Floor Statements

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 President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. President, I ask unanimous consent to speak as in morning business for up to 5 minutes.

Mr. President, I rise to share the stories, once again, of some of our Nation's great Federal employees.

All throughout March, libraries across America have been celebrating

National Reading Month. Children from coast to coast have been learning about the importance of books, and schools have been promoting literacy as a tool for academic advancement.

This month-long celebration of reading--from Dr. Seuss's classic ``The Cat in the Hat'' to Joyce's ``Ulysses''--reminds us not only of the joy found in the written word but also of the critical role libraries play in all our communities.

Libraries have long been a staple of American life, dating back even to our early colonial days. In the decades before the Revolution, America's first libraries enabled the dissemination of the very ideas that inspired our founding patriots. In the eighteenth century, the athenaeums of New England and the shareholder libraries of Benjamin Franklin served as precursors to our robust, modern network of free public libraries.

In 1800, our predecessors in the Sixth Congress established a research library to help those in government carry out their work with access to scholarly volumes on every subject. Today, the Library of Congress is the largest library in the world, and its ornate reading room remains an awe-inspiring cathedral of learning.

I have chosen today to honor three public servants who work at the Library of Congress.

Mary Klutts began her Federal career as a U.S. Marine. In 1990, she came to the Library of Congress as a budget analyst, and in her 20 years there she has become an expert in every aspect of the Library's operating budget.

Since 2007, when Mary was named budget officer, she has set out to transform the way the Library's budget proposals and funding justifications are formulated. Her work has helped make the Library's budget and operations more transparent, and its funding proposals are more concise. Now Library of Congress budget proposals are often cited as the model for the legislative branch. As a result of Mary's efforts, the Library received strong support from Congress in appropriations for the last two fiscal years.

During this time of economic challenges, Mary has helped demonstrate where every dollar of taxpayer money for the Library goes and why.

Another outstanding Library of Congress employee is Donna Scheeder, who has worked there for over 40 years. Having worked in a number of roles throughout her career at the Library, Donna was an early champion of integrating computers into libraries, and she introduced the idea of electronic briefing books for Congress.

She is recognized as a leader in the information management field, and she has guest-lectured around the world on the topic of legislative library management. Donna is also a former president of the Special Libraries Association.

Until recently, Donna was serving as the Acting Law Librarian of Congress, and she was awarded the Federal Librarians Achievement Award in 2009.

An active member of the Washington, DC, community, she serves as Chair of the Eastern Market Community Advisory Committee and on the Board of the Old Naval Hospital Foundation. When not spearheading innovative initiatives at the Library, Donna spends time relaxing at her home on the Delaware shore.

One of the branches of the Library of Congress most familiar to those of us who serve in this chamber is the Congressional Research Service, or CRS. This nonpartisan office houses scholars who prepare reports on every policy issue and the effects of proposed and enacted legislation. They are our ``go-to guys'' for information on every topic, and they are truly great at their jobs.

The third person I am honoring today has been an analyst with the CRS since 1984.

When Ronald O'Rourke joined the CRS as a naval analyst, he arrived with an impressive background as a Phi Beta Kappa graduate of the Johns Hopkins University. He was also valedictorian of his class at the Nitze School of Advanced International Studies, where he obtained his master's degree.

At CRS, Ronald quickly distinguished himself as a leading expert on naval strategic and budgetary issues, and he frequently briefs members of Congress and their staffs on defense programs and appropriations. He has even been called to testify as an expert at congressional hearings.

Though he already had a busy schedule as a specialist in naval affairs, he stepped in when the CRS's expert in military aviation passed away suddenly last year. Ronald took responsibility for that portfolio in addition to his own, and his reports on high-profile aviation programs proved invaluable during the congressional debates on defense spending in the 2010 budget.

Mary Klutts, Donna Scheeder, and Ronald O'Rourke continue their work in public service at the Library of Congress to this day. They are just three of the many talented and dedicated men and women whose work benefits not only those of us in Congress but also the tens of millions who access resources from community libraries throughout our Nation.

I hope my colleagues will join me in recognizing the important contribution made by the employees of the Library of Congress.

They are all truly Great Federal Employees.

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

Mr. President, I ask unanimous consent to speak as in morning business.

Mr. President, I am truly pleased to join with my friends, Senator Casey and Senator Franken, today to underscore the importance of reducing our nuclear arms.

I have spoken in the past about the importance of signing a successor treaty to the Strategic Arms Reduction Treaty, or START, in order to maintain verification and other confidence-building measures. I have also spoken in support of the President's fiscal year 2011 spending priorities, which include a program to modernize and secure our nuclear arsenal. Today, I wish to go back to the basics when talking about arms reduction because it is easy to get lost in the details and misconceptions and forget the big picture.

First, we must remember what is at stake when it comes to our nuclear arms reduction policy. We cannot afford to lose sight of why it is so important to get a successor to START, why it must be the right successor, and why the Senate should take action on the treaty in the very near future.

This treaty was signed by the Soviet Union at a time when we still had fallout shelters to prepare for nuclear war. Almost two decades later, a nuclear attack is more likely to originate from rogue regimes or nonstate actors, but it is still critical that we not take our eye off the ball when it comes to existing nuclear stockpiles.

American and Russian nuclear weapons alone account for almost 96 percent of the world's nuclear arsenal, and stockpile reduction remains a significant challenge in easing residual tensions of the Cold War. The accumulation of nuclear serves as a reminder of the animosity that existed between our countries, much of which has now been relegated, thankfully, to the pages of history. Our nuclear stockpiles reflect the realities of the past, not the economic and security considerations of the present and the future.

START is also symbolically significant because it serves as a cornerstone of the world's nonproliferation efforts and sets tough international standards. With no arms reduction treaty between the United States and Russia, we hand cynics an opportunity around the globe a pretext for derailing nonproliferation efforts.

Now that START has expired, we need a follow-on treaty because security efforts have changed since the Cold War. This is why we must ensure that we end up with the right treaty, not just one that renews now-outdated provisions of START. It is important that a new treaty both adapts to the needs of the world today and presents a clear vision for a more secure future.

It is expected that Americans and Russians have different ideas of this vision and how we can get there. Both countries have domestic and political considerations which must also complicate matters. Throughout this process, I have been thoroughly impressed with Ambassador Rose Gottemoeller and her negotiating team, who have consistently maintained their focus and core principles.

The Obama administration wants the right treaty, not just any treaty, and future generations will likely benefit from its steadfast dedication and resolve.

Finally, we must consider the parameters of the treaty we hope to achieve. By definition, a lasting treaty cannot be drawn unilaterally, so it must be something mutually acceptable to both the United States and Russia. At the same time, there are some important red lines which must be reflected in the final treaty from the perspective of the United States:

First, it must have an intrusive verification system in order to maintain confidence and avoid catastrophic misunderstandings between the two sides.

Second, it must reduce ready-to-go strategic arsenals in a meaningful way, which means addressing upload capability.

Third, it must allow modernization of our existing nuclear capabilities to enhance national and international security.

Fourth, it must remain a strategic offensive treaty with an intentionally narrow scope. We should not include any other weapons systems, including antiballistic missile systems, under its regulatory umbrella.

The Senate should take action on a START follow-on treaty as soon as possible in order to keep Americans safe and protect global security. For anyone who has doubts, rest assured that the President and his negotiating team are working hard to finalize a treaty that first and foremost must advance U.S. security interests.

I look forward to working with my colleagues on this issue because the responsible reduction of the nuclear stockpile is one of the most important measures we can take to improve global security for future generations.

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

Mr. President, I ask unanimous consent to speak as in morning business for up to 5 minutes.

