Fixed Indexed Annuities and Insurance Products Classification Act of 2009

Madam President, in the final hours of debate on this bill, I think we should be asking ourselves why we started the whole exercise in the first place. What is the purpose of financial regulatory reform? I wish to address that for a moment this morning.

Presumably, we all agree the purpose should have been to tackle the problems that led to the financial crisis in the first place. That means serious reform must address root causes: most prominently, too big to fail--ending that and reining in the two government-sponsored enterprises, Fannie Mae and Freddie Mac, that had a lot to do with causing the problem in the first place. Amazingly, despite its size-- and this is the legislation--and all of the hype that has attended it, the bill before us fails to address these root causes.

Moreover, even though Main Street didn't cause the problem, the bill is so extensive in its regulatory reach, it creates new burdens on Main Street while continuing the recent pattern--and one, by the way, Americans are very fed up with--of using every crisis as an excuse to involve government in almost every sector and every aspect of American life.

Republicans had hoped that once the bill came to the Senate, improvements would be made and the final product would be less partisan. We offered amendments to improve the bill, but almost all of these have been defeated. Along the way, Democratic amendments have been adopted that actually make the bill worse.

I hoped the bill would be amended to actually end taxpayer-financed bailouts and the concept that companies can be too big to fail and that it would protect small businesses from the regulatory burdens imposed by the bill and protect the rights of privacy for people's financial information. But that didn't happen, so we are left with a bill that enshrines into law failed policies of the past, imposes a massive new bureaucracy on small businesses that had nothing to do with creating the financial crisis, and threatens jobs and our economic growth.

Today, let me address these three problems in a bit more detail-- first, too big to fail. The very first amendment offered by the majority purported to end too big to fail. While that sounds good, the amendment that passed won't accomplish the goal. The amendment has the effect only of declaring the intent of Congress. It does not actually prohibit taxpayer funds from being used to assist banks, and that is why I voted against it. It expresses a sentiment, but it is not actually operative.

As I will discuss, provisions remain in this bill that enshrine taxpayer bailouts forever, even after the removal of the $50 billion bailout fund. For instance, section 113 establishes a Financial Stability Oversight Council. This section would give the Federal Reserve the authority to prop up any nonbank financial company the council deems to be a potential threat to systemic stability.

The council would designate certain firms as ``systematically significant.'' Market participants would obviously interpret this to mean too big to fail. Therefore, the designations would increase moral hazard and perpetuate the very problem we are trying to fix. So a new government board based in Washington would decide which institutions get special treatment, giving unaccountable government officials tremendous authority to pick winners and losers, resulting in a competitive advantage for the winners.

What determines whether a nonbank financial institution is a threat to stability? Among other possible considerations, ``any other factors that the Council deems appropriate,'' according to the bill. Such broad authority would allow the council to protect and promote or to hamper firms based on whatever it deems appropriate--``any other factors.''

Section 1155 of the bill, entitled ``Emergency Financial Stabilization,'' also guarantees bailouts. Here, the FDIC would be allowed to create a new program of unlimited size to guarantee the obligations of depositories and holding companies with depositories. Since there is no requirement that a company that receives the guarantees and defaults on its obligations be taken into bankruptcy, the FDIC and Treasury could prop up whatever company they choose.

So this bill does not end too big to fail. If we had truly wanted to do that, we would have passed the Sessions amendment. This amendment would have struck the entire liquidation authority section from the bill and replaced it with a bankruptcy process for nonbank financial institutions. It also would have prohibited bailout authority and made needed adjustments so that a few provisions of the U.S. Bankruptcy Code to provide necessary flexibility to deal with the failure of large financial firms, such as Lehman Brothers, would work. In other words, it would have ended too big to fail.

The second area I mentioned was the government-sponsored enterprises. No debate on too big to fail would be complete without a discussion of Fannie Mae and Freddie Mac. These are the two government-sponsored enterprises given the authority to acquire mortgages. It seems to me almost unconscionable that this bill does not even attempt any reform of these two institutions given the fact they were a large part of the creation of the problem. And it is not because Republicans haven't tried. We have. The reckless behavior of these two institutions--by the way, institutions that have come to epitomize too big to fail--has surged through the entire commercial banking sector and our economy as a whole.

