PAUL WELLSTONE MENTAL HEALTH AND ADDICTION EQUITY ACT OF 2008 -- (Senate - October 01, 2008)
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Mr. BAUCUS. Mr. President, the energy policy in the pending legislation is partially paid for by a proposal that requires brokers to report to their clients and to the IRS the basis of securities that are sold during the year. This provision expands existing information reporting requirements that require brokers to report the sales proceeds of securities that are sold. The IRS estimates that in 2001 the tax gap associated with all capital gains was about $11 billion. Providing this information will reduce burden on axpayers and increase the accuracy of tax returns that are filed.
Mr. GRASSLEY. Senator Baucus and I asked the Government Accountability Office to review the accuracy of tax returns that are filed reporting capital gains. The GAO found that as many as 7 million individual taxpayers, or 36 percent, who sold securities in 2001 may have misreported capital gains or losses, and around half of those taxpayers did so because they misreported their basis. This information reporting proposal will reduce errors and help taxpayers to file their returns more accurately.
Mr. BAUCUS. Congress intends that the Treasury Department issue guidance and regulations that will help brokers implement this reporting requirement, including the issue of year-end reclassifications. The existing regulatory authority under Internal Revenue Code section 6045 fully applies to the new basis reporting rules proposed in this legislation.
Mr. GRASSLEY. The Congress further intends that the IRS will exercise its administrative authority to revise forms and take other actions as appropriate to help brokers and taxpayers understand and comply with this new law so that burden is reduced, errors decrease, and compliance is enhanced.
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Mr. GRASSLEY. Mr. President, this Congress is on the cusp of making an extremely difficult decision that will not only affect our financial markets in the near term, but it will also leave a lasting footprint on the direction of the our economy for years to come.
We face an unprecedented economic challenge--failing banks, declining credit, rising unemployment, and a likely recession. These problems have led us to the point of placing hundreds of billions of taxpayer dollars at risk to purchase risky subprime mortgages in an effort to avoid, or lessen the impact of these looming problems. Allow me to discuss a few of the factors that led us to where we are today.
In response to the high-tech, dot-com bust in 2000, the Federal Reserve began a series of interest rate cuts reducing the Fed Funds rate from 6.5 percent to 1.0 percent. The rate averaged 1.4 percent from 2002 through 2004.
As cheap credit flooded the markets, financial institutions borrowed money at low short-term rates and invested at higher long-term rates--playing the spread. They adopted reckless lending practices under the political banner of increasing homeownership. These practices included ``liar loans,'' i.e. no credit check, no-money down, interest-only, negative amortization, i.e. missed payments are added to the principal, adjustable-rates, and balloon payments.
As these risky loans were extended to marginal borrowers who could not afford their overpriced homes, the financial wizards on Wall Street devised schemes to theoretically insure themselves against default. These so called ``credit default swaps'' allowed investors who purchased mortgage-backed securities to pay fees to underwriters, like AIG, in exchange for a promise to cover any losses. However, the underwriters often failed to acquire and maintain adequate reserves to cover such losses.
There is plenty of blame to go around for getting us into this mess. But the financial problems we face are much bigger and more fundamental than the home mortgage market itself.
Our financial system is based on the fundamentally unstable practice of maturity transformation--more commonly known as borrowing short and lending long.
The consequences of this practice are illustrated in the classic movie ``It's a Wonderful Life.'' In this movie, Jimmy Stewart plays the owner of the Bailey Building and Loan Association. In the wake of the Great Depression, the citizens of Bedford Falls panic and begin a run on his bank. Stewart's character explains that he does not have their money, but rather it has been used to build their homes. He asks them to be patient, and they will eventually get their money back. But they persist. He ultimately stops the run by convincing them to take only what they need right away. He uses his own money that he was saving for his honeymoon to repay his customers.
The scene from this movie illustrates the fundamental instability of our current financial system. We operate under the illusion that we can deposit our money in a bank and then withdraw it anytime we choose. But at the same time we expect the bank to pay us interest on our deposits.
However, the interest we receive can only be achieved by giving our money to someone else to invest for weeks, or months, or years.
