The Impact Of The Great 2008 Financial Collapse

Floor Speech

BREAK IN TRANSCRIPT

Ms. KILROY. Thank you very much for yielding.

I am pleased to join my colleagues on the floor this evening. And, of course, I work with Congresswoman Speier on the Financial Services Committee. And she very aptly talked about what was going on at Goldman and the effect that it has had on our economy. But this is not a case of just one bad company. We, unfortunately, had a culture all across Wall Street that allowed things like this to happen. And recently I asked Chairman Frank if we could take a look at some of the practices of Lehman Brothers. And we did. We had a hearing on Lehman Brothers. We both participated in that hearing. Because Lehman Brothers gambled with the hard-earned money, the pension funds of countless Americans. Certainly people from Ohio, people from California's pensions, people from Colorado's pensions had been invested in Lehman products, and Lehman Brothers did not tell those investors or other investors that they were so over-leveraged that their financial picture was pretty bleak. Instead, they tried to disguise what was really going on at Lehman by this tricky accounting practice where they moved some of the problems off the balance sheet at the time when their quarterly report was due.

If you look at the quarterly report, you would not get the real story from Lehman because of this practice called Repo 105. They did this very deliberately. And they had become, like Goldman, very leveraged into the subprime mortgage market, the Alt-A mortgage market, and even came up with this product called an Alt-B. And Lehman Brothers, which is an investment house, did not have the same level of regulation that, say, a community bank in one of our localities would have if they were engaging in mortgage practices. Nobody was watching them. The SEC wasn't watching enough, and investors and advisors who maybe would be sophisticated investors who could look at a balance sheet, they weren't getting the right picture either because of this on- and off-balance sheet practice of disguising the true financial picture. When Lehman did this, when they gambled in the subprime market, when they increased, bought more, bought more, bought more to try to make up for the losses and tried to hide what was really going on, they hurt not just the sophisticated investor; they hurt hardworking Americans.

I asked for some public records. One of our pension funds told us that they took an actual loss of over $100 million as a result of this between December of 2007 and September of 2008. Over $100 million. That's just one. I'm getting information from the other public

pension funds in Ohio. And this isn't right that they are allowed to gamble and not listen to the alarms that were sounded in their own company by the risk managers or the fixed asset manager. Instead, those people who were trying to tell the truth were forced out. And it's that same story: Everything's just fine, don't look over here at what's on the off-balance sheet accounting tricks and give a different picture to the world.

We need to hold the Lehman Brothers and the Goldmans to account, and it is time to really talk about real financial reform, real Wall Street reform so that they are not allowed to hurt hardworking Americans and put their life savings in jeopardy again.

BREAK IN TRANSCRIPT

Ms. KILROY. I think it's really important when you take a look at what went on in Wall Street after Bear Stearns collapsed. The SEC and the New York Fed went into these major Wall Street investment houses and were there trying to look things over but either didn't have the statutory authority or the expertise to really take a look at these mortgage instruments or really take the kind of action that would have protected consumers, and even not waited until you got to a situation with Bear Stearns but had gone in there much earlier and looked at it from the eyes of the consumer. Not how it's doing for Wall Street traders but what is its impact on consumers, the subprime mortgage solicitations and all the things that went on around this. It's so important, I think, that we do have a Consumer Protection Agency as part of Wall Street reform.

BREAK IN TRANSCRIPT

Mr. GARAMENDI. So on the buy side, they would be giving information that was inaccurate, that Standard & Poor's, the rating industries of the world would go out and use some, I don't know, gimmick to re-rate this tranche, this piece of that tower, re-rate it as though it was more valuable and more secure than it really was. So we really had a cabal here, and that is why the regulation of Wall Street is so critically important to us as individuals, in our homes, in our ordinary life, in our ability to keep a job.

It is also important for the financial system of America. Banking is crucial to the economy, and when you get a banking industry that is playing financial games rather than simply making loans, we are going to find ourselves in trouble. The creativity of Goldman Sachs, we now know from the hearings. We also know that other major banks and mortgage lending companies were playing similar games.

So that is what we are trying to do as Democrats, is to rein in Wall Street, to set new rules in place that will force the banks to be banks; not to play risky financial games, but rather to do the everyday lending, taking deposits, making a loan that is sound, and making those loans on Wall Street.

What is happening in Ohio? What do you see from your constituents in Ohio about Main Street? Is Main Street a place where the banks are making loans?

Ms. KILROY. I hear from so many of my constituents, people in business, people who are developers, that the ability to obtain capital and then to expand their business, to hire more people, just isn't there. They are not being able to get the loans. It is really important to get that moving again so we can get our Main Street economy, our real economy, going again.