Mr. President, I rise once more to highlight some of our Nation's outstanding Federal employees. I have spoken before about those who, in serving our Nation, place their lives in danger in order to protect others. On March 4, a lone gunman opened fired near the main entrance to the Pentagon, wounding two security officers before being quickly subdued. These two officers and a third who assisted them provide an example of the bravery and excellence of Federal employees, and especially Federal employees in law enforcement who take risks every day.

These three men all worked for the Pentagon Force Protection Agency,

which oversees security for the Defense Department's headquarters as well as several other Defense facilities in the Washington area. It was created after the attacks of September 11, 2001, to provide comprehensive threat prevention for one of the buildings targeted on that fateful day. Like those serving in other law enforcement and security agencies, the men and women of the Pentagon Force Protection Agency undergo rigorous training. Many are veterans of the Armed Forces or have worked previously as police officers for States and municipalities. They train to be ready at a moment's notice for scenarios they pray will never come. Often these security officers will stand at a checkpoint for hours at a time at the ready during days and weeks and months of quiet.

As a youth, I worked two summers as a lifeguard in Philadelphia, and we always used to say it was hours of boredom interspersed with seconds of sheer terror. Well, sheer terror happened for these great Federal employees. For these three officers from the Pentagon Force Protection Agency such a moment came just before 7 o'clock in the evening of March 4, 2010.

Officers Marvin Caraway, Jr. and Colin Richards were standing guard at the main entrance to the building--the Pentagon--when a suspicious figure approached. Marvin sensed something was amiss, so he walked toward him to check out his identification. When the man pulled a gun from his jacket and began firing, one of the bullets grazed Marvin's thigh. Undeterred, he held his ground and fired back. Later, his fellow officer would tell reporters that Marvin was like ``Superman''--``a man of steel.''

Colin ducked behind a barricade and began to return fire. Hearing the shots, a third officer, Jeffrey Amos, ran over from his post nearby and joined the effort to subdue the gunman. In the process, he was wounded in the shoulder. The whole incident took only a minute and the three officers fatally shot the assailant.

The quick reaction and undeterred professionalism of these three are inspiring. All brought to the job a strong background in law enforcement and public service. Marvin, who lives in Clinton, MD, is a former marine, who served in the first Persian gulf war, and has experience protecting our embassies overseas. Jeffrey, from Woodbridge, VA, is a retired member of the Air Force Reserve. He spent 11 years in the New Orleans Police SWAT team.

Colin, who resides in Arlington, VA, recalled how his experience and training prepared him to act quickly. He said: ``My vision was big; my hearing--I could hear everything. When the shooter started running, he looked like a big target. At that point I felt like I couldn't miss.''

Federal security officers, such as Marvin, Jeffrey, and Colin, are our modern-day ``Minutemen''--trained and ready to keep us safe from threats to our liberty and security. We owe all of them our constant appreciation.

I must add that we see the same dedication and professionalism right here each day in our very own Capitol Police force as well. I know how proud Majority Leader Reid is of his own service as a Capitol Police officer when, as a young man, he stood guard at one of the entrances to this building.

I hope my colleagues will join me in thanking Marvin Caraway, Jr., Jeffrey Amos, and Colin Richards for their bravery and a job well done--as well as all those who serve as Federal security officers standing at the ready. They are reminders of our great Federal employees.

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

Madam President, I ask unanimous consent to speak as in morning business for up to 25 minutes.

Madam President, last Thursday the bankruptcy examiner for Lehman Brothers Holdings, Incorporated released a 2,200-page report about the demise of the firm, which included riveting detail on the firm's accounting practices. That report has put into sharp relief what many have expected all along: that fraud and potential criminal conduct were at the heart of this financial crisis.

Now that we are beginning to learn many of the facts, at least with respect to the activities of Lehman Brothers, the country has every right to be outraged.

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

Mr. President, last Thursday, the bankruptcy examiner for Lehman Brothers Holding Company released a 2,200-page report about the demise of the firm, which included riveting detail on the firm's accounting practices. That report has put into sharp relief what many of us have expected all along: that fraud and potential criminal conduct were at the heart of the financial crisis.

Now that we are beginning to learn many of the facts, at least with respect to the activities at Lehman Brothers, the country has every right to be outraged. Lehman was cooking its books, hiding $50 billion in toxic assets by temporarily shifting them off its balance sheet in time to produce rosier quarter-end reports. According to the bankruptcy examiner's report, Lehman Brothers's financial statements were ``materially misleading'' and said its executives engaged in ``actionable balance sheet manipulation.'' Only further investigation will determine whether the individuals involved can be indicted or convicted of criminal wrongdoing.

According to the examiner's report, Lehman used accounting tricks to hide billions in debt from its investors and the public. Starting in 2001, that firm began abusing financial transactions called repurchase agreements or repos. Repos are basically short-term loans that exchange collateral for cash in trades that may be unwound as soon as the next day. While investment banks have come to overrely on repos to finance their operations, they are neither illegal nor questionable, assuming, of course, they are clearly accounted for.

Lehman structured some of its repo agreements so the collateral was worth 105 percent of the cash it received--hence, the name ``Repo 105.'' As explained by the New York Times' DealBook:

That meant that for a few days--and by the fourth quarter

of 2007 that meant end-of-quarter--Lehman could shuffle off

tens of billions of dollars in assets to appear more

financially healthy than it really was.

Even worse, Lehman's management trumpeted how the firm was decreasing its leverage so investors would not flee from the firm. But inside Lehman, according to the report, someone described the Repo 105 transactions as ``window dressing,'' a nice way of saying they were designed to mislead the public.

Ernst & Young, Lehman's outside auditor, apparently became comfortable with and never objected to the Repo 105 transactions. While Lehman could never find a U.S. law firm to provide an opinion that treating the Repo 105 transactions as a sale for accounting purposes was legal, the British law firm Linklaters provided an opinion letter under British law that they were sales and not merely financing agreements. Lehman ran the transaction through its London subsidiary and used several different foreign bank counterparties.

The SEC and Justice Department should pursue a thorough investigation, both civil and criminal, to identify every last person who had knowledge Lehman was misleading the public about its troubled balance sheet--and that means everyone from the Lehman executives, to its board of directors, to its accounting firm, Ernst & Young. Moreover, if the foreign bank counterparties who purchased the now infamous ``Repo 105s'' were complicit in the scheme, they should be held accountable as well.

It is high time that we return the rule of law to Wall Street, which has been seriously eroded by the deregulatory mindset that captured our regulatory agencies over the past 30 years, a process I described at length in my speech on the floor last Thursday. We became enamored of the view that self-regulation was adequate, that ``rational'' self- interest would motivate counterparties to undertake stronger and better forms of due diligence than any regulator could perform, and that market fundamentalism would lead to the best outcomes for the most people. Transparency and vigorous oversight by outside accountants were supposed to keep our financial system credible and sound.

The allure of deregulation, instead, led to the biggest financial crisis since 1929. And now we are learning, not surprisingly, that fraud and lawlessness were key ingredients in the collapse as well. Since the fall of 2008, Congress, the Federal Reserve and the American taxpayer have had to step into the breach--at a direct cost of more than $2.5 trillion--because, as so many experts have said: ``We had to save the system.''

But what exactly did we save?

First, a system of overwhelming and concentrated financial power that has become dangerous. It caused the crisis of 2008-2009 and threatens to cause another major crisis if we do not enact fundamental reforms. Only six U.S. banks control assets equal to 63 percent of the nation's gross domestic

product, while oversight is splintered among various regulators who are often overmatched in assessing weaknesses at these firms.

