BANKING LESSON -- (Senate - September 25, 2008)
Mr. DOMENICI. Madam President, I want to give a little history lesson on banking. It is strange that I only served on the Banking Committee 2 years of my Senate life. That was when I filled in. I served and learned a lot. But when this crisis came about, I decided that somebody was going to teach me about what had happened since the Great Depression. So I am going to try to do that as quickly as I can.
First, it is not time for partisan ideological finger-pointing.
Second, there is no plan that can emerge from any set of honest deliberations that will be painless. We are undergoing a massive deleveraging in the finance markets.
Third, I was chairman of the Senate Budget Committee when the Resolution Trust Corporation was formed in order to curb the savings and loan crisis of the early 1990s. That effort was also controversial. I hope the plan that emerges from Congress and the administration does the same for financial markets now. I recognize the difference between the two. The first was much easier because there were many physical assets we could look at and transfer title to, and people could feel assets. I would say that, as a model, that terrible situation ended with the Federal Government making money instead of losing money.
From everything I know about the proposal, the principal proposal put forth by the executive branch through the two spokesmen who have been working 24 hours a day nonstop, the chairman of the Federal Reserve, an absolute expert in this field--it has been said over and over that he knows much about recessions and he knows much about depressions. He wrote his professorial doctorate thesis on the Great Depression. That is why he talks as if he knows what happens in depressions. He has been telling us what will happen if we go into a depression. Then we have the Secretary of the Treasury, whom we all have gotten to know. He apologizes profusely for not being a great speaker, but he has presented a difficult plan and come a long way.
I, for one, hope we come to a resolution soon between Democrats and Republicans and the White House, speaking through their spokesmen, and send a signal to the American people that we know how to take care of the financial markets--not Wall Street, the financial markets--of America. The financial markets, not Wall Street, are plugged. They don't work right now. They don't run. They are filled with toxic assets. We have to get the toxic assets out or else we will have no liquidity in the financing system.
Some say the basic problem goes back to 1933 and the so-called Glass-Steagall Act that separated investment banking from commercial banking. Some say that, to the contrary, if Glass-Steagall were still the law of the land, we wouldn't have the problems we now confront. Both sides cite great scholars, economic theorists, and market gurus, but both Democrats and Republicans voted for the original Glass-Steagall. In 1999, under the leadership of President Clinton and Treasury Secretary Rubin, Glass-Steagall was repealed. Now many say that repeal of Glass-Steagall has caused the problem. I should note that Republicans controlled the Congress then and Democrats controlled the executive branch. Both parties played a role.
Some contend that the problem goes back to 1977, when Congress passed the Community Reinvestment Act requiring that financial institutions finance home purchases to borrowers who were historically deemed unlikely to pay back the loans. The theorists say that when politicians try to determine who is a good borrower, both the borrower and the lender will suffer. I think we will look back on this effort to save the system and that conclusion will become a reality. Let me repeat. Some say that when we try to determine who is a good borrower and make a determination rather than letting the market make the determination as to who is a good borrower, we both suffer. Those who lend the money don't get paid, and those who buy don't get what they bought. That is sort of what has happened here. Many of those became the toxic assets that we are now talking about. The Reinvestment Act, which both Democrats and Republicans voted for, was an act that attempted to push loans that were questionable in terms of whether the people buying could ever pay them off.
Some say we should have seen this coming. They note that the savings and loan crisis came not too long after the Garn-St. Germain Act of 1982 that loosened regulation of savings and loans in America. The law drew the support of both Democrats and Republicans and was signed into law by a Republican President. This argument says that when regulation of Government-insured money loosens, the odds that extremely risky behavior will occur increases.
During the last 10 years, as regulation of markets decreased, globalization of markets increased. More and more complicated and model-driven financial products were invented, and regulators clearly lost the ability to analyze risk and to step in when necessary. Many believe the Long-Term Capital Management debacle was an early warning that financial mathematicians in the marketplace had gotten ahead of the financial regulators. Warnings about the size and complexity of derivatives of all sorts proliferated. Many policymakers asked aboutthe size and complexity of these derivatives of all sorts and could not get answers and could not understand some of that which they were being told. Many policymakers and regulators assumed that the financial companies themselves would realize that proper risk analysis was in their self-interest and self-regulation would naturally occur. That assumption has proved wrong. Many purchasers of these convoluted products were reassured because rating agencies continued to give so many of them AAA ratings. Instead of going through the extremely difficult process of analyzing each and every component of each and every product, purchasers depended upon the ratings agencies. So some analysts now say it was the rating agencies that failed.
Finally, we all recognize that turmoil plagues all markets worldwide. Many nations and institutions in many countries now own what are called ``toxic assets.'' I have just tried to describe them a minute ago.
Literally trillions of dollars of various complex financial products are held by many banks, investment houses, pension funds, and insurance companies in almost every developed nation. China has had to step in by increasing Government shares of some banks. Russia closed down its markets for 2 days and may spend as much as $120 billion to stabilize its markets. Germany and the United Kingdom have had to devote billions within the last 18 months to try to stem financial contagion. Serious erosion of confidence in financial institutions threatens to freeze credit, with all the disastrous consequences that holds for a financial world built on easy, safe, transparent credit. Now credit is hard, insecure, and opaque.
So, I will not pretend to know if the plan proposed by the administration and some in Congress will solve the problem. Since no one seems to know what shape this plan will take in the end, any predictions seem foolish at this point. I do know that the size of the potential market injury, and the consequences that the working man and woman in this and other nations will suffer, compel serious, strategic sovereign government action. Thus, I believe the warnings of a Federal Reserve Chairman who probably knows as much about the financial consequences of the Great Depression as anyone else in town, and the warnings of a Treasury Secretary who used to head a Wall Street firm that invented many of the instruments that now seem ``toxic.'' If they don't know the severity of this problem, and if they cannot at least give us a plan that will stabilize market behavior until a clearing price for these assets emerges, then I suspect that no one can.
We will pass legislation that I guarantee you will be imperfect. All sorts of objections from various industries and groups have already filled cyberspace, and newspaper space, and air time. Ideological and theoretical objections already fill the atmosphere. It seems to me that the time for such almost theological discussions is long past. As a Senator who has been here a long time, and seen many recessions and market crises come and go, I only know two things: we are all to blame in some form or other; and we need to act now, with a very large, Government-led program, and with all prudent speed.
Madam President, I believe my time is about to expire.
I certainly hope we will pass something like what has been asked of us by the executive branch, with five or six things that clearly are necessary, that we find necessary as representatives of the people, but that we get it done because we must save our own ability to lend money--that is, our system of borrowing and lending--and the rest of the world kind of waits on us also.
So this is truly a big one. As I said to my hometown paper, after 36 years in the Senate, on the last day or next to the last day of my time here, I will vote on the most important issue I have ever voted on, the most complex, and that costs the most--all in one shot. As I leave and walk out, here will be behind me the most difficult issue we have faced as a Nation. It is very hard for our people to understand it, but it is a terrible one.