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Public Statements

Financial Regulatory Reform

Floor Speech

Location: Washington, DC


Ms. CANTWELL. Madam President, I appreciate my colleague from Michigan being out here, as she has been repeatedly, to talk about how our process oftentimes breaks down and what the consequences are because there is probably no bigger consequence than what has happened to the State of Michigan, and she fights every day to make sure we are aware of what will help our economy and help Main Street. So I thank her for that.

I thank her for being out here to urge us to get off of a filibuster and on to important legislation that I think will help our country.

I am here also to talk about something that I wish to make sure, as we enter this floor debate, people aren't confused about; that is, that we have made choices in the past that have helped accentuate the situation we are in, and if we are going to get out of this situation, we have to be honest with ourselves that this is a time when we need to do our job and make sure we understand the opportunity to make sure consumers are protected.

I wish to start by talking about the Commodities Exchange Act. There has been a lot of debate about what various committees have oversight and what the important issues are. For me, there is no more important issue than making sure the Commodities Futures Trading Commission, which has oversight of financial indexes, has the authority to regulate what are called derivative markets. The reason I say this is so important is because of the fact that we allowed legislation to pass in 2000--the Commodities Futures Modernization Act--that literally deregulated these derivatives. More specifically, it prevented us from regulating. We had a Commodities Futures Trading Commission Chair, a woman named Brooksley Born, who saw what damage was happening in 1998 with these derivatives because they were unregulated. She tried to do something about it. She tried to do something about it because the Commodities Exchange Act provided oversight to deter and prevent price manipulation or any other disruptions to the market and to ensure financial integrity of all transactions and avoid systemic risk and to protect participants from fraudulent or abusive practices.

That is what their charge was. When she saw in the marketplace that there were these products that were being used that basically thwarted this act, she proposed regulating derivatives. That is in the 1998 timeframe. So this problem has been around for a long time.

As we saw the demise of long-term capital management and incurred a financial crisis at that time, she said: Let's make sure we are regulating these products. What happened was, she was basically run out of town for her views. She was the Chair of the Commission at the time, and a bunch of people, basically influenced by Wall Street, came down to Washington, DC, and said: That is the wrong idea. We don't need to do this. This issue isn't going to be a problem for us. So not only was she prohibited as the Chair of the Commodities Futures Trading Commission to fulfill this act, to make sure we regulated this market--not only that--legislation was passed by the Congress prohibiting us from regulating these derivatives. Imagine that. You actually had the Chair of the Commission doing her job; you actually had her calling out a problem in the market, fulfilling her responsibilities of oversight, and not only was she told she couldn't regulate those, Congress prohibited her from doing that in the Commodities Futures Modernization Act.

How did we get to that situation? I get it because I had to live through the Enron crisis in our State and a lot of people cooked up off-book accounting and people said: Oh, it is a bunch of environmentalists not allowing us to have an energy supply. That is why we have an energy crisis--or people said: Oh, we are having an energy crisis because we don't have enough refineries. We found out it was people manipulating supply and demand with various schemes called Death Star and Get Shorty, a variety of things that all came down to this: off-book accounting. How could you fool the accountants into believing that your scheme was legitimate?

So it should be no surprise that in 1994, in a little retreat effort--some of us go on retreats and talk about our policy issues. Here, some of the titans of Wall Street went down to Boca Raton, about 80 J.P. Morgan bankers, and started to wonder if there was a way to create derivatives that could bet on whether bonds or loans would default. That is what they did. They were down in Boca Raton saying, basically: How can we do off-book accounting to figure out ways in which we can bet on these things?

So that is what happened. That was the start of this. A few years later, Brooksley Born, after she saw them, called them out on it, said: Let's stop it and basically was prohibited from doing it.

So what happened when we prohibited the derivatives from being regulated? Well, one of the CFTC personnel, at that time, basically said all the fundamental templates we have learned from the Great Depression are needed to have markets function smoothly are gone. These are things we had put in place after the last fiscal crisis. We put them in place because we knew we had to protect things.