Second, a system in which the rule of law has broken yet again. Big banks can get away with extraordinarily bad behavior--conduct that would not be tolerated in the rest of society, such as the blatant gimmicks used by Lehman, despite the massive cost to the rest of us.

What lessons should we take from the bankruptcy examiner's report on Lehman, and from other recent examples of misleading conduct on Wall Street? I see three.

First, we must undo the damage done by decades of deregulation. That damage includes--financial institutions that are ``too big to manage and too big to regulate''--as former FDIC Chairman Bill Isaac has called them--a ``wild west'' attitude on Wall Street, and colossal failures by accountants and lawyers who misunderstand or disregard their role as gatekeepers. The rule of law depends in part on manageably-sized institutions, participants interested in following the law, and gatekeepers motivated by more than a paycheck from their clients.

Second, we must concentrate law enforcement and regulatory resources on restoring the rule of law to Wall Street. We must treat financial crimes with the same gravity as other crimes, because the price of inaction and a failure to deter future misconduct is enormous.

Third, we must help regulators and other gatekeepers not only by demanding transparency but also by providing clear, enforceable ``rules of the road'' wherever possible. That includes studying conduct that may not be illegal now, but that we should nonetheless consider banning or curtailing because it provides too ready a cover for financial wrongdoing.

The bottom line is that we need financial regulatory reform that is tough, far-reaching, and untainted by discredited claims about the efficacy of self-regulation.

When Senators Leahy, Grassley and I introduced the Fraud Enforcement and Recovery Act--FERA--last year, our central objective was restoring the rule of law to Wall Street. We wanted to make certain that the Department of Justice and other law enforcement authorities had the resources necessary to investigate and prosecute precisely the sort of fraudulent behavior allegedly engaged in by Lehman Brothers that we learned about recently.

We all understood that to restore the public's faith in our financial markets and the rule of law, we must identify, prosecute, and send to prison the participants in those markets who broke the law. Their fraudulent conduct has severely damaged our economy, caused devastating and sustained harm to countless hard-working Americans, and contributed to the widespread view that Wall Street does not play by the same rules as Main Street.

FERA, signed into law in May, ensures that additional tools and resources will be provided to those charged with enforcement of our Nation's laws against financial fraud. Since its passage, progress has been made, including the President's creation of an interagency Financial Fraud Enforcement Task Force, but much more needs to be done.

Many have said we should of seek to punish anyone, as all of Wall Street was in a delirium of profitmaking and almost no one foresaw the sub-prime crisis caused by the dramatic decline in housing values. But this is not about retribution. This is about addressing the continuum of behavior that took place--some of it fraudulent and illegal--and in the process addressing what Wall Street and the legal and regulatory system underlying its behavior have become.

As part of that effort, we must ensure that the legal system tackles financial crimes with the same gravity as other crimes. When crimes happened in the past--as in the case of Enron, when aided and abetted by, among others, Merrill Lynch, and not prevented by the supposed gatekeepers at Arthur Andersen--there were criminal convictions. If individuals and entities broke the law in the lead up to the 2008 financial crisis--such as at Lehman Brothers, which allegedly deceived everyone, including the New York Fed and the SEC--there should be civil and criminal cases that hold them accountable.

If we uncover bad behavior that was nonetheless lawful, or that we cannot prove to be unlawful, as may be exemplified by the recent reports of actions by Goldman Sachs with respect to the debt of Greece, then we should review our legal rules in the United States and perhaps change them so that certain misleading behavior cannot go unpunished again. This will not be easy. As the Wall Street Journal's ``Heard on the Street'' noted last week, ``Give Wall Street a rule and it will find a loophole.''

This confirms what I heard on December 9 of last year when I convened an oversight hearing on FERA. As that hearing made clear, unraveling sophisticated financial fraud is an enormously complicated and resource-intensive undertaking, because of the nature of both the conduct and the perpetrators.

Rob Khuzami, head of the SEC's enforcement division, put it this way during the hearing:

White-collar area cases, I think, are distinguishable from

terrorism or drug crimes, for the primary reason that, often,

people are plotting their defense at the same time they're

committing their crime. They are smart people who understand

that they are crossing the line, and so they are papering the

record or having veiled or coded conversations that make it

difficult to establish a wrongdoing.

In other words, Wall Street criminals not only possess enormous resources but also are sophisticated enough to cover their tracks as they go along, often with the help, perhaps unwitting, of their lawyers and accountants.

Assistant Attorney General Lanny Breuer and Khuzami, along with Assistant FBI Director Kevin Perkins, all emphasized at the hearing the difficulty of proving these cases from the historical record alone. The strongest cases come with the help of insiders, those who have first- hand knowledge of not only conduct but also motive and intent. That is why I have applauded the efforts of the SEC and DOJ to use both carrots and sticks to encourage those with knowledge to come forward.

At the conclusion of that hearing in December, I was confident that our law enforcement agencies were intensely focused on bringing to justice those wrongdoers who brought our economy to the brink of collapse.

Going forward, we need to make sure that those agencies have the resources and tools they need to complete the job. But we are fooling ourselves if we believe that our law enforcement efforts, no matter how vigorous or well funded, are enough by themselves to prevent the types of destructive behavior perpetrated by today's too-big, too-powerful financial institutions on Wall Street.

I am concerned that the revelations about Lehman Brothers are just the tip of the iceberg. We have no reason to believe that the conduct detailed last week is somehow isolated or unique. Indeed, this sort of behavior is hardly novel. Enron engaged in similar deceit with some of its assets. And while we don't have the benefit of an examiner's report for other firms with a business model like Lehman's, law enforcement authorities should be well on their way in conducting investigations of whether others used similar ``accounting gimmicks'' to hide dangerous risk from investors and the public.

At the same time, there are reports that raise questions about whether Goldman Sachs and other firms may have failed to disclose material information about swaps with Greece that allowed the country to effectively mask the full extent of its debt just as it was joining the European Monetary Union, EMU. We simply do not know whether fraud was involved, but these actions have kicked off a continent-wide controversy, with ramifications for U.S. investors as well.

In Greece, the main transactions in question were called cross- currency swaps that exchange cash flows denominated in one currency for cash flows denominated in another. In Greece's case, these swaps were priced ``off-market,'' meaning that they didn't use prevailing market exchange rates. Instead, these highly unorthodox transactions provided Greece with a large upfront payment, and an apparent reduction in debt, which they then paid off through periodic interest payments and finally a large ``balloon'' payment at the contract's maturity. In other words, Goldman Sachs allegedly provided Greece with a loan by another name.

The story, however, does not end there. Following these transactions, Goldman Sachs and other investment banks underwrote billions of Euros in bonds for Greece. The questions being raised include whether some of these bond offering documents disclosed the true nature of these swaps to investors, and, if not, whether the failure to do so was material.

These bonds were issued under Greek law, and there is nothing necessarily illegal about not disclosing this information to bond investors in Europe. At least some of these bonds, however, were likely sold to American investors, so they may therefore still be subject to applicable U.S. securities law. While ``qualified institutional buyers,'' QIBs, in the United States are able to purchase bonds, such as the ones issued by Greece, and other securities not registered with the SEC under Securities Act of 1933, the sale of these bonds would still be governed by other requirements of U.S. law. Specifically, they presumably would be subject to the prohibition against the sale of securities to U.S. investors while deliberately withholding material adverse information.

The point may be not so much what happened in Greece, but yet again the broader point that financial transactions must be transparent to the investing public and verified as such by outside auditors. AIG fell in large part due to its credit default swap exposure, but no one knew until it was too late how much risk AIG had taken upon itself. Why do some on Wall Street resist transparency so? Lehman shows the answer: everyone will flee a listing ship, so the less investors know, the better off are the firms which find themselves in a downward spiral. At least until the final reckoning.