Maturity transformation works only as long as people have confidence in our banking system. Federal deposit insurance was created to instill this confidence. By having the Government stand behind our banks ready to provide the cash necessary to repay our deposits, there is no reason to have a run on a bank. Moreover, if there is a run, banking regulators can swiftly close down the failed bank, or orchestrate a takeover by a healthier bank, and promptly resolve the problem.
Deposit insurance is not a perfect system, as we learned from the savings & loan fiasco in the late.80s and early.90s. Deposit insurance creates moral hazard. Because depositors are protected from their bank's failure, they have no incentive to question the reckless lending practices of their bank. Without adequate oversight, risk-based premiums, and adequate capital requirements, deposit insurance is unsustainable in the long run.
The current home mortgage mess is merely an extension of the maturity transformation and moral hazard problem. But in this case, instead of depositors and deposit insurance, we have overnight loans and too-big-to-fail institutions.
Essentially what happened is Wall Street created an alternate banking system in which participants loaned each other money overnight and invested in mortgage backed securities. They treated their overnight loans as deposits, and they relied on the widely-held belief that once their activities reached critical mass, they would be too-big-to-fail and the Government would bail them all out if anything went wrong.
This financial house of cards collapsed as home prices began to fall and default rates began to rise. At that point, investors became unwilling to rollover their overnight loans. Participants began to suggest there was not enough liquidity. That is a fancy way of saying investors were no longer willing to lend money overnight to buy long-term assets that were declining in value.
So what is the solution?
Last week, the President asked Congress to enact legislation to address this problem. The original plan proposed by Treasury Secretary Paulson would have authorized the Government to buy $700 billion in mortgage-related assets. By taking these troubled assets off the books of financial institutions, it was hoped the government could stabilize falling asset prices and restore investor confidence. Since this plan was first proposed, improvements have been made.
The bill we are considering isn't perfect. Like my constituents, I am outraged that we are in this position today. But the fact is, we are facing a global economic meltdown. Irresponsible lenders and greedy investors have put small businesses, farmers, and families at risk. While many in Iowa may not yet see the effects, our inaction will lead them to understand how dire this problem truly is. We must unfreeze the financial markets as soon as we can, and this is the only solution on the table that will come close to working. We can't guarantee to the taxpayers that this solution will work. What we can say is that we are doing the best we can, representing our constituents the best we can, and trying to solve the problem before the American people really have to suffer the consequences.
What I have come to learn is that the credit crunch doesn't just impact Wall Street. Our economy depends on America's small businesses. We are nine meals away from a revolution, making the farmer an integral part of our country's survival. But farmers and businesses are at risk. Parents who are hoping to send their children to college may not get the loans they need. Individuals that need loans to purchase autos or homes may be left without a ride to their workplace or a roof over their head. There is a trickle-down effect that is sure to be felt if Congress sidelines this bill today.
Since Congress was urged to act, I have stated--in public and private sessions--that there are core principles that must be addressed before I would vote for the bill. I wanted to see strong oversight of the program, including an independent inspector general. I wanted strict executive compensation restrictions for CEOs that got us in this mess. I wanted those who are responsible to give up their pin-striped suits for orange jump suits and to be held accountable. I wanted assurances that the Government would take equity in the firms we bail out. The bill, unlike the original Treasury proposal, includes the core principles I wanted to see. This bill is an improvement from the Treasury plan because there is transparency, oversight, and more protections for taxpayers.
One of the duties I take most seriously as a U.S. Senator is overseeing the policies and activities of the Federal Government. Government must have its checks and balances in place to prevent waste, fraud, and abuse by bureaucrats in Washington. I have been the chief supporter of inspectors general at Federal agencies, and making sure they remain independent overseers of taxpayer dollars. The proposal brought forward by the Secretary of the Treasury failed to include any oversight. Because the emergency plan is sure to be one of the most complex and difficult tasks ever undertaken, I pushed the leaders in the House and Senate to include a special inspector general to monitor the activities of the Treasury Department and its contractors. Timely, comprehensive and truly independent reporting is critical to these oversight efforts.
I am glad oversight was included in this bill. Not only will there be a special inspector general, but we will also have a financial stability oversight board responsible for reviewing the exercise of authority under the program, including the review of policies and making recommendations to the Secretary. Additionally, there is established a congressional oversight panel to review the current state of the financial markets and the regulatory system. This panel will be independent, tasked with reviewing the administration of the program. They will also study the effectiveness of foreclosure mitigation efforts and the effectiveness of the program from the standpoint of minimizing long-term costs to the taxpayers.
