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WALL STREET REFORM
Mr. BROWN of Ohio. Madam President, I rise to discuss the troubling state of our financial system and the unfinished business of Wall Street reform. I am here to talk specifically about too-big-to-fail banks.
Decades of deregulation and laissez faire economic policies helped the six largest U.S. banks grow from 18 percent of gross domestic product only 25 years ago to 68 percent of gross domestic product in 2009. So it went from 18 percent in the mid-1990s to 68 percent of GDP in 2009.
We know what happened next. During the financial crisis, these six megabanks collected $1.2 trillion--just to understand that figure, if we can--$1.2 trillion is $1,200 billion and $1 billion is $1,000 million. The six megabanks collected $1.2 trillion in Federal taxpayer-funded support from the Treasury, from the FDIC, and from the Federal Reserve.
Two years after we passed the Dodd-Frank Wall Street Reform Act--and I supported it because it took many important steps--I am concerned we are not seeing reform, nearly sufficient enough reform, in the financial sector. As we uncover more and more risky, fraudulent, and illegal activities, it seems far too clear that the American people absolutely see this and believe Wall Street is back to business as usual.
Since 2010, we have learned about a number of things. I am just going to rattle off seven or eight significant, serious problems. Some are illegal, some are accusations, some are alleging significant systemic problems--all troubling issues that have happened just in the last couple years: Investor lawsuits and SEC enforcement actions over mortgage-backed securities; municipalities being sold overpriced credit derivatives, bankrupting some of those municipalities, and think of the hardship that causes these communities; the forging of foreclosure documents and mortgage securities legal documents by five of the Nation's largest servicers, leading to $25 billion in penalties--$25 billion in penalties--from these servicers forging foreclosure documents and mortgage security legal documents--$25 billion in penalties; the Nation's largest bank halting all consumer debt collection lawsuits due to concerns about poorly maintained and inaccurate paperwork; the Nation's largest bank losing $5.8 billion so far--so far--on large, complex derivative trades that regulators either missed or didn't understand or ignored; suspicions that 16 global banks, including the three largest U.S. banks, manipulated LIBOR--the London Interbank Overnight Rate--that is used as a benchmark for mortgages, credit cards, student loans, and even for derivatives--financial instruments that affect almost everybody in our country.
Continuing with the list of problems since 2010: a criminal bid-rigging trial exposing illegal practices by many Wall Street banks in arranging bids so banks could underpay for municipal bonds; former employees of the Nation's largest bank alleging the company urged them to steer clients to their own mutual funds because they were more profitable to the bank, even though they paid investors lower returns than other funds, while their clients presumably were trusting them to act in their best interests; the Federal Energy Regulatory Commission investigating whether the biggest U.S. bank manipulated prices in the energy markets, forcing consumers to pay more; a $175 million settlement by the Nation's fourth largest bank for discriminatory lending practices in housing markets that include Cleveland and many other cities. One can walk through these neighborhoods and see what foreclosures have done to them, see what rigging, what other dysfunctional servicers' behavior or illegal activities have done to these communities and to these families.
Putting the numbers aside and the political speech aside, imagine for a moment that a parent of 12- and 13-year-old daughters has to sit down with them and say: Sorry, but dad lost his job a few months ago and now we are losing our home.
Where are we going to move, Mom?
I don't know.
What school am I going to go to?
I don't know yet. We have to figure that out.
Imagine the personal hurt and hardship caused by a lot of these things to a whole lot of families in Cleveland and Mansfield and Cincinnati and Dayton.
More problems since 2010: Regulators are investigating whether the rate that establishes municipal bond prices is susceptible to manipulation.
These are just 11 examples, all of them huge separately and in the aggregate devastating, potentially--certainly devastating to many individuals and potentially devastating in a huge way to our economy as a whole. The list goes on and on and on.
Some experts say we can't--when we talk about potentially forcing these banks to divest themselves because of their size, some experts say our banks need to compete. They say: No, our banks need to compete with the banks in other countries. But then does anyone truly believe--do any of these bankers on Wall Street or bankers in my State who have acted, frankly, more responsibly--the community banks and the credit unions and the regional banks--does anybody truly believe we should follow the European model where never-ending bank bailouts have become the norm?
We know the world's largest bank, HSBC, at $2.55 trillion, helped launder money from Mexican drug traffickers and Middle Eastern terrorists. As we know by now--all over the newspapers--the eighth largest bank in the world, the $2.4 trillion Barclays--the city where the Olympics are being held--was the first bank caught manipulating the LIBOR rate, not exactly models we should emulate.
Financial reform is supposed to reduce industry concentration. It is supposed to end too big to fail. But the financial sector is even more concentrated now than it was before the financial crisis.