Let's recall how central these two government-sponsored enterprises were to the housing bubble and the ensuing collapse of that bubble. For years, Fannie and Freddie backed mortgages that were issued to too many people who could not really afford them. The two GSEs reaped enormous profits, while recklessly taking advantage of the government's intrinsic guarantee of purchasing trillions of dollars' worth of these bad mortgages, including all those made to risky subprime borrowers. This is the model that allowed Fannie and Freddie to inflate the subprime mortgage bubble. But when the housing market collapsed, the two GSEs were left with billions of dollars of bad debt. And guess who is on the hook for those billions. The American taxpayers.

These two institutions had their own dedicated regulator--the Office of Federal Housing Enterprise Oversight, or OFHEO. Republicans tried to give OFHEO more authority, Democrats objected, and so they allowed the situation to spiral out of control. The easy credit fueled rapidly rising homes prices. As prices rose, so, too, did the demand for even larger mortgages. So Fannie and Freddie looked for ways to make even more mortgage credit available to borrowers with a questionable ability to repay.

By 2008, the two GSEs had nearly $5 trillion in mortgages and mortgage-backed securities. They were overleveraged and too big to fail. It was a textbook example of moral hazard on a massive scale. I warned about it repeatedly.

Today, they hold a combined $8.1 trillion of total outstanding debt. Because the Federal Government has decided to cover this debt--by the way, even though there has never been a vote in the Congress to authorize this--both of these entities have recently asked taxpayers for billions more to cover their rapidly mounting losses. Recently, Freddie Mac announced it will need an additional taxpayer bailout of $10.6 billion, and that is after it lost $6.7 billion during the first quarter of this year. In 10 of the last 11 quarters, Freddie Mac has lost a total of $82 billion, which is twice the amount it earned over the previous 30 years. Fannie, too, just recently asked taxpayers for more money--$8.4 billion--to cover its soaring losses.

Since the Federal takeover of Fannie and Freddie, taxpayers have lost $145 billion propping them up--just two companies. And since the Treasury Secretary recently lifted the bailout cap, taxpayers are responsible for unlimited losses at these institutions.

The Associated Press summed up the situation succinctly. It wrote last week:

The rescue of Fannie Mae and sister company Freddie Mac is

turning out to be one of the most expensive after effects of

the financial meltdown.

So why not embrace real reform and relieve the taxpayers? We know some of our friends on the other side believe we have an obligation to trim Fannie's and Freddie's sails. Republicans offered three amendments, all of which attracted bipartisan support--one each from Senators McCain, Crapo and Ensign--that would have done exactly that. But they were all rejected by the majority.

The alternative side-by-side amendment that was adopted instead is meaningless. Rather than rein in Fannie and Freddie, this amendment really established that Congress will commission a study on conservatorship of the two GSEs from Treasury Secretary Timothy Geithner. As the Wall Street Journal asked in an editorial, if a study is so key to dealing with the GSEs, what has Mr. Geithner been doing in the last 17 months since the crisis? Let's also remember that it was Mr. Geithner's Treasury Department that lifted the $400 billion GSA bailout cap last Christmas Eve.

Let's be absolutely clear: Every day Fannie and Freddie remain in their current form is a day U.S. taxpayers are subsidizing their activities. This bill does nothing to change the status quo, and I think taxpayers deserve better.

The third area I wanted to mention is the so-called consumer protection and its effect on small businesses--this Bureau of Consumer Financial Protection. Well, small businesses across my home State of Arizona and, indeed, across the country are very worried about the intrusive new bureaucracy here intended for consumer protection. Of course, all of us support consumer protection. I don't know of anybody who doesn't. The question is how you do it and to whom it applies.