Who is to blame for this state of affairs, where major Wall Street firms conclude that hiding the truth is okay? Well, there is plenty of blame to go around. As I said previously, both Congress and the regulators came to believe that self-interest was regulation enough. In the now-immortal words of Alan Greenspan, ``Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity--myself especially--are in a state of shocked disbelief.'' The time has come to get over the shock and get on with the work.

What about the professions? Accountants and lawyers are supposed to help insure that their clients obey the law. Indeed they often claim that simply by giving good advice to their clients, they are responsible for far more compliance with the law than are government investigators. That claim rings hollow, however, when these professionals now seem too often focused on helping their clients get around the law.

Experts such as Professor Peter Henning of Wayne State University Law School, looking at the Lehman examiner's report on the Repo 105 transactions, are stunned that the accountant Ernst & Young never seemed to be troubled in the least about it. Of course, the fact that a Lehman executive was blowing a whistle on the practice in May 2008 did not change anything, other than to cause some discomfort in the ranks.

While saying he was confident he could clear up the whistleblower's concerns, the lead partner for Lehman at Ernst & Young wrote that the letter and off-balance sheet accounting issues were ``adding stress to everyone.''

As Professor Henning notes, one of the supposed major effects of the Sarbanes-Oxley Act was to empower the accountants to challenge management and ensure that transactions were accounted for properly. Indeed, it was my predecessor, then-Senator Biden, who was the lead author of the provision requiring the CEO and CFO to attest to the accuracy of financial statements, under penalty of criminal sanction if they knowingly or willfully certified materially false statements. I don't believe this is a failure of Sarbanes-Oxley. A law is not a failure simply because some people subsequently violate it.

I am deeply disturbed at the apparent failure of some in the accounting profession to change their ways and truly undertake the profession's role as the first line of defense--the gatekeeper--against accounting fraud. In just a few years time since the Enron-related death of the accounting firm Arthur Andersen, one might have hoped that ``technically correct'' was no longer a defensible standard if the cumulative impression left by the action is grossly misleading. But apparently that standard as a singular defense is creeping back into the profession.

The accountants and lawyers weren't the only gatekeepers. If Lehman was hiding balance sheet risks from investors, it was also hiding them from rating agencies and regulators, thereby allowing it to delay possible ratings downgrades that would increase its capital requirements. The Repo 105 transactions allowed Lehman to lower its reported net leverage ratio from 17.3 to 15.4 for the first quarter of 2008, according to the examiner's report. It was bad enough that the SEC focused on a misguided metric like net leverage when Lehman's gross leverage ratio was much higher and more indicative of its risks. The SEC's failure to uncover such aggressive and possibly fraudulent accounting, as was employed on the Repo 105 transactions, provides a clear indication of the lack of rigor of its supervision of Lehman and other investment banks.

The SEC in years past allowed the investment banks to increase their leverage ratios by permitting them to determine their own risk level. When that approach was taken, it should have been coupled with absolute transparency on the level of risk. What the Lehman example shows is that increased leverage without the accountants and regulators and credit rating agencies insisting on transparency is yet another recipe for disaster.

Mr. President, last week's revelations about Lehman Brothers reinforce what I have been saying for some time. The folly of radical deregulation has given us financial institutions that are too big to fail, too big to manage, and too big to regulate. If we have any hope of returning the rule of law to Wall Street, we need regulatory reform that addresses this central reality.

As I said more than a year ago:

At the end of the day, this is a test of whether we have

one justice system in this country or two. If we don't treat

a Wall Street firm that defrauded investors of millions of

dollars the same way we treat someone who stole $500 from a

cash register, then how can we expect our citizens to have

faith in the rule of law? For our economy to work for all

Americans, investors must have confidence in the honest and

open functioning of our financial markets. Our markets can

only flourish when Americans again trust that they are fair,

transparent, and accountable to the laws.

The American people deserve no less.

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

Mr. President, I ask unanimous consent that when the Senate resumes consideration of the House message with respect to H.R. 2847,

there be 10 minutes of debate time, with the time equally divided and controlled between Senators Gregg and Schumer or their designees, at which time Senator Gregg is expected to make a budget point of order and Senator Schumer would move to waive any relevant points of order; that if the waiver is successful, then no further debate or motions be in order, and the Senate proceed to vote on the Durbin motion to concur; further, that the order with respect to the DeMint motion to suspend be vitiated; that upon disposition of the House message, the Senate then resume consideration of H.R. 1586, and any other provisions with respect to the House message remaining in effect.

I ask unanimous consent the Judiciary Committee be discharged from further consideration of H. Con. Res. 249 and the Senate proceed to its immediate consideration.

I ask unanimous consent the concurrent resolution be agreed to, the preamble be agreed to, the motions to reconsider be laid upon the table, with no intervening action or debate, and any statement be printed in the Record.

Mr. President, I ask unanimous consent the Senate proceed to the immediate consideration of S. Res. 456, submitted earlier today.

I ask unanimous consent the resolution be agreed to, the preamble be agreed to, the motions to reconsider be laid upon the table, with no intervening action or debate, and any statements be printed in the Record.

I ask unanimous consent that the Judiciary Committee be discharged from further consideration of S. 1782 and the Senate proceed to its immediate consideration.

Mr. President, I ask unanimous consent that a Whitehouse substitute amendment which is at the desk be agreed to; the bill, as amended, be read a third time and passed; the motion to reconsider be laid upon the table, with no intervening action or debate, and any statements be printed in the Record.

Mr. President, I ask unanimous consent that when the Senate completes its business today, it adjourn until 9:30 a.m. on Wednesday, March 17; that following the prayer and the pledge, the Journal of proceedings be approved to date, the morning hour be deemed expired, the time for the two leaders be reserved for their use later in the day, and the Senate resume consideration of the House Message on H.R. 2847, as provided for under the previous order. Finally, I ask that the Senate recess from 12:30 to 2 p.m. for a special Democratic caucus.

Mr. President, Senators should expect two rollcall votes in relation to the HIRE Act beginning around 9:45 a.m. Upon disposition of the HIRE Act, the Senate will resume consideration of the FAA reauthorization legislation. Rollcall votes in relation to amendments to the FAA bill are expected to occur throughout the day.

As a reminder, at 2 o'clock tomorrow there will be a live quorum and the Senate will receive the managers appointed by the House of Representatives for the purpose of presenting and exhibiting Articles of Impeachment against G. Thomas Porteous, Jr., judge of the United States for the Eastern District of Louisiana. As a reminder, once the House managers are received, Senators will be sworn in and required to sign the Secretary's oath book.

If there is no further business to come before the Senate, I ask unanimous consent that it adjourn under the previous order.

Madam President, I ask unanimous consent to speak for up to 25 minutes.

Madam President, financial regulatory reform is perhaps the most important legislation the Congress will address for many years to come. If we do not get it right, the consequences of another financial meltdown could be devastating.

In the Senate, as we continue to move closer to consideration of a landmark bill, however, we are still far short of addressing some of the fundamental problems--particularly that of too big to fail--that caused the last crisis and already have planted the seeds for the next one. This is happening after months of careful deliberation and negotiations and just a year and a half after the virtual meltdown of our entire financial system.

Following the Great Depression, the Congress built a legal and regulatory edifice that endured for decades. One of its cornerstones was the Glass-Steagall Act, which established a firewall between commercial and investment banking activities. Another was the federally guaranteed insurance fund to back up bank deposits. There were other rules imposed on investors and designed to tamp down on rampant speculation--Federal rules such as margin requirements and the uptick rule for short selling.

