity.
2. There are no practical end user exemptions for our clients, who would be subject to posting margin against their trades with a clearinghouse.
3. All swap parties have to be an eligible swap participant, so a real estate single project partnership would not qualify.
It makes no sense that community and regional banks that run matched loan-level hedging programs should be subject to the swap dealer provisions, as such programs are fully hedged and are not taking undue risk.
The letter goes on to say they hope that as we go through this debate, we can fix these unintended practical issues or consequences that provide practical issues in the day-to-day operation of commercial and community banks that are not on Wall Street but are in Atlanta and in Moultrie or other communities around my State and in every other community in America.
Just because a bank is big does not mean that bank is risky. We need to remember, as we think about this, that our regulators need to have the right kinds of tools to look at every single trade that comes up. That is why it is important and why we agree on both sides of the aisle that there needs to be 100 percent transparency in these markets. We are going to provide for that in our substitute.
There needs to be a fixing of the definition in the underlying bill of what is a major swap participant. There again, that goes to the issue of whether you are a big bank, you are automatically systemically risky, which is not the case, but you are automatically covered by this provision. Should Wall Street be covered? Yes. Will they be covered in the base bill? Yes. Will they be covered in our amendment? Yes.
Every swap dealer on Wall Street needs to have not just 100 percent transparency but all their transactions with other financial institutions go through a clearinghouse. That is done in the base bill. That is also provided for in our amendment. We wish to make sure these end users who don't deal in these swaps on a daily basis in the kind of volume the banks do are not thrown into a category of all of a sudden having to pay huge fees and costs added to the cost of doing business. At the end of the day, we know who will pay for that: we consumers who buy the automobiles and the widgets or whatever it may be.
Lastly, I wish to talk about the provision in the bill that requires--it is section 106, the 716 provision. What this provision does is require all swaps dealers and financial institutions to be physically moved out of the financial institution and kind of operate on its own. Here is the practical effect of what that will do. Any Wall Street bank that is a dealer in swaps and derivatives today--and every one of them are--will simply take the swaps desk and move it across the street. Under the base bill, they are going to be required to raise huge amounts of capital for that swaps dealer desk. There is no reason for that to happen. If they are going to raise capital, it ought to be in the bank, where they can utilize it and loan that money out to customers.
The other truly unintended consequence of moving the swaps desk out is the fact that the financial institution itself--again, major banks will be included in this--those individual banks are not going to be able to access the discount window at the Fed because they are all of a sudden not going to be able to borrow money from any Federal entity under the language that is in the underlying bill. That doesn't make sense. The reason it doesn't make sense is that all these swaps and derivatives transactions--whether they are interest rates, metals or whatever the transaction may be--have to be cleared every day. The bank needs a huge amount of cash or the swap dealer needs a huge amount of cash in order to clear those trades.
If they do not have access to the Fed discount window, then they are simply not going to be able to access the amount of cash they need to clear these transactions. The reason they need that cash is to ensure the parties to that transaction are going to, in fact, be able to have the assurance that the other party to the transaction is going to be able to live up to its rights and obligations. If they do not have access to the Fed discount window, then they are not going to be able to access that cash they are going to need to make sure these transactions are, in fact, cashed out at the end of every single day.
We are going to have one amendment that will be a substitute, and then we will have a series of additional amendments that will be more in the way of rifle shots to address the specific issues I have talked about.
I talked with the chairman of the Banking Committee about these over a period of time. Obviously, I have talked with my friend Senator Lincoln about this. As we go through this debate, I want to make sure that at the end of the day, we do exactly what all of us want to do and certainly what the chairman and Senator Shelby set out to do from the start, which is to protect consumers, to protect people who lost a lot of money in the market because of transactions of greed that took place on Wall Street. We can do that in a bipartisan way because we all agree that has to be done.
The thing we want to make sure of is that umbrella or that reaching out to accomplish that particular part of the problem that exists does not look for other problems that do not exist on Main Street and that we have the ability of our community banks, our Main Street banks, as well as our manufacturing sector, to have access to the swaps and derivatives markets that they have done in a commercially responsible way for decades. They are not part of the problem, but yet it is going to be of significant consequence to every manufacturer. Not every community bank engages in swaps and derivative transactions, but a lot of them do. We need to make sure we take into consideration the continued ability of those banks to operate in a normal commercial banking way. Under the base bill, they are simply not going to be able to do that.
Again, I commend the chairman for his hard work. I know he and Senator Shelby are still trying to work out some agreements on the too-big-to-fail issue. It is my understanding that some of the provisions in the hopeful agreement they are talking about are going to have a direct impact on some of the things I have talked about today. It will make our job a little bit easier trying to fix the derivatives title to this bill.
Mr. President, I yield the floor.
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