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Public Statements

Restoring American Finacial Stability Act of 2010

Floor Speech

Location: Washington, DC


Mr. CHAMBLISS. Mr. President, first, let me thank the chairman. And he is exactly right, I would encourage all of those who have indicated to me they wish to speak on my amendment, from both sides of the aisle, to let us know, come down to the floor. We wish to dispose of this amendment as soon as possible. I am prepared to enter into any kind of reasonable time agreement as soon as we get an idea of exactly how many speakers there will be in order to accommodate those folks.

I am going to talk in detail about the amendment, but first I do want to respond to the Senator from North Dakota who makes some good points with which I agree. But when we talk about the elimination or not allowing credit default swaps, let me say what bothers me about that.

In 2000, when we passed the Commodities Futures Modernization Act, nobody envisioned that credit default swaps would mushroom as they did. The fact is that not only did they grow larger in number, they grew in dollar volume, and they grew in a way that certainly did participate in the collapse that occurred in 2008.

But the real problem with it is not that we had those products on the market but that the regulators did not have the power and authority and the tools to deal with those products, rather than thinking about eliminating a specific product, knowing these smart folks who are in this business in the financial industry are out there right now looking at this bill, and trying to figure out other products they can design that will be different from a credit default swap, but yet be as dangerous as what happened in 2008. We need to give the regulators the power and authority to look at these products and put 100 percent transparency in place. That is what I want to see, and that is what my chairman, Senator Lincoln, wants to see, and I think everybody in here agrees we ought to have full transparency.

Mr. DORGAN. Will the Senator yield for a clarification?

Mr. CHAMBLISS. Surely.

Mr. DORGAN. Mr. President, let me clarify that my position is to ban what are called naked or synthetic credit default swaps, not ban credit default swaps. Those with no insurable interest of any kind are considered naked credit default swaps. It appears to me that 70 to 80 percent of all credit default swaps are in that category; they have no insurable interest. So I did not want the Senator to think I want to ban credit default swaps. That is not the case. Naked credit default swaps, yes.

Mr. CHAMBLISS. I understand that. My point is the same, though, that if we give the regulators the authority to regulate those products, then I think we can deal with it better that way than targeting specific products to be eliminated or banned.

Among the many complex issues this body deals with every day, there are few more complicated than the issue of derivatives. However, we should not let the complexity of the swaps market be an excuse for ignoring good public policy and ensuring that our markets are both safe as well as functional.

In the past couple of years, a lot of people have become acquainted with one particular type of derivative known as, as we have just talked about, a credit default swap or CDS, which permits one party to transfer the credit risk or bonds or syndicated bank loans to another party.

Since AIG was heavily involved in CDS, it seems simple enough to blame swaps generally for what went wrong in the system. However, that would be an inaccurate oversimplification, because the real situation is much more complicated. We need to distinguish between credit default swaps and the actual underlying assets represented by those swaps, in this case mortgage-backed securities or mortgages that were themselves the root of the problem.

There are so many other types of swaps that U.S. businesses rely on every day to mitigate just about any risk they face in the ordinary course of doing business. Before we make a big policy change that makes these over-the-counter products less desirable to market participants or require that these products trade only on an exchange type facility, we need to ask ourselves whether this will even address the underlying problem.

Why take a chance in these uncertain times to make legislative and regulatory changes that could possibly make things worse, potentially dry up more capital or force the cost of business going higher? This does not mean there is not room for improvement. That is why I have joined with several of my colleagues today in developing an amendment to apply strong and reasonable regulation to the derivatives markets.

Let me be clear. We share the desire to apply stronger safeguards in these markets to regulate swap market participants and to ensure that swap transactions are more closely monitored by the regulators. I am absolutely convinced that the market volatility and financial meltdown of the recent past makes the case for more market transparency.

How can we in the Congress be sure of the outcome of sweeping reforms without first properly identifying the exact cause of these problems? How can we identify the cause of the problem without authorizing and requiring more transparency through the collection of necessary data?