Too much of the money is somewhere else in the pipeline. We need to get it out there to Main Street. I know several of us are working on a number of bills and issues to help expand Small Business Administration loans and others, but we need to get the banks in a position where they are doing the kind of lending that helps small business and mortgages that make sense, because there is the right kind of documentation, down payment, and other finances are in order.

Mr. GARAMENDI. The statistics are really frightening in what has happened with Wall Street. If you take a look, what is really happening is Wall Street is not making loans, and many of the small banks, the community banks, don't have the capital to make the loans, so the capital is being tied up in these huge banks. So what we are really looking to do as part of this reform is to push the capital down to the local banks, down to the Main Street banks, so that they can make loans to people.

However, if you take a look at the large banks, the leading United States banks in 2009, they reduced the number of loans that they made by 7.4 percent. It was the steepest drop in lending by the large banks since 1942, and that was the beginning of World War II.

The 22 firms that received the most bailout money, this is the Wall Street bailout money, cut small business loans by $12 billion in 2009. Meanwhile, and this was the point you were making a moment ago, the top 38 largest financial firms gave out $145 billion in record pay to their employees in 2009. That was an 18 percent increase from 2008, which was also a very high year.

So what is happening here is that Wall Street's philosophy seems to be all about greed for them and poverty for the rest of the Nation. That has got to end.

What we need is this reform of Wall Street. We need to put in place very clear rules: No more games with derivatives. If you are a banker, you are a banker. You are not a loan shark on the street selling a bad loan. You are a banker. You are to take deposits. You are to make loans that are sound and secure, and make those loans on Main Street, not to another Wall Street shark.

So what we want to do is take the derivatives out of the banking business. If somebody wants to play the games of a gambler, they are not going to gamble with taxpayers money. They are not going to gamble with depositors money. They are going to have to do that separate and apart from banking.

Fortunately, the Senate bill seems to be moving in that direction. So when it passes the Senate and comes back to the House in a conference committee, I really want to see derivatives out of the banking business. Let them be handled by Wall Street firms that are not banks. If they want to play the game, let them play the game there. I think that will make a difference back in Main Street, back in Concord and Walnut Creek in my district.

Ms. KILROY. If the gentleman will yield, I agree that we really need to have strong regulation of derivatives and, of course, make them much more transparent. But the point you have made just now about the Wall Street pay is interesting. One of the things that I think infuriates people is when they see they are being hurt, jobs have been lost, shops have closed up, and yet they see the people that are responsible for taking our economy to the brink of disaster are getting that kind of a reward.

Also we need to see the corporate boards and the corporate shareholders take some more responsibility for what their corporations are doing. I think some of them want to do that. One of the things I would like to see happen is that shareholders get some kind of a say, some kind of an up-or-down vote on this kind of compensation. And not only do they get to vote, but I think when you have shareholders that may be hedge funds or pension funds or mutual funds, that they need to disclose also how their proxies are being exercised in these decisions about pay.

Mr. GARAMENDI. You mentioned the issue of Wall Street pay. The numbers are really astounding. In 2007, before the collapse, Wall Street paid out $137 billion to its employees. In 2008, in the midst of the great collapse, they actually reduced it. They went down to $123 billion. But in 2009, while unemployment in America was hovering well over 10 percent, and in California 12 percent, in 2009, the Wall Street fat cats paid themselves $145 billion.

I believe a lot of that money was our taxpayer money that we put in Wall Street to shore up the banks, and instead of making loans to Main Street, to the contractor, to the fellow that wanted to manufacture more ladders, that wanted to improve his business and hire people, instead of making loans to them, it appears to me that they took the money that was used to bail out Wall Street, to stabilize the economy and stabilize the banks, they took that money and they put it in their own pockets. That is reprehensible.

There was a bill here circulating, it hasn't passed, but I think it ought to pass, where these Wall Street bonuses, of which this $145 billion is part of, I think it ought to be taxed. I think about an 80 or 90 percent tax on those bonuses in which they used our taxpayer money, that we ought to get that money back, and we ought to take that money back and put it into the local banks so that their financial situation is shored up so that they can make loans to the businesses in our communities, and tell Wall Street, folks, the big ripoff is over. The big short is over. The big fraud is over. There is going to be a law. There is going to be a tough law regulating Wall Street, reining in the excesses of those fat cats on Wall Street who came to the U.S. Senate with such arrogance that somehow they were the kings of the world, that they were the financial managers of the world and they could create out of nothing.

Wasn't there an Aesop's fable about spinning gold from wool? Maybe that is what those characters were doing. They were creating something that had the appearance of value, but actually had no value, and it nearly cost us the American and the world economy. It also cost some 10 percent, almost 11 percent of every working man and woman in this country, their job.

