Banking Integrity Act of 2009

Mr. President, I am pleased to be joining my friend and colleague from Washington, Senator Cantwell, to introduce the Banking Integrity Act of 2009. My reasons for joining this effort are simple--I want to ensure that we never stick the American taxpayer with another $700 billion tab to bail out the financial industry. If big Wall Street institutions want to take part in risky transactions--fine. But we should not allow them to do so with federally insured deposits.

Paul Volcker, a top economist in the Obama administration and former Federal Reserve Chairman, wants the nation's banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. The administration is saying no, it will not separate commercial banking from investment operations. Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street's wild ways. ``The banks are there to serve the public,'' Mr. Volcker said, ``and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties'' and ultimately fails.

The bill we are introducing today precludes any member bank of the Federal Reserve System from being affiliated with any entity or organization that is engaged principally in the issue, flotation, underwriting, public sale or distribution of stocks, bonds, debentures or other securities. Essentially, commercial banks may no longer intermingle their business activities with investment banks. It is that simple.

Since the repeal of the Glass Steagall Act in 1999, this country has seen a new culture emerge in the financial industry: one of dangerous greed and excessive risk-taking. Commercial banks traditionally used people's deposits for the constructive purpose of main street loans. They did not engage in high risk ventures. Investment banks, however, managed rich people's money--those who can afford to take bigger risks in order to get a bigger return, and who bore their own losses. When these two worlds collided, the investment bank culture prevailed, cutting off the credit lifeblood of main street firms, demanding greater returns that were achievable only through high leverage and huge risk taking, and leaving taxpayers with the fallout.

When the glass wall dividing banks and securities firms was shattered, common sense and caution went out the door. The new mantra of ``bigger is better'' took over--and the path forward focused on short-term gains rather than long-term planning. Banks became overleveraged in their haste to keep up in the race. The more they lent, the more they made. Aggressive mortgages were underwritten for unqualified individuals who became homeowners saddled with loans they couldn't afford. Banks turned right around and bought portfolios of these shaky loans.

Sub-prime loans made up only five percent of all mortgage lending in 1998, but by the time the financial crisis peaked in late 2008, they were approaching 30 percent. Since January 2008, we have seen 159 state and national banks fail. In my home State of Arizona, five banks have shut their doors, leaving small businesses scrambling to find credit from other banks that may have already been overleveraged.

Banks sold sub-prime mortgages to their affiliates and other securities firms for securitization, while other financial institutions made risky bets on these and other assets for which they had no financial interest. As the market grew bigger, its foundation became shakier. It was like a house of cards waiting to fall, and fall it did.

In October 2008, the financial system was on the brink of collapse when Congress was forced to risk $700 billion of taxpayer dollars to bail out the industry. These financial institutions had become ``too big to fail.'' In fact, the special inspector general of the Troubled Asset Relief Program, TARP, testified before Congress earlier this year that ``total potential Federal Government support could reach $23.7 trillion'' to stabilize and support the financial system. Ironically, some of these ``too big to fail'' institutions have now become even bigger. An editorial from yesterday's New York Times stated:

The truth is that the taxpayers are still very much on the

hook for a banking system that is shaping up to be much

riskier than the one that led to disaster.

Big bank profits, for instance, still come mostly courtesy

of taxpayers. Their trading earnings are financed by more

than a trillion dollars' worth of cheap loans from the

Federal Reserve, for which some of their most noxious assets

are collateral. They benefit from immense federal loan

guarantees, but they are not lending much. Lending to

business, notably, is very tight.

What profits the banks make come mostly from trading. Many

big banks are happy to depend on the lifeline from the Fed

and hang onto their toxic assets hoping for a rebound in

prices. And the whole system has grown more concentrated.

Bank of America was considered too big to fail before the

meltdown. Since then, it has acquired Merrill Lynch. Wells

Fargo took over Wachovia. JPMorgan Chase gobbled up Bear

Stearns.