Despite these oversight boards and panels, you can be sure that I will not let up on my efforts to reign in fraud, abuse and misconduct. I will not tolerate bureaucrats taking advantage of taxpayer money, and will do my best to make sure heads roll if conflicts of interests by those who run the program are suspected.
Like all Iowans, I am concerned about the risk that this plan places on hard working and responsible taxpayers. Since we began discussing this plan, using taxpayer dollars responsibly has been the top priority. That's why many taxpayer protections were added to the bill.
Treasury's proposal had minimal oversight to protect taxpayer dollars. Like I said earlier, this compromise enhances the oversight structure by creating a financial stability oversight board, a special inspector general, and a congressional oversight panel. It also requires the Secretary to develop regulations and guidelines necessary to prohibit or, in specific cases, manage any conflicts of interest with respect to contractors, advisors, and asset managers.
The Secretary also has to take steps to prevent ``unjust enrichment''--or paying more for a troubled asset than what the seller paid to purchase it. The Secretary--in considering the purchase of troubled assets--must take into account the ``long term viability'' of the financial institution. The bill requires Treasury to take an equity stake in the companies from which it purchases troubled assets. And it requires the Treasury Department to be transparent when they buy and sell. In fact, they must post, within 2 days, the purchases, amounts, and pricing of assets acquired. These provisions will help shield taxpayers from losses and may provide taxpayers with potential future benefits.
Should taxpayers lose out, the bill allows the government to go back after 5 years to recoup losses from financial companies. The Office of Management and Budget and the Congressional Budget Office will report on the net amount lost in the TARP after 5 years. The Government can assess a fee on companies that use TARP to make sure taxpayers don't lose out in the long run.
I am also glad that the final bill does not siphon profits from the program for an existing housing trust fund, as was proposed by the other side of the aisle. I firmly believe that all proceeds of sales must go to the Treasury and back to the taxpayers.
Taxpayers are protected because the final bill doesn't provide $700 billion upfront. The Administration originally wanted the authority to have it all at once, but this bill provides for the program to be implemented in stages. Only $250 billion will be provided immediately, and another $100 billion will be provided upon a written certification of need by the President. Finally, the remaining $350 billion will be provided unless Congress acts. Let's be clear. Congress can act anytime to revoke the Treasury's authority. They will be watched, and they will be questioned. And if Congress doesn't like what it sees, we can repeal this economic stabilization plan.
Finally, this bill provides for an increase in the deposit insurance cap through the Federal Deposit Insurance Corporation. The last time we increased the level was in 1980. The provision temporarily increases from $100,000 to $250,000 the amount of deposit coverage for banks and share coverage for credit unions. The coverage amount reverts back to $100,000 after December 31, 2009. The bill that was voted on by the House did not include this provision, which is an added protection for American families and businesses.
I am supportive of a provision in the bill to modify the tax treatment for banks holding preferred stock in Fannie Mae and Freddie Mac. The proposal would allow banks to treat gains and losses on Fannie Mae and Freddie Mac preferred stock as ordinary, instead of as capital, for tax purposes.
I have heard this relief is important for a number of Iowa community banks. These banks were permitted and even encouraged to hold these investments. These investments were believed to be safe. They had the backing of the Federal Government and provided reliable revenue streams through quarterly dividends.
In the wake of Treasury's acquisition of close to 80 percent of Fannie Mae and Freddie Mac, these preferred shares became virtually worthless. These small banks generally don't have capital gains. Accordingly, without this provision, they would not be able to recognize a tax deduction for their losses. This provision will help community banks satisfy their regulatory capital standards in order to continue to lend and support economic activity and growth in their local communities.
This legislation includes limits on executive compensation. I will be honest: I wish the executive compensation limitations were stronger. However, the limitations included in the bill are a step in the right direction. Why? Because those executives that got us into this mess should not be able to walk away from the institution that they ran with oodles of money. Not only should they be prohibited from walking away with oodles of money, they should go before the board of directors--before the public--and before the stockholders and bow deeply and apologize for their mismanagement. Like the Japanese do. But I will say this--I will take what I can get, and I will look forward to taking a closer look at excessive executive compensation in the next Congress.