That is reprehensible. And it is time for Congress, it is time for the Senate--excuse me, Congress did its thing back in December--it is time for the Senate to pass a strong bill, send it back, let's get this thing done, and let's rein in Wall Street.

Ms. KILROY. I absolutely agree with you. I voted for the House bill. I supported the House bill. I would welcome an even stronger bill in the Senate if they would pass something along those lines to make sure that the excesses of Wall Street are reined in, that there is appropriate regulation, that these exotic products don't bring our economy down again, that there is accountability, and if somebody, some big house gets in economic difficulty, that it is not in the position where the government and the taxpayers have to rush in and bail them out.

We need to make very clear that there is not going to be a taxpayer-funded bailout, and that there needs to be the kind of resolution authority or some kind of orderly method to protect the rest of the economy from a company that has gotten into trouble.

Mr. GARAMENDI. There is something I learned long ago at the University of California when I was taking an economics class, and that was the American private system of the economy was dependent upon competition, and that laws were put in place more than a century ago to eliminate concentration so that there are many, many players in the marketplace.

It seems as though we have forgotten, or at least the Republican administration in 2000 to 2008, forgot that one of the key ingredients in a free market system is many, many competitors.

But what happened during the decade of the nineties and 2000-2008 was a concentration in the banking industry so that now just a handful of companies, huge megabanks, control an enormous proportion of the American economy. And there's a proposal that has now been made by the Senator from, I believe, Delaware to limit all financial institutions to no more than 10 percent of the financial market, so that when they get to 10 percent, they can no longer grow. They would have to shed the business and, in that way, keep many, many players in the business. So there would be good competition and, simultaneously, create a situation in which no one bank would be too big to fail, thereby eliminating the need for a taxpayer bailout.

I kind of like that idea. It goes back to something I learned many, many years ago in an economics class about the role of competition and the need for many, many players in the marketplace. We'll see what happens with that, but financial regulation law in its final form has to deal with this issue of too big to fail. I don't want, you don't want, I don't believe the American public want to see another financial bailout with our taxpayer money going to Wall Street so they can fatten their wallets on our hard-earned money. So we'll see what happens here. We know things are coming back.

But let's not end this discussion in a down mood. If we take a look at where the American economy is going, these lines here in the red are the Bush years, and this is the unemployment rate actually growing during the final years of the Bush period so that we were losing about 800,000 jobs a quarter in the final quarter of the Bush period. Now, when Obama came in, we see the beginning of the turnaround with the unemployment--monthly unemployment statistics changing so that, yes, the first month of the Obama administration, in January, February, it was the same as the last month of the Bush administration. But now we see a steady decrease in the number of people losing their jobs.

This is a result of three things happening. The first is the Wall Street turnaround, the Obama administration getting control of Wall Street in the early months of 2009, followed by a very courageous action taken by Congress, which was called the American Recovery Act. The stimulus bill. That began to put people back to work or keep people employed. I know that in California it was an extremely important piece of the puzzle of keeping our schools open, keeping teachers in place, and then preventing further erosion of the economy. So as that began to take hold, we began to see the number of people losing their jobs on a month-to-month basis declining so that now, in the last month, we are actually seeing the number of people employed rising--getting jobs, rising.

We still have an extraordinarily high unemployment rate. We are not even close to being home yet. So we've got a lot of work to do. Part of that work is to make sure that Wall Street doesn't ever again put at risk the job of a family, put at risk home mortgages, put at risk the American economy and, indeed, the international economy. So that's where we are headed. We've got some more work to do.

Ms. KILROY. We do have more work to do.

Mr. GARAMENDI. If you would like to wrap this up from the perspective of Ohio, one of the States hardest hit for many, many years now, but a State that's coming back with leadership such as yours.

Ms. KILROY. You're correct that things are improving and also correct that we're not out of the woods yet. The Recovery Act in Ohio, as in your State, helped keep teachers; police cadets were able to get another class going in the city of Columbus, Ohio; keep firefighters on the job, keep teachers teaching in schools.

We also put money in the pockets of hardworking Americans with the biggest tax cut in our history to make sure that middle-class families benefited from that Recovery Act. People who were unemployed or on food stamps also got a raise--not the kind of raise that Wall Street gets, but they got a raise. We know that that money goes directly back into the local economies. That helps build that path to economic recovery.

We'll continue to focus on jobs, on our economy, and on holding Wall Street accountable, and passing a strong Wall Street regulation bill. I look forward to working with you on that.

BREAK IN TRANSCRIPT

Source