Mr. GREGG. Mr. President, I wanted to rise to speak further about this financial reform bill. Yesterday, I talked at some length about the problems I saw with the bill relative to section 106 in the derivatives language. Today, I want to talk about things that are not in the bill that should have been in the bill.
The reason I am rising to talk about this bill, which is a very complex bill, and intricate, is because we on our side feel very strongly that we should be involved in the negotiations of a better bill. We are not asking that there be no bill; just the opposite. We are saying there is a lot in this bill that just plain needs to be improved.
For example, in the area of too big to fail, we have to make absolutely sure, if a company is large and it gets into trouble and it overextends itself, that it fails; that the American taxpayer doesn't come in and support that company in the financial sector, or anybody else, as a matter of fact, such as the automobile sector. So that language in the bill needs to be tightened up. It doesn't accomplish that as effectively as we think it should.
The derivatives language has some serious problems. I talked yesterday about one of them, but there are a whole series of problems. The purpose of the derivatives part of this bill should be, No. 1, to reduce systemic risk and make sure that, prospectively, we do everything we can to make these instruments--which are critical to the ability of the economy to be liquid and produce credit--are as safe and as sound as possible, while at the same time making sure we do not overreact and create a situation where this market--which is so crucial to manufacturers across this country and especially to Main Street, which basically benefits from the credit generated by derivatives--doesn't artificially contract due to excessive regulation, or that it doesn't go overseas. So we lose the fact that we are today at the center of capital and credit. We want to be the best place in the world to create capital and to create credit, and we should have a bill that accomplishes that.
I have been outlining concerns I have in the derivatives area--yesterday I talked about section 106--and I could highlight a number of other areas. For example, the immediacy with which derivatives are pushed from a clearinghouse into an exchange situation, which I don't think will work under this bill. I think, basically, it would contract the market dramatically.
But what I want to speak to specifically are the things left out of this bill that should be addressed in order to make sure we don't have happen again what happened in September of 2008 and on into the rest of that year, which was that tremendous trauma that our Nation went through and is just now coming out of--and for some people it is still a trauma because they don't have a job, which is the worst trauma of all for somebody. That trauma was caused by some very distinct and specific events that occurred, and a lot of them were the responsibility of the Congress.
If we want to look for who is the cause of the downturn and the crisis in the subprime market, we can look at ourselves in the mirror and say: We are, to a large degree. Easy money was also a problem. But I think right at the center of the problem was the collapse of underwriting standards in this country.
It used to be, up through the 1990s, you couldn't get a loan for much more than 85 percent of the value of the home. You had to put some money down, and you had to be able to show to the person who was lending you the money--the mortgagor--that you could pay the money back. Well, we went into this huge expansion in lending which was driven in large part by two things: One, the monetary policy of the Fed, which basically allowed for easy money to flow out there very quickly into the market; and, secondly, the Congress, specifically insisting everybody should be able to have a home whether they could afford it or not or whether the home was properly valued. Those two factors lead to an explosion in home ownership, equally leading to an explosion in mortgages which, first, did not meet the value of the underlying asset and, in fact, in some instances were actually valued at more than the asset even at the time they were issued.
Almost all these subprime mortgages presumed there would always be an appreciation of real estate prices, so they could loan at 100 percent and at some point you would be down to 85 percent or 90 percent of the value. That didn't happen, of course. The value went down, and so the mortgages went underwater in terms of their basic value. Secondly, the monies were lent to individuals who, because of the way they structured these loans for the first 2 or 3 years, could pay the interest or the mortgage payment, but as soon as these loans reset to a realistic interest rate, they couldn't pay it. Everybody knew it when they did the loan.
Now, why did people do that? Why was there this collapse in underwriting standards? Well, there were a lot of reasons. I happen to think probably the primary one was that we separated the owner of the loan from the actual loanmaking process. Therefore, the people who were originating the loans weren't interested in the underlying security. They were not even interested in whether the person could pay it back. They were only interested in the fees they were generating. So we had a collapse in the underwriting standards. We had an inverted pyramid, with this person down here borrowing money from this entity over here on a piece of property which wasn't worth the value at which money was being borrowed. The person borrowing the money couldn't pay it back, but nobody cared because that loan was then taken and sold and securitized and subdivided and syndicated and sometimes put into a synthetic instrument, or had a synthetic instrument mirroring it. So we had this loan down here, and this massive structure from the churning of that loan on top of it, and the loan wouldn't support all that structure over it. So it all collapsed on us in late 2008.
