EMERGENCY ECONOMIC STABILITY ACT -- (Senate - October 02, 2008)
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Mr. KERRY. Mr. President, to protect and defend the economic health of our Nation and the security of the systems on which our prosperity depends, I am pleased that the Senate passed the Emergency Economic Stabilization Act last night. I call upon my colleagues in the House of Representatives to pass this legislation as soon as possible because I believe it will help restore confidence in our capital markets and our financial institutions. It will help our Nation avert serious economic dislocation that could have been the cost of inaction
I want to take this opportunity to thank Majority Leader Reid, Senate Banking Committee Chairman Dodd and Senate Finance Committee Chairman Baucus for their efforts to include critical modifications to the proposed plan by Treasury Secretary Paulson and Federal Reserve Chairman Bernanke. This legislation we are considering today includes provisions that will protect the taxpayer, limit executive compensation, provide critically needed assistance to homeowners, and provide strong congressional and judicial review procedures. Without their efforts, I do not believe we would have been able to pass this critically needed legislation.
Our Nation is facing its greatest economic crisis since the Great Depression. A series of financial institution failures and frozen credit markets have imperiled our economy. We need to take immediate action to restore confidence and help stop this threat and stabilize our financial system.
Every American family is concerned about the economic situation we face. They are already facing rising gas prices, food prices, health care costs and college tuition. Many are wondering: How will bailing out Wall Street firms help me? The answer is we have to bail out Wall Street to protect Main Street.
This will not be done without great expense to the taxpayers. However, I strongly believe that taking quick and decisive action is not only our best option it may be our only option. As we consider this extraordinary commitment on the part of the American taxpayer, we have to ask ourselves: What is the price of inaction?
The ripple effect of the collapse of Wall Street's major financial institutions could develop into an economic disaster sweeping across the country. The stark reality is that without massive Federal assistance, our financial system could collapse. Small businesses would be unable to obtain financing and jobs would vanish. Families would be unable to borrow for new homes or to send their children to college. Retirement funds could plummet. Those are the stakes.
The Emergency Economic Stabilization Act will provide up to $700 billion to the Secretary of the Treasury to buy mortgages and other assets from financial institutions. Instead of giving all the funds at once, as requested by Secretary Paulson, the legislation gives the Treasury only $250 billon immediately. The bill requires the President to certify that the additional $450 billion are required subject to congressional disapproval. It requires the Treasury to modify mortgage loans whenever possible to help keep families in their homes. It requires companies that sell bad assets to the Government to give taxpayers the opportunity to share in their future growth. This will help offset the costs of this program. Finally, it includes meaningful limits on both executive compensation and ``golden parachutes''. This will help insure that not one dime of taxpayer funds will be used to pay the salary of CEOs who have abused the public trust and played a role in developing the economic crisis we face.
American families must have confidence that the deposits they have in our banks are safe. Thanks to measures put in place during the Great Depression, deposits of up to $100,000 are guaranteed by the Federal Government. I am pleased this legislation temporarily raises the FDIC limit to $250,000. I think it will help small businesses, make our banking system more secure, and help restore public confidence in our financial system.
The Emergency Economic Stabilization Act of 2008 also contains an important provision that will help hundreds of community banks throughout the country. Prior to the Federal Housing Finance Agency placing Fannie Mae and Freddie Mac into conservatorship, many banks had invested in Fannie Mae and Freddie Mac preferred stock. Unfortunately, the value of these shares was essentially eliminated due to the Government's action. These investments--standard means for the banking industry and the Government-Sponsored enterprises to provide and raise capital--have always been viewed as a conservative investment by financial institutions.
These investments provided capital to Fannie and Freddie, and thus indirectly benefited the economy by helping Fannie and Freddie provide liquidity to the secondary mortgage market. Unfortunately, losses on these shares will have significant tax consequences for these banks, which will translate into fewer loans being made across the Nation.