For this reason, I have worked with several of my colleagues to develop an amendment that would require all swap transactions be made known to the appropriate regulators so effective regulation can be applied where necessary.

Additionally, there will be public dissemination of prices and volumes of completed swap transactions in order that investors and other market participants might be assisted in marking existing swap positions to market, making informed decisions before executing future transactions, and assessing the quality of transactions they have executed.

Beyond requiring more transparency, I also believe we should provide the CFTC and the SEC with the necessary authorities to more properly regulate those market participants who are potentially contributing to the type of risk that jeopardizes our financial system: swap dealers, Fannie Mae, Freddie Mac, large hedge funds, and AIG-type entities.

Many may not even realize that swaps are statutorily excluded from the current regulatory oversight of both the CFTC and the SEC. That is right; current law does not provide for clear regulation of swap market participants. Our amendment would ensure that these market participants are fully regulated and that their swap positions are cleared through a fully regulated clearinghouse. This is a huge departure from current law.

Speaking of clearing, we need to determine how best to encourage the clearing of certain derivative products without jeopardizing either the use of these risk management tools or the sustainability of our clearinghouses. For that reason, our amendment would enable true end-users, those businesses that use swaps to hedge their risk, not for speculative purpose, but true hedging, to avoid an expensive mandate to clear their swaps.

These businesses had absolutely nothing to do with the financial crisis and should not be punished with increased costs and burdens. We certainly do not want to discourage them from managing their risk, especially not in the current economic environment.

Last Friday, the Department of Labor published their unemployment report for the month of April. Again, unemployment rose from 9.7 percent to 9.9 percent. In my State, it is in excess of 10 percent. Why would we subject U.S. companies to expensive mandates when we should be advancing policies that lessen their financial burdens so they can employ more people?

Why is Congress considering slapping an additional cost on them in the form of a clearing mandate? This does not make sense, when these individual companies are the true end-users of the products they are trading in, and they were absolutely not the cause of the financial meltdown. Those mandates should be targeted and in such a way to lessen the risks of those large financial institution swap dealers who are responsible for the bulk majority of all swap transactions and, therefore, contributing to systemic risk.

But a clearing mandate is not appropriate for businesses using swaps to manage their risks and keep their costs down. This is very simple. If their costs go up, they will either pass it along to consumers or stop managing their risk, and then they certainly cannot afford to hire more workers.

Our amendment has a more targeted clearing mandate designed to reach those who are actually responsible for this crisis we are in, Wall Street and not Main Street businesses.

The Senate will soon have the chance to vote on this substitute amendment on derivatives. I am looking forward to further debate on our amendment because it will highlight a handful of significant differences between the derivatives language in the Dodd-Lincoln amendment versus our amendment. I believe our approach on transparency, on clearing, on end users, on capital requirements, and on trading mandates is much more appropriate, much more reasonable, much more business friendly, and, frankly, much more secure. My amendment will ensure that Main Street businesses will still be able to appropriately use derivatives in hedging their daily business risks, while ensuring that appropriate regulatory standards are put into place for the institutions and transactions that contribute to systemic financial risk.

If Congress is truly interested in addressing the problem as opposed to politicizing a solution, we can no longer ignore the complexities of these markets. We must seek to understand the legitimate purposes these complex instruments serve for large and small businesses in each of our States. Unfortunately, the language currently before the Senate misses the mark when it comes to the appropriate regulation of derivatives. The underlying bill would have many unfortunate consequences--some intended, some unintended--resulting from applying complicated regulations too broadly and will subject our American businesses to more risk, not less.

Three consequences of the underlying bill on derivatives are these: One, the users will pay huge clearing fees and pass on those expenses to consumers; two, no longer will businesses use the derivatives market, and they will pass on the higher, unstable market costs to consumers; and three, these businesses, instead of using U.S. markets, will simply take their business offshore. As they do today, they will trade in the dark, and no U.S. regulator will ever see what they are doing. That is not right. That is not what any of us intend to see happen.