This bill, however, doesn't address that issue of underwriting standards in any effective way. Senator Isakson and I have spoken about this on the Senate floor a number of times, and we are going to offer what we hope is a bipartisan proposal. But it will improve the bill because it will basically be taking us back to the underwriting standards that used to be in place in the 1990s, not only for the origination of the loan but also for the securitizer of the loan. This is critical. If we are going to fix this problem--and the purpose of the bill should be to fix the problem that created the crisis and make sure it doesn't occur again--if that is the real goal, then there should be underwriting standards.
The second issue in this bill that is not addressed is Fannie and Freddie. These two entities have trillions of dollars of outstanding liability, outstanding notes, and it is estimated that the taxpayer has a $400 billion to $500 billion--that is $ 1/2 trillion--of liability because a lot of these notes aren't ever going to be paid back. Yet Fannie and Freddie are still operating almost in a business-as-usual mindset, pushing money out the door, buying up bonds and notes and mortgages, and doing it almost as if there is no end to the taxpayers' pocketbook.
In fact, we don't even put Fannie and Freddie on the Federal balance sheet. We know, since we own 80 percent of those companies that the taxpayer is on the hook for this debt--this $400 billion to $500 billion of debt. This bill acts as if it doesn't even exist, and yet that was one of the primary drivers of the economic collapse of 2008, from which we are all suffering and have suffered. So this bill should have at least an initial step into the arena of how we are going to handle this issue of straightening out the GSEs, as they are called.
The first step is that we ought to bring their liabilities onto our books so that the taxpayers aren't being lied to; so that we are telling the truth to the American people as to how much it will cost to straighten this out and we have started thinking about how we are going to straighten it out. Yet this bill doesn't do that. That is a place where we, as Republicans--and I think a lot of other people--would like to see this bill improved, and that is why we are opposing going forward with the bill in its present form until we are allowed to participate in the negotiations on improving it. That is what this is all about.
The third issue, of course, is the credit rating agencies. We know without
any question that the credit rating agencies failed miserably, and people relied on their information, their credit rating of varied securities. That is one of the primary reasons people were willing to buy a lot of the instruments that were floating around. They believed, generally, when the credit rating agency said it was a triple-A rated security, that they had done their due diligence and it was a triple-A rated security. It turned out it wasn't, in many instances.
As a result, it was sloppy underwriting again, by people or financial houses that were willing to buy these securitized products, the CDOs and various other products. They didn't do the heavy lifting of everyone going and looking at the actual assets which were backing up these products. They relied on the rating agencies, and the rating agencies didn't do their job either.
So we have this serious issue with rating agencies that needs to be addressed. It is not effectively addressed in this bill. But we cannot correct the problems which created the 2008 crisis and caused this very severe recession and put this country through this tremendous trauma unless we address that issue, along with underwriting standards, GSEs, and credit rating agencies. So Republicans are saying: Let's look at that and try to fix that. That is why we don't want to go forward until we are brought to the table and allowed to address that issue.
Another question: They have filled this bill with all sorts of extraneous things that had absolutely nothing to do--absolutely nothing to do--with the housing crisis and the economic meltdown that followed. A lot of corporate governance rules that have been kicking around this city for a long time and that are the agenda of certain groups in this city that have a political agenda dealing with wanting to have control over corporations--a lot of it influenced by organized labor--have been thrown into this bill willy-nilly. They had nothing, and they have nothing, to do with the overarching issues that affect protecting the market and making and giving us a sound financial system. Yet they are in this bill. They shouldn't be in this bill or, if they are going to be in the bill, they should be significantly adjusted.
So these are some of our concerns. People ask: Well, why are the Republicans stopping this bill at this point? Because we want a better bill, and we have specific proposals for accomplishing that. We want language which does accomplish too big to fail and ends that policy. We want language which makes the derivative market not only safe and not a systemic risk but a sound and strong force for credit in this country. We want language which addresses better underwriting standards. We want language which addresses the issues of the GSEs. And we want language which addresses the failures of the credit rating agencies. We don't want a lot of extraneous language which is simply brought along because the train was leaving the station and it was thrown on it, and which, in many instances, in my mind at least, undermines rather than becomes a constructive force for a better financial system in this country.
So those are our concerns, and that is why we are continuing to insist that we be allowed to be at the table to negotiate these very critical issues on this very complicated bill.
I thank the Senator from North Dakota for showing me the courtesy of allowing me to go first, and I yield the floor.
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