That edifice worked well to ensure financial stability for decades. But in the past thirty years, the financial industry, like so many others, went through a process of deregulation. Bit by bit, many of the protections and standards put in place by the New Deal were methodically removed. And while the seminal moment came in 1999 with the repeal of Glass-Steagall, that formal rollback was primarily the confirmation of a lengthy process already underway.

Indeed, after 1999, the process only accelerated. Financial conglomerates that combined commercial and investment banking consolidated, becoming more leveraged and interconnected through ever more complex transactions and structures, all of which made our financial system more vulnerable to collapse. A shadow banking industry grew to larger proportions than even the banking industry itself, virtually unshackled by any regulation. By lifting basic restraints on financial markets and institutions, and more importantly, failing to put in place new rules as complex innovations arose and became widespread, this deregulatory philosophy unleashed the forces that would cause our financial crisis.

I start by asking a simple question: Given that deregulation caused the crisis, why don't we go back to the statutory and regulatory frameworks of the past that were proven successes in ensuring financial stability? This is basically a conservative question and I am a conservative on this issue. Why don't we go back to what has worked in the past?

And what response do I hear when I raise this rather obvious question? That we have moved beyond the old frameworks, that the eggs are too scrambled, that the financial industry has become too sophisticated and modernized and that it was not this or that piece of deregulation that caused the crisis in the first place.

Mind you, this is a financial crisis that necessitated a $2.5 trillion bailout. And that amount includes neither the many trillions of dollars more that were committed as guarantees for toxic debt nor the de facto bailout that banks received through the Federal Reserve's easing of monetary policy. The crisis triggered a Great Recession that has thrown millions out of work, caused millions to lose their homes, and caused everyone to suffer in an American economy that has been knocked off its stride for more than 2 years.

Given the high costs of our policy and regulatory failures, as well as the reckless behavior on Wall Street, why should those of us who propose going back to the proven statutory and regulatory ideas of the past bear the burden of proof? The burden of proof should be upon those who would only tinker at the edges of our current system of financial regulation. After a crisis of this magnitude, it amazes me that some of our reform proposals effectively maintain the status quo in so many critical areas, whether it is allowing multitrillion-dollar financial conglomerates that house traditional banking and speculative activities to continue to exist and pose threats to our financial system, permitting banks to continue to determine their own capital standards, or allowing a significant portion of the derivatives market to remain opaque and lightly regulated.

To address these problems, Congress needs to draw hard lines that provide fundamental systemic reforms, the very kind of protections we had under Glass-Steagall. We need to rebuild the wall between the government-guaranteed part of the financial system and those financial entities that remain free to take on greater risk. We need limits on the size of systemically significant nonbank players. And we need to effectively regulate the derivatives market that caused so much widespread financial ruin. It is my sincere hope that we don't enact compromise measures that give only the illusion of change and a false sense of accomplishment. If we do, then we will only have set in place the prelude to the next financial crisis.

First, however, let us examine the origins--both obscure and well- known--of the Great Recession of 2008. As I have already noted, the regulators began tearing down the walls between commercial banking and investment banking long before the repeal of Glass-Steagall. Through a series of decisions in the 1980s and 1990s, the Federal Reserve liberalized prudential limitations placed upon commercial banks, allowing them to engage in securities underwriting and trading activities, which had traditionally been the particular province of investment banks. One fateful decision in 1987 to relax Glass-Steagall restrictions passed over the objections of then Federal Reserve Chairman Paul Volcker, the man who is today leading the charge to restrict government-backed banks from engaging in proprietary trading and other speculative activities.

With the steady erosion of these protections by the Federal Reserve, the repeal of Glass-Steagall had become a fait accompli even before the passage of the Gramm Leach Bliley Act in 1999. In effect, by passing GLBA, Congress was acknowledging the reality in the marketplace that commercial banks were already engaging in investment banking. As the business of finance moved from bank loans to bonds and other forms of capital provided by investors, commercial banks pushed the Federal Reserve to relax Glass-Steagall standards to allow them to underwrite bonds and make markets in new products like derivatives. Even before GLBA was passed, J.P. Morgan, Citigroup, Bank of America and their predecessor organizations had all become leaders in those businesses.

If the changes in the financial marketplace that led to the repeal of Glass-Steagall took place over many years, the market's transformation after 1999 was swift and profound.

First, there was frenzied merger activity in the banking sector, as financial supermarkets that had bank and nonbank franchises under the umbrella of a single holding company bought out smaller rivals to gain an ever-increasing national and international footprint. While the Riegle-Neal Banking Act of 1994, which established a 10 percent cap nationally on any particular bank's share of federally insured deposits, should have been a barrier for at least some of these mergers, regulatory forbearance permitted them to go through anyway. In fact, then Citicorp's proposed merger Travelers Insurance was actually a major rationale behind the Glass-Steagall Act. Most of the largest banks are products of serial mergers. For example, J.P. Morgan Chase is a product of J.P. Morgan, Chase Bank, Chemical Bank, Manufacturers Hanover, Banc One, Bear Stearns, and Washington Mutual. Meanwhile, Bank of America is an amalgam of that predecessor bank, Nation's Bank, Barnett Banks, Continental Illinois, MBNA, Fleet Bank, and finally Merrill Lynch.

Second, the business of finance was changing. Disintermediation, the process by which investors directly fund businesses and individuals through securities markets, was already in full bloom by the time of the repeal of Glass-Steagall. This was demonstrated by the dramatic growth in money market fund and mutual fund assets and by the fact that corporate bonds actually exceeded nonmortgage bank loans by the middle of the 1990s.

The subsequent boom in structured finance took this process to ever greater heights. Securitization, whereby pools of illiquid loans and other assets are structured, converted and marketed into asset-backed securities, ABS, is in principle a valuable process that facilitates the flow of credit and the dispersion of risk beyond the banking system. Regulatory neglect, however, permitted a good model to mutate and grow into a sad farce.

On one end of the securitization supply chain, regulators allowed underwriting standards to erode precipitously without strengthening mortgage origination regulations or sounding the alarm bells on harmful nonbank actors--not even those within bank holding companies over which the regulators had jurisdiction. On the other, securities backed by risky loans were transformed into securities deemed ``hi-grade'' by credit rating agencies, only after a dizzying array of steps where securities were packaged and repackaged into many layers of senior tranches, which had high claims to interest and principal payments, and subordinate tranches.

The nonbanking actors--investment banks, hedge funds, money market funds, off-balance-sheet investment funds--that powered structured finance came to be known as the shadow banking market. Of course, the shadow banking market could only have grown to surpass by trillions of dollars the actual banking market with the consent of regulators.

In fact, one of the primary purposes behind the securitization market was to arbitrage bank capital standards. Banks that could show regulators that they could offload risks through asset securitizations or through guarantees on their assets in the form of derivatives called credit default swaps received more favorable regulatory capital treatment, allowing them to build their balance sheets to more and more stratospheric levels.

With the completion of the Basel II Capital Accord, determinations on capital adequacy became dependent on the judgments of rating agencies and, increasingly, the banks' own internal models. While this was a recipe for disaster, it reflected in part the extent to which the size and complexity of this new era of quantitative finance exceeded the regulators' own comprehension.

When Basel II was effectively applied to investment banks like Lehman Brothers and Goldman Sachs, which had far more precarious and potentially explosive business models that

utilized overnight funding to finance illiquid inventories of assets, the results were even worse. The SEC, which had no track record to speak of with respect to ensuring the safety and soundness of financial institutions, allowed these investment banks to leverage a small base of capital over 40 times into asset holdings that, in some cases, exceeded $1 trillion.