If the goal is to reduce the number of huge banks that

taxpayers must rescue at any cost, the nation is moving in

the wrong direction. The growth of the biggest banks ensures

that the next bailout will have to be even bigger. These

banks will be more likely to take on excessive risk because

they have the implicit assurance of rescue.

Excess was a common theme for banks/financial institutions in the mid-2000s--excessive risk, excessive bonuses. Times were good at Merrill Lynch in 2006 when the firm's risky mortgage business was booming. The firm made record earnings of $7.5 billion that year and paid out bonuses of $5 billion to $6 billion. Fast forward to late 2008 when Merrill's gambling left it in deep financial despair with losses exceeding $27 billion. Yet we witnessed the firm pay out another $3.6 billion in bonuses just before it was acquired by Bank of America.

Merrill Lynch wasn't alone in excess and greed. Citigroup posted a net loss of nearly $28 billion in 2008, yet paid out $5.3 billion in bonuses. Although Goldman Sachs earned only $2.3 billion, it paid out $4.8 billion in bonuses. Morgan Stanley earned $1.7 billion, and paid out nearly $4.5 billion in bonuses. JPMorgan Chase earned $5.6 billion and paid $8.7 billion in bonuses. If a company doesn't make money, how can it pay these bonuses? In this case, each of these firms was a recipient of billions in taxpayer-funded TARP money.

The Federal Government has set a dangerous precedent here. We sent the wrong message to the financial industry: you engage in bad, risky business practices, and when you get into trouble, the government will be there to save your hide. Many would call it a moral hazard. I call it a taxpayer-funded subsidy for risky behavior.

The consolidation of the banking world was also riddled with conflicts of interest, despite the purported firewalls that were put into place. If an investment bank had underwritten shares for a company that was now in financial trouble, the investment bank's commercial arm would feel pressure to lend the company money, despite the lack of merits to do so. The Banking Integrity Act of 2009 would eliminate some of these conflicts.

Today, it is time to put a stop to the taxpayer-financed excesses of Wall Street. No single financial institution should be so big that its failure would bring ruin to our economy and destroy millions of American jobs. This country would be better served if we limit the activities of these financial institutions. Banks should accept consumer deposits and invest conservatively, while investment banks engage in underwriting and sales of securities.

I urge my colleagues to support this bill.

Mr. President, I am pleased to be joining my friend and colleague from Washington, Senator Cantwell, to introduce the Banking Integrity Act of 2009. My reasons for joining this effort are simple--I want to ensure that we never stick the American taxpayer with another $700 billion tab to bail out the financial industry. If big Wall Street institutions want to take part in risky transactions--fine. But we should not allow them to do so with federally insured deposits.

Paul Volcker, a top economist in the Obama administration and former Federal Reserve Chairman, wants the nation's banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. The administration is saying no, it will not separate commercial banking from investment operations. Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street's wild ways. ``The banks are there to serve the public,'' Mr. Volcker said, ``and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties'' and ultimately fails.

The bill we are introducing today precludes any member bank of the Federal Reserve System from being affiliated with any entity or organization that is engaged principally in the issue, flotation, underwriting, public sale or distribution of stocks, bonds, debentures or other securities. Essentially, commercial banks may no longer intermingle their business activities with investment banks. It is that simple.

Since the repeal of the Glass Steagall Act in 1999, this country has seen a new culture emerge in the financial industry: one of dangerous greed and excessive risk-taking. Commercial banks traditionally used people's deposits for the constructive purpose of main street loans. They did not engage in high risk ventures. Investment banks, however, managed rich people's money--those who can afford to take bigger risks in order to get a bigger return, and who bore their own losses. When these two worlds collided, the investment bank culture prevailed, cutting off the credit lifeblood of main street firms, demanding greater returns that were achievable only through high leverage and huge risk taking, and leaving taxpayers with the fallout.

When the glass wall dividing banks and securities firms was shattered, common sense and caution went out the door. The new mantra of ``bigger is better'' took over--and the path forward focused on short-term gains rather than long-term planning. Banks became overleveraged in their haste to keep up in the race. The more they lent, the more they made. Aggressive mortgages were underwritten for unqualified individuals who became homeowners saddled with loans they couldn't afford. Banks turned right around and bought portfolios of these shaky loans.