We create a lot more cost to consumers if we make the regulation so expensive and inefficient that consumers actually wind up paying more money than they would have otherwise. That is what has happened with the credit card legislation we previously passed, and it could happen with this legislation as well, thanks to a newly created Bureau of Consumer Financial Protection.

The bill establishes new restrictions on credit through so-called consumer protection provisions by limiting or reconfiguring credit options that are currently available to us. The bill gives the new bureau a budget of up to $650 million--an amount that is more than double what the FTC has requested for its economy-wide consumer protection activities. This money is to be spent as the director of the BCFP wishes, with no oversight or veto authority by Congress or the administration.

Moving regulatory authority for consumer protection to a new bureau with broad powers would add to an already complex layer of regulation these businesses are forced to navigate, creating uncertainty that would likely make it more difficult to comply with existing regulations.

My staff and I regularly hear from constituents who are trying to find ways to pay off their outstanding debts. I am concerned that duplicative regulation has the potential to have the unintended consequence of making it more difficult for individuals and families to manage their debts.

Moreover, the proposed consumer protections reach beyond credit cards, restricting the availability of all forms of credit. These reductions in credit also mean declines in job creation since many small business startups use things such as home equity debt and sometimes credit cards as their sources of funding. Obviously, this poses a serious threat to our economy.

A recent New York Post op-ed by Mark Calabria stated:

New restrictions on credit are likely to cost our economy

tens of thousands of jobs a year.

Of course, no one intends this result. No one wants to raise costs on small businesses. But that is the inevitable result of a policy that is written too broadly. That is one reason the Chamber of Commerce, for example, opposes this bill.

Some of my colleagues have suggested that the Bureau of Consumer Financial Protection would be significantly different from the Consumer Financial Protection Agency that was written into the House bill that passed last year. Well, I respectfully disagree. While the new bureau would not be officially independent, it would effectively function as an independent, stand-alone agency with rule-writing powers and enforcement authority; whereas, the Consumer Financial Protection Agency would be responsible for its own financing, this Bureau of Consumer Financial Protection would enjoy an automatic funding stream from the Federal Reserve. Given the close similarities between the two proposed consumer units, it is constructive to consult a study released last year by economists David Evans and Joshua Wright. After analyzing the Consumer Financial Protection Agency Act, they concluded it would ``most likely result in a significant reduction in the availability of credit to consumers.''

``A significant reduction in the availability of credit.'' Of course, that is not what the authors intend, but that would be the probable result.

In my view, the potentially serious costs of this Consumer Financial Protection Bureau do not justify its purported benefits. We all want to shield consumers from real abuses and exploitation, but this is not the right way to do it.

As the National Review recently editorialized, ``To the extent that existing consumer safeguards need strengthening, the task can be accomplished without launching a massive new bureaucracy that would negatively affect credit access and economic growth.''

In conclusion, I hope my colleagues will ask themselves this question: Why is it that the CEOs of large companies such as Goldman Sachs and Citigroup

favor this bill? The reason is simple: The legislation would entrench their privileged status. It would institutionalize the idea that certain big financial firms deserve preferential treatment by Federal regulators. These firms would be insulated from the negative effects of the new consumer protection bureaucracy. However, that bureaucracy would severely diminish credit access for small businesses and middle- class Americans.

What we have before us is a bill that is supported by Wall Street but opposed by the Chamber of Commerce, the Business Roundtable, and many others on Main Street.

For all these reasons that I have discussed and others, despite my strong desire to enact prudent financial reform, I cannot support this legislation. It does not effectively take on the fundamental problems that we all agree needed to be addressed.

I suggest the absence of a quorum.

Madam President, parliamentary inquiry: What is before the Senate at the present time?

Madam President, I have been, for some time, trying to bring up an amendment that has been filed which deals with a kind of, some might say, a little-known part of the insurance industry, called indexed annuities.