Third, little more than a year after repealing Glass-Steagall, Congress passed legislation--the Commodity Futures Modernization Act of 2000--to allow over-the-counter derivatives to essentially remain unregulated. Following the collapse of the hedge fund Long Term Capital Management in 1998, then Commodities Futures Trading Commission Chairwoman Brooksley Born began to warn of problems in this market. Unfortunately, her calls for stronger regulation of the derivatives market clashed with the uncompromising free-market philosophies of Federal Reserve Chairman Alan Greenspan, then Treasury Secretary Robert Rubin and later Treasury Secretary Larry Summers. To head off any attempt by the CFTC or another agency from regulating this market, they successfully convinced Congress to pass the CFMA.

The explosive growth of the OTC derivatives market following the passage of the CFMA was stunning--the size of the OTC derivatives market grew from just over $95 trillion at the end of 2000 to over $600 trillion in 2009. This growth had profound implications for the overall risk profile of the financial system. While derivatives can be used as a valuable tool to mitigate or hedge risk, they can also be used as an inexpensive way to take on leverage and risk. As I noted before, certain OTC derivatives called credit default swaps were crucial in allowing banks to evade their regulatory capital requirements. In other contexts, CDS contracts have been used to speculate on the credit worthiness of a particular company or asset.

But they pose other problems as well. Since derivatives represent contingent liabilities or assets, the risks associated with them are imperfectly accounted for on company balance sheets. And they have concentrated risk in the banking sector, since even before the repeal of Glass-Steagall, large commercial banks like J.P. Morgan were major derivatives dealers. Finally, the proliferation of derivatives has significantly increased the interdependence of financial actors while also overwhelming their back-office infrastructure. Hence, while the growth of derivatives greatly increased counterparty credit risks between financial institutions--the risk, that is, that the other party will default at some point during the life of the derivative contract-- those entities had little ability to quantify those risks, let alone manage them.

Therefore, on the eve of what was arguably the biggest economic crisis since the Great Depression, which was caused in large part by the confluence of all the forces and trends that I have just described, the financial industry was larger, more concentrated, more complex, more leveraged and more interconnected than ever before. Once the subprime crisis hit, it spread like a contagion, causing a collapse in confidence throughout virtually the entire financial industry. And without clear walls between those institutions the government insures and those that are free to take on excessive leverage and risk, the American taxpayer was called upon to step forward into the breach.

Unfortunately, the government's response to the financial meltdown has only made the industry bigger, more concentrated and more complex. As the entire financial system was imploding following the bankruptcy filing by Lehman Brothers, the Treasury and the Federal Reserve hastily arranged mergers between commercial banks, which had a stable source of funding in insured deposits, and investment banks, whose business model depended on market confidence to roll over short-term debt.

Before the Lehman bankruptcy, Bear Stearns had been merged into J.P. Morgan. After the Lehman collapse, one of the biggest mergers to occur was between Bank of America and Merrill Lynch. And Ken Lewis, the CEO of Bank of America at the time, alleges that it was consummated only following pressure he received from Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke.

As merger plans for the remaining two investment banks, Goldman Sachs and Morgan Stanley, faltered, another plan was hatched. Both Goldman Sachs and Morgan Stanley--neither of which had anything even close to traditional banking franchises--were both given special dispensations from the Federal Reserve to become bank holding companies. This provided them with permanent borrowing privileges at the Federal Reserve's discount window--without having to dispose of risky assets. In a sense, it was an official confirmation that they were covered by the government safety net because they were literally ``too big to fail.''

Following the crisis, the U.S. mega banks left standing have even more dominant positions. Take the multitrillion-dollar market for OTC derivatives. The five largest banks control 95 percent of that market. Let me repeat that. The five largest banks control 95 percent of the over-the-counter derivatives market. With such strong pricing power, these firms could afford to expand dramatically their margins. The Federal Reserve estimated that those five banks made $35 billion from trading in the first half of 2009 alone. Of course, they used these outsized profits from trading activities in derivatives and other securities not only to replenish their capital, but also to pay billions of dollars in bonuses.

Large and complex institutions like Citigroup dominate our financial industry and our economy. MIT professor Simon Johnson and James Kwak, a researcher at Yale Law School, estimate that the six largest U.S. banks now have total assets in excess of 63 percent of our overall GDP. Only 15 years ago, the six largest US banks had assets equal to 17 percent of GDP. This is an extraordinary increase. We haven't seen such concentration of financial power since the days of Morgan, Rockefeller and Carnegie.

As I stated at the outset, I am extremely concerned that our reform efforts to date do little, if anything, to address this most serious of problems. By expanding the safety net--as we did in response to the last crisis--to cover ever larger and more complex institutions heavily engaged in speculative activities, I fear that we may be sowing the seeds for an even bigger crisis in only a few years or a decade.

Unfortunately, the current reform proposals focus more on reorganizing and consolidating our regulatory infrastructure, which does nothing to address the most basic issue in the banking industry: that we still have gigantic banks capable of causing the very financial shocks that they themselves cannot withstand.

Rather than pass the buck to a reshuffled regulatory deck, which will still be forced to oversee banks that former FDIC Chairman Bill Isaac describes as ``too big to manage, and too big to regulate,'' we must draw hard statutory lines between banks and investment houses.

We must eliminate the problem of ``too big to fail'' by reinstituting the spirit of Glass-Steagall, a modern version that separates commercial from investment banking activities and imposes strict size and leverage limits on financial institutions.

We must also establish clear and enforceable rules of the road for our securities market in the interest of making them less fragmented, opaque and prone to collapse. The over-the-counter derivatives market must be tightly regulated, as originally proposed by Brooksley Born-- and rejected by Congress--in the late 1990s.

Finally, I believe the myriad conflicts of interest on Wall Street must be addressed through greater protection and empowerment of individual investors. Our antifraud provisions, as represented for example by rule 10(b)5, under the 1934 Securities Act, need to be strengthened.

One key reform that has been proposed to address the ``too big to fail'' problem is resolution authority. The existing mechanism whereby the FDIC resolves failing depository institutions has, by and large, worked well. After the experiences of Bear Stearns and Lehman Brothers in 2008, it is clear that a similar process should be applied to entire bank holding companies and large nonbank institutions.

While no doubt necessary, this is no panacea. No matter how well Congress

crafts a resolution mechanism, there can never be an orderly wind-down, particularly during periods of serious stress, of a $2-trillion institution like Citigroup that had hundreds of billions of off- balance-sheet assets, relies heavily on wholesale funding, and has more than a toehold in over 100 countries.

There is no cross-border resolution authority now, nor will there be for the foreseeable future. In the days and weeks following the collapse of Lehman Brothers, there was an intense and disruptive dispute between regulators in the U.S. and U.K. regarding how to handle customer claims and liabilities more generally. Yet experts in the private sector and governments agree--national interests make any viable international agreement on how financial failures are resolved difficult to achieve. A resolution authority based on U.S. law will do precisely nothing to address this issue.

While some believe market discipline would be reimposed by refining the bankruptcy process, Lehman Brothers demonstrates that the very concept of market discipline is illusory with institutions like investment banks, which used funds that they borrowed in the repo market to finance their own inventories of securities, as well as their own book of repurchase agreements, which they provided to hedge funds through their prime brokerage business.