Despite my reluctant support for this bill, I remain concerned about the lack of provisions that will bring about long-term changes to our financial health. I would have liked to see language to address the underlying problems that led us to this emergency relief bill. However, I realize this situation calls for an emergency reaction, and we must temporarily forego consideration of provisions that would beef up the securities markets, and toughen regulations for companies that do business on Wall Street.
Take hedge funds, for example. Two years ago, I started conducting oversight of the Securities and Exchange Commission in response to a whistleblower who came to my office complaining that SEC supervisors were pulling their punches in their investigation of a major hedge fund. Nearly a year and a half ago, I came to this floor to introduce an important piece of legislation based on what I learned from my oversight. The bill was aimed at closing a loophole in our securities laws. In light of the current instability in our financial system, I think it is critical that Senators take another look at this bill. It is S. 1402 the The Hedge Fund Registration Act. It is pretty simple, only two pages long. All it does is clarify that the Securities and Exchange Commission has the authority to require hedge funds to register, so the Government knows who they are and what they're doing.
Given the SEC's current attempts to halt manipulative short selling and other transactions by hedge funds that threaten the stability of our markets, I am disappointed that the Senate did not adopt this legislation long ago. If it had, then the SEC might have more of the tools it needs now in these nervous markets.
One major cause of the current crisis is a lack of transparency. Markets need a free flow of information to function properly. Transparency was the focus of our system of securities regulations adopted in the 1930's. Unfortunately, over time, the wizards on Wall Street figured out a million clever ways to avoid transparency. The result is the confusion and uncertainty fueling the crisis we see today. This bill would have been one important step toward greater transparency on Wall Street, but so far it has been a lonely effort on my part.
Another problem in bringing about transparency in the market is the notion of suspending mark-to-market Rules. Mark-to-market accounting requires entities to calculate fair market value by estimating the price that would be received for that asset in an orderly transaction occurring on a specific date, i.e. willing buyer-willing seller. Contrary to public perception, the mark-to-market rule is not new. Other existing accounting standards have and continue to require certain assets to be written down if the asset value falls below cost. This is often referred to ``lower of cost or market''. Under mark-to-market, assets are required to reflect fair market value so they are measured above cost or below cost depending on market conditions. According to the Center for Audit Quality, an autonomous public policy organization affiliated with the American Institute of Certified Public Accountants, AICPA,``suspending mark-to-market accounting would throw financial accounting back to a time of less comparability, less consistency and less transparency''. This position is supported by the Council of Institutional Investors and the CFA Institute. The chairman of the Financial Accounting Standards Board said it best when he said ``the harsh reality is that we can't just suspend or modify the financial reporting rules when there is bad news.''
I hope Congress will consider these key statutory changes that are needed when we return early next year.
Aside from the economic stabilization plan that we are voting on today, we are again discussing legislation designed in part to deal with time-sensitive tax matters. I strongly support this part of the package.
These identical AMT relief, disaster tax relief, and individual, business, and energy tax extender provisions were passed by the Senate by an overwhelming vote of 93-2 just last week. There are five categories of tax relief provided in the bill. The first one is the AMT patch. It expired on December 31 of last year. If we don't act, 24 million families will face an average tax increase of at least $2,000 each.
The second category of tax relief includes several tax benefits available to middle income taxpayers. They expired on December 31 of last year.
Included are deductions for out-of-pocket expenses for teachers, sales tax, and college tuition. Millions of taxpaying families would face an unexpected tax increase.
The third category consists of many valuable business incentives, like the research and development tax credit, that likewise expired.
In this time of high oil prices and instability in the energy markets, Congress should send a clear signal in support of alternative energy and conservation. This is the fourth category. We will not let the wide assortment of tax incentives for alternative energy and conservation expire this year.
The fifth and final category deals with disasters that have ravaged the Nation's heartland and the gulf coast. We need to respond to the folks in those regions, including my home State of Iowa.
This is must-do business. Congress cannot dawdle any longer. With a sense of urgency, Senators REID and MCCONNELL have devised a path for the Senate to complete action on these provisions. I would have rather processed this time-sensitive business several months ago, but better late than never.