The other side of the aisle led the charge on that deregulation, led the charge on the deregulation of derivatives and said: Let's keep our hands off. I would say at least four times we have had votes on various derivative measures and the majority of my colleagues on the other side of the aisle have said: No, let's don't reregulate them.

I am all for hearing what they have to say today, but this is an important issue. Let me explain why.

When we look at capital markets, we have to have transparency. If we don't have transparency, people don't know what is going on and products can be manipulated. So after the 2000 Commodities Futures Modernization Act, basically on derivatives we had no transparency, no capital requirements, no prohibition on fraud, no prohibition on manipulation, no regulation of intermediaries. Why are we surprised we ended up in this situation? Because if we basically took what had been the fundamentals of the last fiscal crisis and put them in place in a law and then basically were warned and we deregulated them, why are we surprised we ended up in this situation? Because after deregulation, what it meant if you were doing trading, at least on these derivatives--on other products you had certainty and you had predictability, but on these products--let me be more specific.

We had what were called dark markets and that meant because you couldn't see into these dark markets, you didn't understand what was being done. I know our colleague, Senator Levin, is holding a hearing today, and he is going to get to the bottom of exactly what was going on in those dark markets and who was trying to manipulate them. But the fact that they were dark and not traded meant we couldn't see the price that somebody was paying and thereby couldn't understand what was going on in the market. So we had no transparency. We also had no requirement to keep records, no large trader reporting, which would have been things that the CFTC would have looked at and said: Oh, I can look at that and see whether manipulation is happening. We had no speculation limits. Another thing that happens on the stock market or on trades that happen now--we hear about it all the time--is that if somebody thinks somebody is messing around with the market, we can have limits. We can come in and on an exchange--or an agency can come in and say: We are going to stop that kind of trading because we have concerns about what is going on. We also know there was no capital behind these bets as well, which is very alarming to a lot of people. The synthetic CDOs were cooked up and had no capital behind them. I know my colleague, Senator Dorgan, has been on the floor talking about an amendment he is going to be offering on the Senate floor to make sure we close that. But what it created was just a high risk for fraud and manipulation and excessive speculation. That is what happened.

So when we deregulated the derivative market, what happened? Well, it should be no surprise, again, to find out that when we deregulated it, the market exploded. Here is where we were in 1999. There were some derivative products, but now look at it. It peaked at $700 trillion. It has leveled off now somewhere around $600 trillion. A $600 trillion market in derivatives grew because we created a dark market opportunity in which most people couldn't--not everybody could understand what was going on, and certainly the regulators who used to have a day job of overseeing this were prohibited from doing their day job. I should add, not only were the regulators prohibited from doing their day job, in the Commodities Futures Modernization Act of 2000, we also had a provision in there that said States aren't able to use their authority to look into these markets and market activities as well. So we did two things. We prevented the Federal regulators from doing anything and we prevented the State regulators from doing something as well and now we have this unbelievable--unbelievable--unbelievable market of activity.

My colleagues on the other side of the aisle like to talk about innovation. Well, I know a little bit about innovation. I worked for a company that was a startup company. When I look at that issue, I see we have to have financial markets on Wall Street that help those companies get financing through their very early stages. That is what is so important about our financial markets operating effectively. But one can see from this chart--or maybe not. Maybe you can't see from this chart because it is so hard to see, but at the very bottom there is a little yellow line, and that yellow line represents assets. It represents the loans these banks are making, the amount of money that is in loans in capital going to businesses that are the true ideas of innovation. There is a lot of innovation in derivatives. Now we know what it is: dark market derivatives that cooked up things like CDOs and synthetic instruments to basically bet against bonds because somebody had securitized loans to banks that were risky bank loans anyway and then tried to make somebody believe it was a great way to cover them financially. So all of it was just a risky game, and that is what we are doing. So we are not helping the American economy in investing in Detroit or investing in software or investing in other things, not the way we used to. We are basically investing--and people are making a ton of money--in dark market derivatives. So that is why it is so important we fix this in the legislation.