Investment banks, the fulcrum of these institutional arrangements, found themselves in a classic squeeze. On one side, their hedge fund clients and counterparties withdrew funds and securities in their prime brokerage accounts, drew down credit lines and closed out derivative positions, all of which caused a massive cash drain on the bank. On the other side, the repo lenders, concerned about the value of their collateral as well as the effect of the cash drain on the banks' credit worthiness, refused to roll over their loans without the posting of substantial additional collateral. These circumstances quickly prompted a vicious cycle of deleveraging that brought our financial system to the brink. With such large, complex and combustible institutions like these, there can be no orderly process of winding them down. The rush to the exits happens much too quickly.

That is why we need to directly address the size, the structure and the concentration of our financial system.

The Volcker rule, which would prohibit commercial banks from owning or sponsoring ``hedge funds, private equity funds, and purely proprietary trading in securities, derivatives or commodity markets,'' is a great start, and I applaud Chairman Volcker for proposing that purely speculative activities should be moved out of banks. That is why I joined yesterday with Senators Jeff Merkeley and Carl Levin to introduce a strong version of the Volcker rule. But I think we must go further still. Massive institutions that combine traditional commercial banking and investment banking are rife with conflicts and are too large and complex to be effectively managed.

We can address these problems by reimposing the kind of protections we had under Glass-Steagall. To those who say ``repealing Glass- Steagall did not cause the crisis, that it began at Bear Stearns, Lehman Brothers and AIG,'' I say that the large commercial banks were engaged in exactly the same behavior as Bear Stearns, Lehman and AIG-- and would have collapsed had the federal government not stepped in and taken extraordinary measures. That is the reason why commerical banks did not go under, because we were protecting them because they were too big to fail. We let Bear, Lehman and AIG--go under because they were not. This seems like a circular argument on why we should not do more about commercial banks in this country that are so incredibly large and we would be stuck with the same situation we were in during the meltdown. Moreover, in response to the last crisis, we increased the safety net that covers these behemoth institutions. The result: they will continue to grow unchecked, using insured deposits for speculative activities without running any real risk of failure on account of their size.

We need to reinstate Glass-Steagall in an updated form to prevent or at least severely moderate the next crisis.

By statutorily splitting apart massive financial institutions that house both banking and securities operations, we will both cut these firms down to more reasonable and manageable sizes and rightfully limit the safety net only to traditional banks. President of the Federal Reserve Bank of Dallas Richard Fisher recently stated:

I think the disagreeable but sound thing to do regarding

institutions that are [``too big to fail''] is to dismantle

them over time into institutions that can be prudently

managed and regulated across borders. And this should be done

before the next financial crisis, because it surely cannot be

done in the middle of a crisis.

A growing number of people are calling for this change. They include former FDIC Chairman Bill Isaac, former Citigroup chairman John Reed, famed investor George Soros, Nobel Prize winning economist Joseph Stiglitz, president of the Federal Reserve Bank of Kansas City, Thomas Hoenig, and Bank of England Governor, Mervyn King, among others. A chastened Alan Greenspan also adds to that chorus, noting:

If they're too big to fail, they're too big. In 1911 we

broke up Standard Oil--so what happened? The individual parts

became more valuable than the whole. Maybe that's what we

need to do.

Alan Greenspan, in my opinion, has never been more right.

But even this extraordinary step of splitting these institutions apart is not sufficient. Cleaving investment banking from traditional commercial banking will still leave us with massive investment banks, some with balance sheets that exceed $1 trillion in assets.

For that reason, Glass-Steagall would need to be supplemented with strict size and leverage constraints. The size limit should focus on constraining the amount of nondeposit liabilities at large investment banks, which rely heavily on short-term financing, such as repos and commercial paper.

The growth of those funding markets in the run-up to the crisis was staggering. One report by researchers at the Bank of International Settlements estimated that the size of the overall repo market in the United States, Euro region and the United Kingdom totaled approximately $11 trillion at the end of 2007. Incredibly, the size was more than $5 trillion more than the total value of domestic bank deposits at that time, which was less than $7 trillion.

The overreliance on such wholesale financing made the entire financial system vulnerable to a classic bank run, the type that we had before we instituted a system of deposit insurance and strong bank supervision. Remarkably, while there is a prudential cap on the amount of deposits a bank can have--even though deposits are already federally insured--there is no limit of any kind on liabilities like repos that need to be rolled over every day. With a sensible limit on these liabilities at each financial institution--for example, as a percentage of GDP--we can ensure that never again will the so-called shadow banking system eclipse the real banking system.

In addition, institutions that rely upon market confidence every day to finance their balance sheet and market prices to determine the worth of their assets should not be leveraged to stratospheric levels. To ensure that regulatory forbearance does not permit another Lehman Brothers, we should institute a simple statutory leverage requirement, that is, a limit on how much firms can borrow relative to how much their shareholders have on the line. As I have said in a previous speech, a statutory leverage requirement that is based upon banks' core capital--i.e., their common stock plus retained earnings--could supplement regulators' more highly calibrated risk-based assessments, providing a sorely needed gut check that ensures that regulators don't miss the forest for the trees when assessing the capital adequacy of a financial institution.

This would push firms back towards the levels of effective capital they had in the pre-bailout days--like in the post World War II period when our financial system generally functioned well. To be sure, this would move our core banks from being predominantly debt financed to substantially based on equity. But other parts of our financial system already operate well on this basis--with venture capital being the most notable example. The return on equity relative to debt would need to rise to accommodate this change, but--as long as we preserve a credible monetary policy--this is consistent with low interest rates in real terms.

I would also stress that a leverage limit without breaking up the biggest banks will have little effect. Because of their implicit guarantee, ``too big to fail'' banks enjoy a major funding advantage-- and leverage caps by themselves do not address that. Our biggest banks and financial institutions have to become significantly smaller if we are to make any progress at all.

Turning now to derivatives reform, I have already noted how large dealer banks completely dominate the OTC marketplace for derivatives, an opaque market where these banks exert enormous pricing power. For over two decades, this market has existed with virtually no regulation whatsoever.

Amazingly, it is a market where the dealers themselves actually set the rules for the amount of collateral and margin that needs to be posted by different counterparties on trades. Dealers never post collateral, while the rules they set for their counterparties are both lax and procyclical, meaning that margin requirements tend to increase during periods of market turmoil when liquidity is at a premium. The complete lack of oversight of these markets has almost brought our financial system to its knees twice in 10 years, first with the failure of LTCM in 1998, and then with the failure of Lehman Brothers in 2008. We have known about these problems for over a decade--yet we have so far done nothing to make this market better regulated.

That is why I applaud CFTC Chairman Gary Gensler's efforts in pushing for centralized clearing and regulated electronic execution of standardized OTC derivatives contracts as well as more robust collateral and margin requirements. Clearinghouses have strong policies and procedures in place for managing both counterparty credit and operational risks. Chairman Gensler underscores that this would get directly at the problem of ``too big to fail'' by stating: ``Central clearing would greatly reduce both the size of dealers as well as the interconnectedness between Wall Street banks, their customers and the economy.'' Moreover, increased clearing and regulated electronic trading will make the market more transparent, which will ultimately give investors better pricing.

A strong clearing requirement, however, should not be swallowed by large exemptions that circumvent the rules. While I am sympathetic to concerns about increased costs raised by nonfinancial corporations that use interest rate and currency swaps for hedging purposes, any exemption of this sort should be narrowly crafted. For example, it might be limited to transactions where non-financial corporations use OTC derivatives in a way that qualifies for GAAP hedge accounting treatment. In any case, we should recognize more explicitly that when such derivatives contracts are provided by too big to fail banks, the end users are in effect splitting the hidden taxpayer subsidy with the big banks. And remember that this subsidy is not only hidden--it is also dangerous, because it is central to the incentives to become bigger and to take more risk once any financial firm is large.