My colleagues will remember what I said at the outset. In 1995, 18 percent of GDP was the assets of these banks. The six largest banks had 18 percent of GDP in 1995. By 2009, it was 68 percent, and it is even worse today--the top 10 banks' assets, 6 percent in 2006, now 77 percent at the end of 2010 and growing, presumably, as a result of mergers during the financial crisis. Three of the four largest megabanks have grown by an average of more than $500 billion--grown by an average of more than $500 billion. They are in the vicinity of $800 billion and $1 trillion and $1.5 trillion and $2 trillion in assets.
The six biggest U.S. banks have combined assets that are twice as large as the rest of the top 50 U.S. banks put together. Think about that. The six largest U.S. banks, their assets total this; and the next largest 50 U.S. banks--big banks, to be sure; hundreds of billions in assets--total even less than the six largest.
According to Robert Wilmers, the CEO of M&T Bank, the six biggest banks in the United States account for 35 percent of all U.S. deposits, 53 percent of U.S. banking assets, 56 percent of all mortgages, and 93 percent--93 percent--of trading revenues.
This is just six banks that wheel such immense power in our economy. The message to the markets is clear: These trillion-dollar megabanks are too big to manage, they are too big to regulate, and they continue to be too big to fail. We still have work to do.
For all of its benefits--including a new consumer protection agency and oversight of derivatives--the Dodd-Frank legislation relies upon regulators to get it right this time.
But given their track record--sometimes being too close to the people they regulate, so-called regulatory capture; sometimes there just are not enough of them; other times they may not have the expertise to be able to chase around some of the smartest, best educated, most experienced banking executives who know how to game the system. Also, as I said, as to these regulators, we simply do not have enough of them.
That is why I am skeptical. That is why we need to go beyond the central provisions of Dodd-Frank that increase capital, that establish living wills, that establish a process for orderly liquidations. Those are all good things. But, clearly--I just mentioned these 10 or 11 or 12 problems; those are just the biggest ones--clearly, those are not enough.
Members of Congress in both political parties agree that banks need to have much more capital to cover their losses--much more of a financial capital cushion. We agree institutions should issue more stock, should restrict dividends, should retain their earnings to build bigger buffers. But while countries such as Switzerland are considering 19 percent capital requirements--a ratio of about 5 to 1--U.S. regulators are staying within the Basel III international capital standards, which FDIC Director Tom Hoenig has said simply will not prevent another financial crisis.
There is also a living will process that is intended to make it easier to resolve large, complex institutions. We talked a lot about that in Dodd-Frank.
Institutions are supposed to tell regulators how they can be dismantled to protect the financial system as a whole and to protect Middle America when they get into financial trouble. But the proof will be in the results.
So far regulators have yet to begin a process of simplifying the six largest banks that have a combined 14,420 subsidiaries. Six banks have 14,420 subsidiaries.
I mention that number because, Madam President, as you think about every look at these six banks, every quantifying number I try to give, every observation of these six banks, every delineation of what these six banks do and what they are, this speaks of these huge, these behemoth banks that are too big to fail--these six banks. They are too big to regulate, and they are too big to manage.
There is title II Orderly Liquidation Authority. I have heard my colleagues, including the ranking member on my subcommittee, Senator Corker from Tennessee, who coauthored title II, note that the FDIC and Treasury could keep failing banks on life support rather than liquidate them. Is that what we want when we think of too big to fail, too big to manage, too big to regulate?
I have talked to regulators who have privately told me and told Graham Steele of my staff that they believe our banks are still too big to be allowed to fail because the collapse of banks that size could potentially crush the economy.
We remember the fear in the voices of some of the top people in the Bush administration when they talked to us in the fall of 2008 about what was happening to our financial system. I do not think we have answered those fears nearly well enough.
This is not capitalism the way it should be. It is not right. Some of my colleagues think the answer to too big to fail requires repeal of Dodd-Frank--this is about as silly as it gets--and a return to the same unfettered free market approach that Alan Greenspan championed for decades and that led us into this mess--except Alan Greenspan does not even think we should have that again, even though he was the No. 1 cheerleader, he and the Wall Street Journal editorial board, for an unfettered, unregulated Wall Street. He is, to his credit--and I do not give him credit for much in most of the last 10 years--but, to his credit, he has acknowledged that, yes, indeed, he was wrong; that this unfettered, unregulated Wall Street capitalism simply did not work for our country. He acknowledges doing that again would be a recipe for financial crises and bailouts as far as the eye could see.