Section 301 of the legislation provides targeted tax relief for all banks holding Fannie Mae and Freddie Mac preferred stock by allowing institutions to treat the losses on these securities as ordinary losses for tax purposes. This temporary change will provide a vital tax reduction against ordinary income and preserve a portion of the capital lost due to the Government's actions with regards to the Government-sponsored enterprises.
The bill is designed to give all banks--especially community banks--regardless of size or organizational structure, ordinary tax relief for these holdings. I encourage the Secretary of the Treasury to work with Congress and the banking industry to ensure that all institutions have access to this relief.
We have no guarantee that this program will fix this acute crisis. What we do know is that if Government does not step in to provide funding, we could hasten an economic meltdown.
After this plan is enacted into law, we must take bold action to revamp our regulatory practices, fix the derivatives market, offer an additional economic stimulus for businesses, provide liquidity for small businesses and provide real assistance to families bearing the weight of the crisis. This will be a long process.
I believe the moment has come to rethink the trend over the past generation toward deregulation of our financial institutions and capital markets. You can see it in the excessive use of derivatives to manage risk. You can see it in the reckless use of leverage by some financial institutions to finance ever riskier and more lucrative financial products. You can see it in our housing markets, where the concept of risk became our greatest undervalued asset. You can see it in the failure to require Fannie Mae and Freddie Mac to set aside the appropriate capital reserves. You can see it in the outrageous salaries that so many CEOs of troubled companies have earned in recent years which can be tied directly to the strategies they adopted that showed no respect for the risks they were taking with other people's money or to our Nation's economic future.
This was a perfect storm: irresponsible lending, irresponsible borrowing and a lack of basic oversight and effective regulation put millions of families in homes they could not afford. Too many Americans took unreasonable risks to buy a home when markets were booming. Too many financial institutions lowered their lending standards but didn't plan appropriately for increased risk. At the same time, some borrowers inflated their incomes and misrepresented themselves in order to buy expensive homes that they could not afford.
In 1994, I supported the Home Ownership and Equity Protection Act which gave the Federal Reserve the authority to prohibit unfair and deceptive lending practices. It took the Federal Reserve 14 years to implement regulations to stop abusive and deceptive practices which helped cause the housing crisis.
Since 2000, I have been concerned about predatory lending and have supported legislation to stop the excesses that these lenders have too often hoodwinked homeowners into accepting. It stopped companies from imposing high-cost mortgages, included critical consumer disclosures, required creditors to assess the consumer's ability to pay, prohibited prepayment fees and penalties. This could have stopped many of the excesses we are paying for today from occurring in the first place. Unfortunately, this legislation did not receive any support from the other side.
The damage has been staggering. Five million homeowners are either in default or in foreclosure and 10,000 more join them in foreclosure every day. Some economists warn that the spike in foreclosures could lower home values by 30 percent--when even a 10 percent decline takes $2 trillion in wealth from American homeowners. The loans financing these homes are now frozen on the balance sheets of banks and other financial institutions, preventing them from providing new loans. Today we are living the consequences: an economy teetering on the edge.
It is obvious to every American that we need greater regulation of our mortgage markets and our lending practices. We must eliminate the unfair and deceptive practices that helped cause our current economic difficulties immediately.
Another crucial ingredient in today's crisis is the use of complex financial derivatives. These complex financial maneuvers--hidden from the view of most Americans--have quietly become a crucial part of managing risk in our economy. In May, the Bank for International Settlements estimated that the total value of derivative contracts was approximately $600 trillion. To put this speculation in context: that is 200 times larger than the Federal budget.
Derivatives are essentially bets on future economic behavior: financial contracts which can gain or lose value as the price of some underlying commodity, financial indicator or other variable changes. Unfortunately their rise to prominence in our economy was not matched with an increase in regulation or transparency. Warren Buffett has previously called derivatives ``. . . financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.''