Just to give an idea of where people are making the money--because I know some people like to say: Well, let's get out here and make sure we do something for small business. I think it is incredibly important to do that, but we are not going to get the big banks to make a bunch of loans to small businesses, as that last chart showed us, when they can make money in dark market derivatives. This chart shows the increased profit they have had since 2008. So we have actually had a decrease in lending. We have actually had a decrease in the amount of capital going out to the tune of something like $574 billion and an increase in trading profits. So we know where the money is going. Wall Street is not putting money into Main Street; Wall Street is putting money into Wall Street dark markets, and we have to get on this legislation to fix that.

So what would we do in this legislation? Well, if my Agriculture Committee colleague's mark is put into this legislation, as I believe the leader is going to do, then we have a choice of having an unregulated market or, with this legislation, a truly regulated market with exchange trading. People say: What does that mean, exchange trading? I don't understand. What is that going to solve for us? Well, just as I said how dark the market was and no one knew what was going on, when we have a product that is traded on an exchange, we actually have transparent pricing so people can see what the pricing is, just as this situation is being described right now in the Senate Oversight Committee hearing about how people didn't know what was going on or who was paying what or who was behind what bets. We have to have transparent pricing, and we have to have real-time trade monitoring. Because someone is monitoring those trades, we know exactly what is happening in the market and who is moving what and how they are moving it and we have a transparent valuation.

If my colleagues have time and they read this latest book out by Michael Lewis, ``The Big Short,'' he talks about how people didn't know exactly what was going on with the valuation of this because it was being hidden from them, so they had no way of understanding exactly what the value of these products were. That is why this scheme was able to be perpetrated on people, because they didn't know what the true valuation is. If we have exchange trading, we actually have speculation limits and we have public transparency.

So when we are on the floor debating this--and I hope my colleagues on the other side of the aisle will support exchange trading. I heard one of our colleagues on the other side of the aisle say: Well, I don't think that is the solution. Well, in my book, it is absolutely the solution. It is absolutely the solution, just as it is for the stock market. Who would buy stock on the stock market if we didn't have oversight of the exchange?

If you didn't have these kinds of things--transparency in pricing, real-time trade monitoring, transparent valuation, speculation limits, and public transparency--who would buy stocks? Why do you think derivatives can operate in the dark? They cannot.

The other thing we will be talking about on the floor is that unregulated trading doesn't have any capital behind the trade. If we actually had a clearinghouse--exchange trading and a clearinghouse--then you would have capital behind these trades, and people would know somebody has the ability to deal with this transaction they are betting on. These are the things we need to do. These are the things that are critical to the type of reform we need to get done.

I am concerned that we are not going to get to this legislation, that the dark market is going to continue to operate that way or that people are going to propose loopholes to basically water down this legislation. We have had a lot of conversation about loopholes. One of them is the end-user loophole. Basically, any kind of loophole in the legislation is kind of like water; the money is going to flow where it can. If it is a dark market, that is where it will flow.

We had a hearing of the Commerce Committee in 2008, 6 or 7 months before the big bubble burst, and George Soros came to testify. He said we are basically inside of a bubble and it is going to cause great concern. He knew then, because he knew what kind of activity was going on. He talked in his testimony about how important it was that you apply regulation and apply it to both the regulated and unregulated market. If you don't apply it to the unregulated market, then all the money moves over to the unregulated area.

I appreciated this New York Times editorial that said:

If [end users] are exempted, potentially trillions of dollars worth of transactions could avoid the exposure--and stability--that comes with exchange trading.

That is what we are going to debate about, whether you are going to have that kind of oversight and make sure that we end up putting the kind of regulations we need in place.

As another New York Times editorial said:

Strong derivatives reform is a matter of putting taxpayers first--ahead of the big banks and corporate America that are fighting hard for a return to the risky business as usual.

We don't need risky business as usual. We need to reform these markets. Let's get capital flowing again and get innovation in products and services in important areas of our economy and know that having fundamental rules in markets and capitalism is to have transparency, and the legislation we are considering will do just that. Hopefully, the Republicans will say what true reforms they are for and realize that, in the past, they have been against some of the derivatives reforms that would have stopped us from having this crisis.

I yield the floor and suggest the absence of a quorum.

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