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Public Statements

Restoring American Financial Stability Act of 2010

Floor Speech

Location: Washington, DC


Mr. BUNNING. Mr. President, I come to the floor to speak about financial reform and the bill the Senate is considering right now. I have made no secret of my desire to pass a strong financial reform bill and rein in excesses of our largest financial companies. No Senator in the Banking Committee or in this Chamber has been a stronger voice against the financial industry enablers at the Fed than I have been. I have fought every bailout that has come through this Congress as well as the bailouts that the Federal Reserve and both the Bush and Obama administrations put in place without the approval of the Congress. I wish to pass a bill that ends bailouts and puts strong restrictions on reckless activities in our financial sector. Unfortunately, the bill before the Senate not only fails to end bailouts, it does the opposite and makes them permanent. This bill will also lead to future financial disasters because it ignores the root causes of the crisis and thus fails to put the necessary handcuffs on key parts of the financial system.

The primary goal of this bill should be to end bailouts and the idea of too big to fail. Instead, the bill makes too big to fail a permanent feature of our financial system. It concentrates regulations of the largest financial institutions at the Federal Reserve and removes only small banks from Fed supervision. The Feds failed as a regulator leading up to the crisis and should not be the regulator of any banks, but now Federal regulation will be a sign that a firm is too big to fail. On top of the new Fed seal of approval for our largest financial companies, this bill creates a new stability council that will designate other firms for the Fed to regulate and, thus, too big to fail.

Federal regulation of the largest financial firms is not the only way this bill makes too big to fail and bailouts permanent. The largest bank holding companies and other financial firms will now be subject to a new resolution process. Any resolution process is, by definition, a bailout because the whole point is to allow some creditors to get paid more than they would in bankruptcy. Even if the financial company is closed down at the end of the process, the fact that the creditors are protected against the losses they would normally take will undermine market discipline and encourage more risky behavior. That will lead to more Bear Stearns, Lehman Brothers, and AIGs, not less.

The bailouts in this bill come with a cost beyond the moral hazard created by protecting creditors. Despite claims that the financial industry will pay for the bailouts, payments into the bailout fund are tax deductible, which means taxpayers are directly subsidizing the bailouts.

The bailout fund is not the only way this bill keeps taxpayers on the hook for future bailouts. First, the bill does not shut off the Federal Reserve's bailout powers. While some limits are placed on the Fed, the bill still lets it create bailout programs to buy up assets and pump money into struggling firms through ``broad-based'' programs. Second, the bill creates an unlimited new debt guarantee program at the FDIC that can be used to prop up firms instead of closing them down. Both of these bailout powers put taxpayers directly at risk and make bailouts a permanent part of the financial system.

Instead of putting all these bailout powers into law, we should be putting failing companies into bankruptcy. Bankruptcy provides certainty and fairness, and protects taxpayers. Under bankruptcy, similar creditors are treated the same, which.prevents the government from picking winners and losers in bailouts. Shareholders and creditors also know up front what losses they are facing and will exercise caution when dealing with financial companies. Later this week I will join several other Senators in offering an amendment that will update our bankruptcy laws to deal with modern financial firms and permanently end bailouts.

If this bill is not going to take away government protection for financial companies and send those that fail through bankruptcy, then it should make them small enough to fail. Decades of combination have allowed a handful of banks to dominate the financial landscape. The four largest financial companies have assets totaling over 50 percent of our annual gross domestic product, and the six largest have assets of more than 60 percent. The four largest banks control approximately one-third of all deposits in the country. This concentration has come about because creditors would rather deal with firms seen as too big to fail, knowing that the government will protect them from losses. I would rather take away the taxpayer protection for creditors of large firms and let the market determine their size. But if that is not going to happen we should place hard limits on the size of financial companies and limit the activities of banks with insured deposits. Any financial companies that are over those size limits must be forced to shrink. This will lead to a more competitive banking sector, reduce the influence of the largest firms, and prevent a handful of them from holding our economy and government hostage ever again.

Along with not solving too big to fail, this bill does not address the housing finance problems that were at the center of the crisis. First, there is nothing in this bill that will stop unsafe mortgage underwriting practices such as zero downpayment and interest-only mortgages. There is a lot of talk of making financial companies have skin in the game, but when it comes to mortgages, the skin in the game that matters is the borrower's. Second, the bill ignores the role of government housing policy and Fannie Mae and Freddie Mac, which have received more bailout money than anyone else. The bill does not put an end to the GSE's taxpayer guarantees and subsidies or stop the taxpayers from having to foot the bill for their irresponsible actions over the past decade. On Friday the Wall Street Journal reported that over 96 percent of all mortgages written in the first quarter were backed by some type of government guarantee. Until we resolve the future of the GSEs, the private mortgage market will not return and the risk to the taxpayers will continue to increase.

This bill also does nothing to address the biggest single factor in the current financial crisis and most other crises in the past--flawed

Federal Reserve monetary policy. Nothing in this bill will stop the next bubble or collapse if the Fed continues with its easy money policies. Cheap money will always distort prices and lead to dangerous behavior; no amount of regulation can contain it.

As I mentioned earlier, the bill concentrates regulation of the largest financial firms at the Federal Reserve, despite the Fed's long history of failed regulation. Leading up to the crisis the Fed already favored the interests of the large banks, and by only removing its supervision of small banks the Fed will become even more of a cheerleader for Wall Street. In an earlier version of this bill, bank and consumer protection regulation were removed from the Fed and placed in a new bank regulator. Unfortunately, that was undone in the current version and the Fed gets more power for both jobs.

No one has criticized the Fed more than I have, for its failure to use its consumer protection powers to regulate mortgages. But I just cannot understand keeping consumer protection inside the same Fed that ignored that job for decades. This bill takes a dangerous approach to consumer protection by separating it from the safety and soundness of financial companies. It also goes even further by letting the Fed reach into businesses that had nothing to do with the financial crisis.

Finally, I want to mention the credit rating agency portion of the bill. Our goal should be to reduce investors' reliance on the agencies. Instead, the bill will give investors a false sense of security by setting new standards to get certified by the government. Also, allowing the rating agencies to be sued will discourage new agencies from entering the market and further concentrate power in the hands of the largest agencies that have performed the worst.

I have many other concerns about the bill that I will not mention on the floor today, but they are explained in detail in the minority views section of the committee report. As the bill stands today, it will not solve the problems in our financial system. It is regulation without reform. But I hope we can work together to get a bipartisan bill that will put an end to too big to fail forever.


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