The fact is, if we pass the derivatives provisions in the underlying bill, there is going to be a significant number of end users who take their business offshore. That truly is unacceptable. Our amendment makes good business sense and good common sense.

We have received support for our amendment from a wide array of businesses. These are not banks that stand to make profits. These are individual users. I have a letter from the National Association of Manufacturers which states:

We have serious concerns that the current end-user exemption in S. 3217 (and in the pending Dodd Substitute) is not strong or clear enough. In addition, other provisions in the derivatives title could effectively eliminate the exemption for many companies and, in some cases, subject them to capital and margin requirements or higher costs. Conversely, the Chambliss/Shelby substitute includes a clear and strong end-user exemption that appropriately exempts businesses that use OTC derivatives to hedge their business risk from the regulatory scheme applicable to swap dealers.

From the Coalition for Derivatives End-Users, we have the following: That my amendment would ``strike the right balance between bringing fundamental and needed reforms to the over-the-counter (OTC) derivatives market while also ensuring significant and burdensome new costs are not necessarily imposed on business end-users.''

Lastly, I have a letter signed by several energy supply groups which states that they ``remain concerned about the potential impact of the proposed financial reform legislation on end-users.'' They go on to say that:

Due to the broad definition of ``swap dealer,'' end users may be ineligible for the end-user exemption if they engage in hedging business risks in the ordinary course of business.

I ask unanimous consent that these respective letters be printed in the Record.

There being no objection, the material was ordered to be printed in the RECORD


Mr. CHAMBLISS. Mr. President, I have had numerous discussions with both the chairman of the Banking Committee as well as the ranking member and the chairman of the Ag Committee about this issue for weeks and months. I know we have the same goal in common: to ensure there is transparency in the marketplace and that we have regulators who will do the job we ask them to do. Frankly, I am not sure that was the case 5 years ago or even 2 years ago. But if we give these regulators the tools and if we give them the opportunity to look at every transaction, irrespective of whether it is going through a clearinghouse or whether it is over the counter, and they have the opportunity to review every large institution or every small institution that engages in these transactions and they also have the opportunity to look at the other side and see which companies are using these products or which entities are using them and they can then deal with those entities that become systemically risky--they didn't have that power and authority before, and we are going to give them that power and authority now--I have all the trust and confidence that they will use it in the right way and that with those tools and with that transparency and with the bringing of these trades out of the shadows and into the sunlight, we will be able to control the financial markets in a way that allows our end users, those who did not cause any of the problem and are not part of the problem, from being thrown into the same basket with those folks who did become systemically risky and caused the financial meltdown that occurred.

My amendment does that. It does it in the right way. I urge my colleagues to support the amendment.

I yield the floor.


Mr. CHAMBLISS. Mr. President, let me extend the same courtesy to my chairman. She is my dear friend. We work very closely together on virtually every issue. It is extremely unusual for us to disagree on any major issue. She and her staff have been great to work with, as always. They have been very open. We have had an ongoing dialog. We just simply disagree about the way this issue needs to be dealt with.

Let me say that an indication of how complex this issue is and why this issue is so important and why we don't need to have our constituents expend money when they don't need to expend money that is going to be passed on to consumers of every single product virtually made in America is this: There are a lot of people who have gotten up on the other side and spoken about this amendment. I know they don't intend to get up here and make statements that are not correct. But frankly, that is what we have heard. All I can attribute that to is the fact that this is such a complex issue, that the folks who have been speaking about my amendment simply don't understand it.

Let me give some examples. We talk about large companies falling prey to derivatives. Large companies use derivatives in a very meaningful way that is advantageous to every single American customer. Everybody who buys something--I don't care whether it is an automobile, a widget, a drug--and every major manufacturer uses derivatives. They are very sophisticated individuals who deal in these products. They know what they are doing. They are not falling prey to the use of these products.