Sub-prime loans made up only five percent of all mortgage lending in 1998, but by the time the financial crisis peaked in late 2008, they were approaching 30 percent. Since January 2008, we have seen 159 state and national banks fail. In my home State of Arizona, five banks have shut their doors, leaving small businesses scrambling to find credit from other banks that may have already been overleveraged.

Banks sold sub-prime mortgages to their affiliates and other securities firms for securitization, while other financial institutions made risky bets on these and other assets for which they had no financial interest. As the market grew bigger, its foundation became shakier. It was like a house of cards waiting to fall, and fall it did.

In October 2008, the financial system was on the brink of collapse when Congress was forced to risk $700 billion of taxpayer dollars to bail out the industry. These financial institutions had become ``too big to fail.'' In fact, the special inspector general of the Troubled Asset Relief Program, TARP, testified before Congress earlier this year that ``total potential Federal Government support could reach $23.7 trillion'' to stabilize and support the financial system. Ironically, some of these ``too big to fail'' institutions have now become even bigger. An editorial from yesterday's New York Times stated:

The truth is that the taxpayers are still very much on the

hook for a banking system that is shaping up to be much

riskier than the one that led to disaster.

Big bank profits, for instance, still come mostly courtesy

of taxpayers. Their trading earnings are financed by more

than a trillion dollars' worth of cheap loans from the

Federal Reserve, for which some of their most noxious assets

are collateral. They benefit from immense federal loan

guarantees, but they are not lending much. Lending to

business, notably, is very tight.

What profits the banks make come mostly from trading. Many

big banks are happy to depend on the lifeline from the Fed

and hang onto their toxic assets hoping for a rebound in

prices. And the whole system has grown more concentrated.

Bank of America was considered too big to fail before the

meltdown. Since then, it has acquired Merrill Lynch. Wells

Fargo took over Wachovia. JPMorgan Chase gobbled up Bear

Stearns.

If the goal is to reduce the number of huge banks that

taxpayers must rescue at any cost, the nation is moving in

the wrong direction. The growth of the biggest banks ensures

that the next bailout will have to be even bigger. These

banks will be more likely to take on excessive risk because

they have the implicit assurance of rescue.

Excess was a common theme for banks/financial institutions in the mid-2000s--excessive risk, excessive bonuses. Times were good at Merrill Lynch in 2006 when the firm's risky mortgage business was booming. The firm made record earnings of $7.5 billion that year and paid out bonuses of $5 billion to $6 billion. Fast forward to late 2008 when Merrill's gambling left it in deep financial despair with losses exceeding $27 billion. Yet we witnessed the firm pay out another $3.6 billion in bonuses just before it was acquired by Bank of America.

Merrill Lynch wasn't alone in excess and greed. Citigroup posted a net loss of nearly $28 billion in 2008, yet paid out $5.3 billion in bonuses. Although Goldman Sachs earned only $2.3 billion, it paid out $4.8 billion in bonuses. Morgan Stanley earned $1.7 billion, and paid out nearly $4.5 billion in bonuses. JPMorgan Chase earned $5.6 billion and paid $8.7 billion in bonuses. If a company doesn't make money, how can it pay these bonuses? In this case, each of these firms was a recipient of billions in taxpayer-funded TARP money.

The Federal Government has set a dangerous precedent here. We sent the wrong message to the financial industry: you engage in bad, risky business practices, and when you get into trouble, the government will be there to save your hide. Many would call it a moral hazard. I call it a taxpayer-funded subsidy for risky behavior.

The consolidation of the banking world was also riddled with conflicts of interest, despite the purported firewalls that were put into place. If an investment bank had underwritten shares for a company that was now in financial trouble, the investment bank's commercial arm would feel pressure to lend the company money, despite the lack of merits to do so. The Banking Integrity Act of 2009 would eliminate some of these conflicts.