Our leaders provided Chairman BAUCUS and me with the authority to make the deal. That was the critical step. I pulled out my notepad and resharpened my pencil. Chairman BAUCUS did the same thing. We have a bipartisan deal evidenced by our 93-2 vote last week.
Last year, I laid out the principles Senate Republicans would follow when it came to revenue raisers. The first principle would be whether the proposal is good tax policy. If the proposal is good tax policy, then we would support and vice-versa. This compromise meets that principle.
The crackdown on offshore deferred compensation plans is appropriate tax policy. I am pleased that we made it tougher on hedge fund managers by removing a charitable loophole. Likewise, the offsets in the energy portion of the bill are appropriate policy.
The second principle deals with how revenue raisers are accounted for. This is where the parties differ. How do they differ? Republicans don't want to go down the slippery slope of building in a bias towards tax increases and against current law tax relief. This is especially compelling when appropriations are wholly outside the Democratic version of pay-go. Likewise, $1.2 trillion of expiring entitlement spending does not figure into pay-go. The Democratic version of pay-go sets us down an irreversible path of higher taxes and higher spending.
If expiring tax relief and expiring spending and appropriations were treated similarly, maybe the deficit reduction rationale behind pay-go would be somewhat credible. As it exists now, it only reinforces an ideology of higher taxes and spending. The rejection of Senator MCCONNELL's deficit neutral offer on AMT and extenders proves my point.
In any event, we found ourselves at an impasse. Democrats insisted on offsetting current law tax relief and Republicans resisted more tax and spend. Republicans were willing to use revenue raisers for new policy and for long-term or permanent tax policy. Republicans did not want to use revenue raisers for new spending.
We came to a compromise by looking at this impasse as a kind of prism. A prism breaks one beam of light into several different shades. Each side can look at the different shades of the prism from their own viewpoint and see that their principles were upheld.
At the end of the day, we will have an AMT patch, extenders, energy, and disaster relief package that is a compromise. Republicans will see that the compromise meets their principles. The offsets are good policy. From a Republicans standpoint, there is enough new policy in the energy part of the deal to tie the non-energy offsets. Otherwise, energy incentives are reformed. Republicans can see that the biggest item in the bill, the AMT patch is not offset. That preserves our point that the unfair AMT should not be a reason to raise taxes on other taxpayers. Likewise, there is enough new and modified policy to tie to the offshore deferred compensation revenue. Bottom line is that the leaders were able to secure a longer term extension of current policy as well with the revenue.
Democrats are able to see the offset policy from their standpoint. Democrats wanted significant revenue raisers and they got them. Both sides wanted the underlying revenue losing extensions and new policy.
Most prisms are delicate and transitory. This one is no different. Our friends in the House need to see that. They can break this fragile prism. The shards will cut millions of taxpaying families.
This deal defers the very vital debate between Republicans and Democrats on whether we tax our way out of this fiscal situation, the Democratic view. Or do we restrain spending, the Republican view.
That important debate, which has held us up for so long, is deferred to another day.
Each side holds to its principles. Each side does the Peoples Business. I thank Chairman BAUCUS and the leaders on both sides.
The tax provisions of this bill present the opportunity to preserve tax relief for millions of middle income families.
I would like to end by saying that I reluctantly support this bill. Again, I am outraged that Congress is in this position to relieve Wall Street and our financial industry. But, unfortunately, this is the hand we have been dealt and the options we have are limited.
I know people in Iowa are opposed to this bill. They would rather see companies fail than to have their dollars used to bail them out of this mess. My vote for this bill is not easy because I respect those concerns, and I agree with them. At the same time, this legislation is the best opportunity we have today to avoid a credit crunch that might cripple our economy. No doubt credit will be tighter with or without this bill as the system becomes more cautious after acting too fast and loose for too long. The argument for this bill is that by unplugging the pipeline that is clogged up with bad debt, good credit can flow. The U.S. Treasury can hold all that bad debt until its value returns with the goal of having the taxpayers recover some of the money, and possibly a great deal of the money, that's being committed with this legislation.
I have to vote in favor of this plan because I want to protect the people back home from what is coming their way if we don't act. I hope my constituents will understand why I feel the need to support this bill.
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