A little bit of background. Indexed annuities have been sold for some time. They are an annuity that people would buy, and there is an upside limit. In other words, if the S&P index goes up by, let's say, 500 percent, the holder of the annuity does not get all of that 500 percent; the insurance company gets a big portion of that. But in exchange for that, there is no downside risk. The holder of that annuity, if the S&P goes down 500 percent, doesn't lose anything if held to its term. It has been a very valuable instrument for a lot of people to have these indexed annuities.

During the recent recession of 2008 and 2009, no one lost any capital in any of their indexed annuities based on the stock market going down. They lost nothing because they had that downside protection. That was not true of other instruments, obviously. If you had a security, obviously, you lost a lot of money in the downturn of the stock market. Owners of the indexed annuities didn't lose any principal whatsoever when they held it to term. That is the value of these indexed annuities.

Two years ago in the waning days of the last administration, the Securities and Exchange Commission decided they wanted to have jurisdiction over these. There had been some abuses by sellers of indexed annuities sold to individuals--mostly elderly individuals--when it was not the best investment for them. They were sold an annuity instrument that was not in their best interest.

The SEC, under Chairman Cox, decided they were going to take jurisdiction of this. They were going to have this within their jurisdiction. It was a divided vote at the SEC as to whether they would do this, but the vote was in favor, so the SEC pulled this under their umbrella. The SEC was taken to court by certain companies. It went to the district court and then it was appealed to the circuit court of appeals in the District of Columbia.

The circuit court of appeals decided this on July 21, 2009, not even 1 year ago.

The circuit court said:

We hold that the Commission's consideration--

That is the Securities and Exchange Commission, SEC--

We hold that the Commission's consideration of the effect

of Rule 151A--

That was the rule that would govern the indexed annuities over which the SEC now wants to have jurisdiction, which they never had before.

We hold that the Commission's consideration of the effect

of Rule 151A on efficiency, competition, and capital

formation was arbitrary and capricious.

``Arbitrary and capricious,'' held by the circuit court.

What did the circuit court say? They said: We remand this. Having determined that their analysis is lacking, ``we conclude that this matter should be remanded to the SEC to address the deficiencies with its 2(b) analysis.''

It is back at the SEC. The SEC could at some point jiggle things around and decide, yes, now they have a better analysis and now they have jurisdiction. They will be taken to court again, and this will go on and on. In the meantime, the status of the companies selling indexed annuities, are in limbo.

Again, if someone says: We had some problems with this in the past, I understand that. But the insurance commissioners who have jurisdiction over insurance fix the problems. In fact, the National Association of Insurance Commissioners, in a letter to Senator Dodd, the chairman of the committee, dated April 30, basically points out what they have done to fix this problem.

The insurance commissioners said: Yes, there is a problem. Let's get together. Let's change the rules and regulations under which these are sold. And they did.

Some might say: Why shouldn't we give this to the SEC? Is the SEC the final and best word and the best protector of consumers, I ask you? Is the SEC the best protector of consumers in this country when it comes to financial instruments? Ask Bernie Madoff's customers.

Did we say because of Bernie Madoff and all the money he cheated and stole from people--and he was under the jurisdiction of the SEC--we have to take that jurisdiction away from the SEC now and give it to somebody else? No. We said: SEC, change your policies and change your regulations so a Bernie Madoff cannot happen again. That is what we are doing.

These indexed annuities have always been insurance products, governed by the insurance commissioners in each State and the National Association of Insurance Commissioners. If there was a problem, it went to them. They addressed the problem. They fixed it. We have a new regulatory regime in which indexed annuities can be sold so the problems that occurred in the past will not happen again. Will there be violations? Yes, but now there are strong enforced regulatory rules in place.

The SEC wants the oversight shared. But, two regulators in conflict create problems and considerable costs.

I am not one who says to protect the consumer against everything we have to give it to the SEC. The SEC did a lousy job--a lousy job--in protecting consumers who held securities. I mean stocks, securities. Not one person who had an indexed annuity lost one single dime in the downturn in 2008, 2009. We cannot say that about Bernie Madoff's accounts, can we?