Today, it is time to put a stop to the taxpayer-financed excesses of Wall Street. No single financial institution should be so big that its failure would bring ruin to our economy and destroy millions of American jobs. This country would be better served if we limit the activities of these financial institutions. Banks should accept consumer deposits and invest conservatively, while investment banks engage in underwriting and sales of securities.

I urge my colleagues to support this bill.

Mr. President, today I am introducing legislation to help American workers and companies.

The bill that I am introducing, the Buy American Improvement Act, focuses on the Federal Government's responsibility to support domestic manufacturers and workers and on the role of Federal procurement policy in achieving this goal. The reintroduction of this bill, which I first introduced in 2003, is part of my ongoing efforts to support American workers and manufacturing.

The Buy American Act of 1933 is the primary statute that governs Federal procurement. The name of this law accurately describes its purpose: to ensure that the Federal Government supports domestic companies and domestic workers by buying American-made goods. Regrettably, this law contains a number of loopholes that make it too easy for government agencies to buy foreign-made goods.

My bill, the Buy American Improvement Act, would strengthen the existing law by tightening its waiver provisions. Currently, the heads of Federal departments and agencies are given broad discretion to waive the act and buy foreign goods with little or no accountability. We should ensure that the Federal Government makes every effort to give Federal contracts to companies that will perform the work domestically. We should also ensure that certain types of industries do not leave the U.S. completely, thus making the Federal Government dependent on foreign sources for goods, such as plane or ship parts, that our military may need to acquire on short notice.

With unemployed workers in the U.S. facing a double-digit unemployment rate, the highest rate since 1983, it is critical Congress back efforts to support American workers. Many unemployed American workers are currently facing persistently long periods of unemployment; data from the Department of Labor showed that in October of this year, over 35 percent of unemployed workers had been without jobs for at least 27 weeks. Since December of 2007, the number of unemployed workers in the U.S. has grown by over 8 million, with manufacturing and construction workers being particularly hard-hit. We need to do all we can to promote fiscally responsible Federal policies that support the creation of American jobs to help get the unemployed and Funderemployed back to work. A strong Buy American Act should be part of the Federal effort to create and retain American jobs.

During another period of economic upheaval in the 1930s, Congress passed a series of laws designed to promote job growth in the U.S., including the Buy American Act of 1933, 41 U.S.C. Sec. 10a-10d. The Buy American Act requires the Federal Government to support domestic manufacturers and workers by purchasing American-made goods. Over the years, other domestic sourcing legislation has been passed to help support American industry, including the Buy America Act, 23 U.S.C. Sec. 313, which applies to Federal transportation funding. In addition, Congress included domestic sourcing requirements in the American Recovery and Reinvestment Act, P.L. 111-5, earlier this year because it recognized the importance of supporting American workers and American industry. My legislation would help American industry by making it more difficult to waive the Buy American Act and help ensure the Federal Government does all it can to support American workers.

I have a long record of supporting efforts to help taxpayers get the most bang for their buck and opposing wasteful Federal spending. I don't think anyone can argue that supporting American jobs is ``wasteful.'' We owe it to American manufacturers and their employees to make sure they get a fair shake. I would not support awarding a contract to an American company that is price-gouging, but we should make every effort to ensure that domestic sources for goods needed by the Federal Government do not dry up because American companies have been slightly underbid by foreign competitors.

The gaping loopholes in the Buy American Act and the trade agreements and defense procurement agreements that contain additional waivers of domestic source restrictions have combined to weaken our domestic

manufacturing base by allowing--and sometimes actually encouraging--the Federal Government to buy foreign-made goods. Congress can and should do more to support American companies and American workers. We must strengthen the Buy American Act and we must stop entering into bad trade agreements that send our jobs overseas and undermine our own domestic preference laws.

By strengthening Federal procurement policy, we can help to bolster our domestic manufacturers during these difficult times. As I have repeatedly noted, Congress cannot simply stand on the sidelines while tens of thousands of American manufacturing jobs have been and continue to be shipped overseas. While there may be no single solution to this problem one way in which Congress should act is by strengthening the Buy American Act.

Mr. President, I ask unanimous consent that the text of the bill be printed in the Record.