Instead, we must face the reality that too big to fail is simply too big, and we must enact the SAFE Banking Act because too big to fail and too big to manage and too big to regulate has become the norm, especially among these large six behemoth institutions.
The SAFE Banking Act, my legislation, would place reasonable limits on the share of deposits and the volatile nondeposit liabilities that any one institution could take on. It would require the largest financial companies to fund themselves with more of their own shareholders' equity and less leverage. It would put an end to the government's implicit and explicit support for megabanks--specifically, the six largest Wall Street institutions that, as I spelled out earlier, are in a class by themselves.
Remember those numbers. The six largest banks: 35 percent of all deposits, 53 percent of all U.S. banking assets, 56 percent of all mortgages, 93 percent of trading revenues. Those six institutions have that kind of power in the economic marketplace in large part because of actions here.
Regulators and banking leaders are increasingly voicing support for this bill.
Former Federal Reserve Chairman Paul Volcker recently said the J.P.Morgan episode might be an illustration that these banks are too big to manage.
Former FDIC Chairman Sheila Bair says shareholders and regulators could force banks to break up, but this legislation would be the most direct way to do it.
Richard Fisher, the president of the Federal Reserve Bank of Dallas, and James Bullard, president of the Federal Reserve Bank of St. Louis, agree that more needs to be done to address the problem of too-big-to-fail banks.
Last week, the architect of the too-big-to-fail banking model, former Citigroup CEO Sandy Weill, said the biggest
banks should be broken up.
Increasingly, this is not a partisan issue. The ranking member of the Banking Committee, Republican Senator Shelby from Alabama, supported the SAFE Banking Act when it was a floor amendment, when it was the Brown-Kaufman floor amendment.
I have heard from more and more of my colleagues on both sides of the aisle that they might have voted against it a couple years ago as a floor amendment, but things have gotten worse. The idea is sounding better and better to them.
This legislation would protect taxpayers by putting megabank shareholders on the hook for losses and ending bailouts for good.
At a time of increasing fiscal restraint, our Nation can ill-afford to waste precious taxpayer dollars bailing out our largest banks in their recklessness.
My legislation would benefit the community banks that are at an unfair competitive disadvantage because megabanks have access to cheaper funding based upon the perception that the government stands behind them.
Studies estimate this support gives megabanks a 70 to 80 basis point funding advantage. Madam President, 70 to 80 basis points means three-fourths, four-fifths of a percent on interest advantage, if you will--a subsidy encouraged, provided, for that matter, by the expectation of taxpayer support of up to $60 billion per year.
So if you are one of the six big banks, you can borrow money in capital markets at a lower cost than if you are a community bank in Carey, OH, or a community bank in Sandusky or a mid-sized bank in Columbus or Akron, OH, because the market knows we will not let those six biggest banks fail. So their lending is a little less expensive because there is a lot less risk.
My legislation will benefit investors, as many experts agree that the sum of the parts of the largest megabanks is more valuable than the banks as a whole. So under our legislation, when they begin--these six megabanks, with assets from $800 billion to $2.2 trillion--when they begin to divest themselves, there is a reasonably good chance they will be worth more in the aggregate than they were in the whole.
It will benefit Main Street families and businesses because increased competition will result in better prices, and fraudsters will be punished with the full force of the law. Just about the only people who will not benefit from my plan are a few Wall Street executives who, frankly, have done just fine in the last 10 years.
We simply cannot wait any longer for regulators to act. Wall Street has been allowed to run wild for years. Their watchdogs are either not up to the job or, in some cases, complicit in their activities.
How many more scandals will it take before we acknowledge that we cannot rely on regulators to prevent subprime lending, dangerous derivatives, risky proprietary trading, and even fraud and manipulation?
Even if the regulators wanted to do the job--and I think they do--it would require 70,000 examiners to examine a trillion-dollar bank with the same level of scrutiny as a community bank.
The regulation of the community banks is plenty, but when its comes to the six largest banks, we are not even close. Again, they are too big to fail, they are too big to manage--look at what has happened, those examples I gave--and they are too big to regulate.
We cannot rely on the market to fix itself. The six largest Wall Street megabanks are essentially an oligopoly and a cartel, making true competition impossible.
Megabanks' shareholders and creditors have no incentive to end too big to fail because they get paid out when banks are bailed out. They get paid out when banks are bailed out. And banking laws prevent meaningful management shakeups because any hostile takeover effort would require Federal Reserve approval.
That is why it is time for Congress to act in the interests of the American public. It is time to restore the public's confidence in our financial markets. It is not there now, to be sure. It is time to put an end to Wall Street welfare and government subsidies. We have seen far too much of that. It is time to enact the SAFE Banking Act.
I yield the floor.
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