I have been trying to get my amendment up to basically say: Look, the SEC does not have jurisdiction right now over these insurance instruments--that is what they principally are, insurance instruments. We left insurance to the States. If the SEC is able to grab hold of this kind of an instrument, what is to keep them from whole life? Now we are going to take over whole life insurance policies, too, because we have had problems in whole life policies, too and the value of their cash value can change with the markets, I say to my colleagues. Insurance

commissioners keep track of this, they strengthened their regulation. They change their rules and regulations to cover these kinds of happenings.

Unless we are to the point where we are saying we are going to have federal regulation of insurance in America, if we are there, OK. I would like to see that vote happen. This is one more overreaching by a Federal department to gain jurisdiction over an area of State regulation over which they have never had jurisdiction. SEC has never had jurisdiction, and the circuit court said the analysis on which they reached their basis to grab this was ``arbitrary and capricious.''

I have an amendment, amendment No. 3920, at the desk. It has broad cosponsorship on both sides of the aisle--Democrats, Republicans, conservatives, liberals, up and down--to say, no, this ought to stay with the insurance commissioners because it is, in its essence, an insurance product.

The new rules that have been promulgated by the insurance commissioners basically cover the problems that happened in the past. The rules require certain amounts of liquidity and take into account the age of the consumer. That was the problem in the past. They were selling these to people who were way too old who would not live long enough to get their annuities. They look at the tax status, the financial objectives of the consumer, and whether this is some kind of churning policies. These are all new regulations instituted by the insurance commissioners to answer a problem that came up because of, let's face it, some agents out there who were taking advantage of elderly people.

There are always going to be some bad actors. I do not care if it is under SEC or the insurance commissioners, there is always going to be someone trying to game the system. This has always been under the insurance commissioners' jurisdictions. They have taken these steps.

We have a letter from the AARP saying they were opposed to my amendment. I have a great deal of respect for the AARP. I do a lot of work with them. More often than not, they do good things. But here is an article from the April 10, 2007, New York Times, titled ``Income for Life? Sounds Good, But Do Your Homework.''

It points out that AARP has teamed up with New York Life Insurance to--guess what--to sell annuities. I detect, I smell a little bit of a flavor of a conflict of interest.

Oh, the AARP does not want the indexed annuities sold out there. They want the elderly to buy their annuities. I don't care. Fine. If they want to be in the business of selling annuities, I don't care if AARP does that. But to send out a letter dated May 19 to the chairman of the Banking Committee talking about how bad my amendment is--did they say in their letter to the chairman of the committee, in all due candor, the AARP has joined with New York Life Insurance to sell annuities? No, they did not say that at all. So there is a little hint of a conflict of interest.

Madam President, I ask unanimous consent to have printed in the Record two items: a letter from AARP dated May 19 to the Honorable Christopher Dodd; and immediately following that, an article from the New York Times dated April 10, 2007.

Madam President, I also ask unanimous consent to have printed in the Record a letter dated April 30 from the National Association of Insurance Commissioners.

Madam President, AARP does not come to this in a neutral position, not a neutral position at all. They have their own annuities, but they are not indexed annuities. With their product. When the downturn comes, people can lose. People can lose money in annuities but not in indexed annuities if held to term. They do not get the upside; the insurance companies get that. But they are protected. If the market goes down, they lose none of their annuity. That is exactly what happened in the last downturn.

I would like to call up my amendment, but I guess I am precluded from doing so. I was waiting for the ranking member to come back before I made a request. I was waiting for the ranking member to come back because I had been discussing this with him. I know we are going out at 10:30; is that right, Madam President?

What time does the Senate reconvene?

Has there been a consent agreement entered as to a certain time for a vote on cloture?

Madam President, I am going to ask unanimous consent to call up my amendment.

I ask unanimous consent to set aside the pending amendment and to call up my amendment No. 3920.

Madam President, I ask unanimous consent then to call up my amendment No. 3920, with 20 minutes evenly divided, with a vote on the amendment prior to the cloture vote.