The continuing uncertainty over derivatives has helped to bring about the recent freeze in our credit markets. For example, Bear Stearns was deeply involved in the financial derivatives markets. The Federal Reserve eventually provided up to $30 billion and convinced JP Morgan to purchase Bear Stearns because they feared its sudden collapse would produce a tidal wave of defaults around the globe. Also, since Lehman Brothers filed for bankruptcy, financial institutions and corporations have been unsure how to process and cover its derivatives and credit default swaps.
Congress must consider and pass legislation to reform and manage derivatives. We must learn from the current crisis and develop safeguards that ensure that the failure of a financial institution which holds derivatives does not cause a freeze in our credit markets.
The housing crisis also triggered a reassessment of other financial risks, including leveraged loans taken out by financial institutions to increase profits. This approach allows institutions to take much larger market positions which increases their profits but also increases their risk. In 2004, the Securities and Exchange Commission relaxed capital rules for investment banks which allowed these firms to increase their risks during good economic times. Unfortunately, some financial institutions were reckless in their use of leverage.
Published reports say Merrill Lynch borrowed an astounding 44 times the size of its capital to increase profits. If you borrow 44 times your capital and your investments increase only 1 percent you have actually made a 44 percent profit. Unfortunately, the reverse is also true. Think about it: If you have $1 and you use it to borrow and invest $44, common sense tells you that if things go wrong, you will be in a world of trouble. Well, that is exactly what happened. These risky investments caught up to Merrill Lynch. They were bought out by Bank of America after facing bankruptcy earlier this month.
We need to dramatically increase our oversight of all financial institutions and increase capital standards to insure companies like Merrill Lynch and Lehman Brothers can never again impact the U.S. financial system due to their risky business plans.
The government sponsored entities, GSEs, particularly Fannie Mae and Freddie Mac and the FHA have played a critical role in expanding homeownership. However, like too many financial institutions, these organizations included subprime mortgage debt in their portfolios but didn't plan appropriately for the increased risk they had incurred. The Congress and the Bush administration also failed to require Fannie Mae and Freddie Mac to increase their capital requirements to adjust to the increased risks. As a result, the Bush administration was forced to put both Fannie Mae and Freddie Mac into conservatorship earlier this month at a cost of approximately $200 billion to the taxpayers.
Back in 2004, I said that I expressed concern about governance and accounting problems at Freddie Mac and that I would support legislation that provides for strong, effective supervision and regulation of government-sponsored enterprises within a framework that assures their safety and soundness. During the 109th Congress, the Bush administration blocked the enactment of bipartisan legislation to reform Fannie Mae and Freddie Mac.
Going forward, in order to stop the increasing numbers of foreclosures, we need the GSEs to continue their mission, within appropriate capital constraints, to help stabilize the mortgage markets.
Executive compensation is another area that we need to address. We have all read about the outrageous salaries that many of the CEOs of troubled companies have earned over the past few years. Some have increased their pay by increasing the risks their companies take. I am pleased that Chairman Baucus of the Senate Finance Committee is pushing for changes in the Treasury proposal to prevent excessive compensation and golden parachutes for executives who sell troubled assets under the Treasury program. CEOs, who abused the public trust and played a role in developing the current economic crisis and are now asking to be bailed out, will not be able to receive severance packages or excessive salaries. Taxpayers will not subsidize their excessive salaries.
When you add it all up, the financial crisis is a result of failures over the past generation to provide appropriate regulation and supervision of the financial services industry. Over the past 8 years, however, what was effectively a trend toward deregulation turned into a stampede. The Bush administration and others in Congress have consistently railed against oversight and accountability during the last 8 years; now taxpayers are forced to clean up this administration's mess.
So I urge my colleagues in the House of Representatives to come together to support the Emergency Economic Stabilization Act that will help protect our vital national interest in the continued health of our economy. Next, we need to come together as a nation to help those who have been hurt by the economic crisis and to finally respond to the structural problems that have brought us to this point.