There have been a couple folks who have said we don't have transparency, that we ought to let these products come out of the shadows. Let me make clear--and I think the chairman will agree with me--100 percent of the transactions under our amendment would be out in the open. There would be a clearing of about 85 to 90 percent of all derivatives contracts under our amendment. The others, the end users, the manufacturers, the energy companies that go out and not only borrow money but buy coal or buy natural gas and that want to have stability in their products, those individual end users would be exempt from the clearing requirement. But every single one of them would have to report every single contract to the CFTC or to the SEC, 100 percent transparency on every single derivative.

I don't know why folks can't understand that in our amendment because it is pretty plain. I think Senator Gregg did a good job of explaining exactly how that is done.

Somebody said they don't want to return to old-fashioned capitalism. If I am considered to be one who is promoting old-fashioned capitalism in my amendment, I plead guilty. Old-fashioned capitalism has made this country the strongest economy the world has ever seen. Old-fashioned capitalism has an alternative. It is called socialism. I do not believe in socialism. I believe, if somebody wants to work hard and generate money to make a better quality of life for themself and their family, they ought to have the opportunity to do so. That is what old-fashioned capitalism is all about.

I could go on and on giving examples of things that have been said that are out of context. Let's get down to the bottom line; that is, who supports the underlying bill? Who supports the Dodd-Lincoln bill? The simple answer is Wall Street. Why do I say that? At a hearing in the Government Relations Committee last week, Goldman Sachs was called to the Hill to testify before Senator Levin and Senator Coburn's committee. Senator Coburn asked a question directly of the Goldman Sachs agent and said: Do you support the underlying bill that is now being debated on the floor of the Senate? Without hesitation, he said: Yes. Why would they support it? They are going to make a lot of money off this underlying bill. Why do I say they are going to make a lot of money? Who is going to clear these contracts? They are going to be cleared by clearinghouses owned by Wall Street banks.

Under the underlying bill, there is another provision that has not even been talked about today: Transactions are required to be executed on what is called a swaps execution facility. It is a mini exchange. In addition to going to that swaps execution facility, that contract, after that, has to go to a clearinghouse. So what you have is a party who agrees with a manufacturer that they are going to enter into an agreement on a derivative for an interest rate, let's say. That entity that has put that deal together is going to charge a fee. They would do that anyway. That entity is also likely to be charged by the swaps execution facility where the contract is executed. They are going to charge another fee for doing that. Then they are going to have to go to a clearinghouse that is going to charge another fee.

So it is pretty easy to see why Wall Street likes this provision, likes the underlying bill, because they are going to make a lot of money in fees off these contracts.

The only other comment I wish to make, with reference to comments that have been made, is whether these end users leave the U.S. markets and go overseas. There has been contention made that is not going to happen. They are not going to do that. Well, they are. Other markets have already indicated they are not about to follow our lead. The London regulator has openly said they will not follow our lead. We have heard nothing out of the Europeans, nothing out of Singapore. Why haven't we? They are watching to see what we do. They are going to be soliciting U.S. customers to go to their markets because our constituents are not going to have to pay these huge fees in their countries that are required under this bill.

It only makes sense that if they can generate more money for their bottom line and they can sit in their office in New York City, Atlanta or Moultrie, GA, and execute a contract in Singapore, where they don't have to pay that fee, you better believe that is where they are going to go. They have no more risk. It is the same amount of risk. Is the CFTC or the SEC going to know they have done that? Absolutely not. It will not be reported to them.

I could go on and on. At the end of the day, if you want to see 100 percent transparency and you want to see the end users in this business who utilize these swaps and derivatives in a nonsystemically risky way continue to have access, then you need to support my amendment. If you listen to the manufacturers across America that know because they have used these products for decades and have done so in a safe way and a way that provides a cheaper product for their consumer, you need to support my amendment.

I ask for the yeas and nays.


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