Madam President, the Senator from Hawaii objects to even having a vote on this amendment. I can see the Senator wanting to object to the unanimous-consent request. I just asked unanimous consent to have a vote on the amendment, and the Senator from Hawaii objects to even having an up-or-down vote. I wish the Senator would explain why he is afraid to have an up-or-down vote. That is just what I asked for. Isn't that what the Senate is for, to try to vote on issues?

I want the record to show that only one person objected to having a vote on this amendment, and that is my friend from Hawaii--and he is my friend--to say we cannot even have a vote. I did not hear any objection from the Republican side or anybody else. All I ask for is an up-or- down vote.

Why does the Senator from Hawaii not even want an up-or-down vote on this amendment?

I yield the floor.

I object.

Madam President, amendment No. 3920 would prevent indexed annuities investors from benefiting from the strong protections provided by Federal securities laws. That is the reason I am objecting.

Some consumers have been hurt, including some in Hawaii. Deceptive sales practices have been found to be used in these products. An individual in Hawaii pushed equity indexed annuities to collect high commissions at the expense of senior investors. Those investors least able to effectively evaluate financial products need these Federal protections, without question, and they have been suffering.

I am not alone in my opposition to the amendment. As my friend from Iowa mentioned, AARP is opposed. The Consumer Federation of America and the North American Securities Administrators Association also oppose it.

This matter is under litigation and under review within the SEC rulemaking process.

Equity indexed annuities are financial products that combine aspects of insurance and securities but which are sold primarily as investments. These products must have the strong disclosure, suitability, and sales practice standards provided within the context of our Nation's securities laws. The amendment would preclude State and Federal securities regulators from protecting investors from inappropriate and harmful products.

I am willing to work with my friend from Iowa to look into this matter further. We need to have hearings to know more about the situation before taking such a potentially precedent-setting action as this amendment would. If this were to prevent securities regulation of a product that clearly has characteristics of a security, we would encourage the development of financial products created to avoid the stronger protection standards.

I thank the Chair.

Madam President, I ask unanimous consent that the order for the quorum call be rescinded.

Madam President, ever since they passed their new health

care bill, Democrats promised to help small businesses offset some of the costs of the new taxes and mandates it will impose.

Yet, according to an AP story this morning, that is looking like yet another empty promise.

According to the story, a furniture supply store owner in Springfield, IL, Zach Hoffman, was confident he qualified for the new small business tax credit. Yet buried in the new law's fine print was language disqualifying his 24 employees from this needed help.

According to the law, Mr. Hoffman created too many jobs to get help, and he paid them too much, even though his average employees only made $35,000 a year.

Mr. Hoffman called this a bait and switch and noted that in order to get the most out of the new credit, he would have to cut his workforce to 10 employees and slash their wages.

``That seems like a strange outcome,'' he said, ``given we've got 10 percent unemployment.''

Speaker Pelosi told Americans we had to pass the health care bill so we could know what was in it. Now that Americans are learning what was buried in the fine print, they are rightly upset.

They see that small businesses are denied the help they were promised, while facing new job-killing taxes and government mandates. They have learned that health care costs will go up, not down, as the administration and Democrats in Congress promised.

Americans want this bill repealed and replaced with something that will work for people such as Zach Hoffman and all the Nation's job creators and small businesses.

Madam President, what is the pending business?

Madam President, I ask for the yeas and nays.

Madam President, will my colleague and friend yield for 1 minute so I may make a couple of unanimous-consent requests?

Madam President, I ask unanimous consent that notwithstanding the adoption of the Vitter-Pryor amendment No. 4003, as modified, it be further modified with the changes that are at the desk.

Madam President, I ask unanimous consent that the President of the Senate be authorized to appoint a committee on the part of the Senate to join with a like committee on the part of the House of Representatives to escort His Excellency Felipe Calderon Hinojosa, the President of Mexico, into the House Chamber for a joint meeting.

Madam President, I further ask unanimous consent--I am looking at my friend from Arizona--that after the remarks of the Senator from Hawaii, the Senator from Arizona be recognized.

Madam President, I ask unanimous consent the call of the quorum be rescinded.