Given that one of the key objectives behind increased clearing is to reduce counterparty credit risk, it also seems reasonable that derivatives legislation place meaningful constraints on the ownership of clearinghouses by large dealer banks.

Finally, we need to address the fundamental conflicts of interest on Wall Street. While separating commercial banking from investment banking is a critical step, there are still inherent conflicts within the modern investment banking model.

Let's take the example of auction rate securities. Brokers at UBS and other firms marketed these products, which were issued by municipalities and not-for-profit entities, as ``safe, liquid cash alternatives'' to retail investors even though they were really long- term debt instruments whose interest rates would reset periodically based upon the results of Dutch auctions. In other words, these unsuspecting investors would be unable to sell their securities if new buyers didn't enter the market, which is exactly what happened. As credit concerns by insurers who guaranteed these securities drained liquidity from the market, bankers continued to sell these securities to retail clients as safe, liquid investments. There was a blatant conflict of interest where the banks served as broker to their retail customers while also underwriting the securities and conducting the auctions.

There is an open issue of why such transactions did not constitute securities fraud, for example under rule 10(b)5--which prohibits the nondisclosure of material information. Civil actions are still in progress and perhaps we will learn more from the outcomes of particular cases. But no matter how these specific cases are resolved, we should move to strengthen the legal framework that enables both private parties and the SEC--both civil and criminal sides--to bring successful enforcement actions.

Individuals at Enron, Merrill Lynch, and Arthur Anderson were called to account for their participation in fraudulent activities--and at least one executive from Merrill went to prison for signing off on a deal that would help manipulate Enron's earnings. But it is quite possible that no one will be held to account, either in terms of criminal or civil penalties, due to the deception and misrepresentation manifest in our most recent credit cycle. We must work hard to remove all the loopholes that helped create this unfair and unreasonable set of outcomes.

We can begin by strengthening investor protection. Currently, brokers are not subject to a fiduciary standard as financial advisors are, but only subject to a ``suitability'' requirement when selling securities products to investors. Hence, brokers don't have to be guided by their customers' best interest when recommending investment product offerings--they might instead be focused on increasing their compensation by pushing proprietary financial products. I am not saying they are doing that, but we have to be aware and deal with clear conflicts of interest. By harmonizing the standards that brokers and financial advisors face and by better disclosing broker compensation, retail investors will be able to make better, more informed investment decisions. Even Lloyd Blankfein, the CEO of Goldman Sachs, has stated that he ``support[s] the extension of a fiduciary standard to broker/ dealer registered representatives who provide advice to retail investors. The fiduciary standard puts the interests of the client first. The advice-giving functions of brokers who work with investors have become similar to that of investment advisers.''

It has also become known that some firms underwrite securities-- promoting them to investors--and then short these same securities within a week and without disclosing this fact, which any reasonable investor would regard as adverse material information. In the structured finance arena, investment banks sold pieces of collateralized debt obligations--which were packages of different asset-backed securities divided into different risk classes--to their clients and then took--proceeded to take short positions in those securities by purchasing credit default swaps. Some banks went further by shorting mortgage indexes tied to securities they were selling to clients and by shorting their counterparties in the CDS market. This is how a firm such as Goldman Sachs could claim that they were effectively hedged to an AIG collapse.

Unfortunately, the use of products like CDS in this way allows the banks to become empty creditors who stand to make more money if people and companies default on their debts than if they actually paid them. These and other problematic practices that place financial firms' interests against those of their clients need to be restricted. They also completely violate the spirit of our seminal legislation from the 1930s, which insisted--for the first time--that the sellers and underwriters of securities disclose all material information. This is nothing less than a return to the unregulated days of the 1920s; to be sure, those days were heady and exciting, but only for a while--such practices always end in a major crash, with the losses disproportionately incurred by small and unsuspecting investors.

Investors should also have greater recourse through our judicial system. For example, auditors, accountants, bankers and other professionals that are complicit in corporate fraud should be held accountable. That is why I worked on a bill with Senators Specter and Reed to allow for private civil

actions against individuals who knowingly or recklessly aid or abet a violation of securities laws.

Admittedly, this is not an exhaustive list of financial reforms. I also believe we need to reconstitute our system of consumer financial protection, which was a major failure before our last crisis. We must have an independent Consumer Financial Protection Agency, CFPA, that has strong and autonomous rulemaking authority and the ability to enforce those rules at nonbanking entities like payday lenders and mortgage finance companies. Most importantly, the head of this agency must not be subject to the authority of any regulator responsible for the ``safety and soundness'' of the financial institutions.

This is basic. If you are involved, like most of our banking regulatory agencies, in the Treasury, their primary responsibility is the safety and soundness of those financial institutions. We need an organization such as the CFPA, which looks out totally for the interest of consumers and consumers alone.

Unfortunately, like the public option in healthcare, the CFPA issue has become something of a ``shiny object''--though certainly an important one--that has distracted the focus of debate away from the core issues of ``too big to fail.''

Beginning with the solutions for ``too big to fail,'' each of these challenges represents a crucial step along the way towards fixing a regulatory system that has permitted both large and small failures. Each is an important piece to the puzzle.

I know there are those who will disagree with some, and perhaps all of these proposals. They sincerely advocate a path of incrementalism, of achieving small reforms over time. They say that problems as complex as these need to be solved by the regulators, not by Congress. After all, they are the ones with the expertise.

I respectfully disagree.

Giving more authority to the regulators is not a complete solution. While I support having a systemic risk council and a consolidated bank regulator, these are necessary but not sufficient reforms--the President's Working Group on Financial Markets has actually played a role in the past similar to that of the proposed council, but to no discernible effect. I do not see how these proposals alone will address the key issue of ``too big to fail.''

In the brief history I outlined earlier, the regulators sat idly by as our financial institutions bulked up on short-term debt to finance large inventories of collateralized debt obligations backed by subprime loans and leveraged loans that financed speculative buyouts in the corporate sector.

They could have sounded the alarm bells and restricted this behavior, but they did not. They could have raised capital requirements, but instead farmed out this function to credit rating agencies and the banks themselves. They could have imposed consumer-related protections sooner and to a greater degree, but they did not. The sad reality is that regulators had substantial powers, but chose to abdicate their responsibilities.

What is more, regulators are almost completely dependent on the information, analysis and evidence as presented to them by those with whom they are charged with regulating. Last year, former Federal Reserve Chairman Alan Greenspan, once the paragon of laissez-faire capitalism, stated that ``it is clear that the levels of complexity to which market practitioners, at the height of their euphoria, carried risk management techniques and risk-product design were too much for even the most sophisticated market players to handle properly and prudently.'' I submit that if these institutions that employ such techniques are too complex to manage, then they are surely too complex to regulate.

That is why I believe that reorganizing the regulators and giving them additional powers and responsibilities isn't the answer. We cannot simply hope that chastened regulators or newly appointed ones will do a better job in the future, even if they try their hardest. Putting our hopes in a resolution authority is an illusion. It is like the harbormaster in Southampton adding more lifeboats to the Titanic, rather than urging the ship to steer clear of the icebergs. We need to break up these institutions before they fail, not stand by with a plan waiting to catch them when they do fail.

Without drawing hard lines that reduce size and complexity, large financial institutions will continue to speculate confidently, knowing that they will eventually be funded by the taxpayer if necessary. As long as we have ``too big to fail'' institutions, we will continue to go through what Professor Johnson and Peter Boone of the London School of Economics has termed ``doomsday'' cycles of booms, busts and bailouts, a so-called ``doom loop'' as Andrew Haldane, who is responsible for financial stability at the Bank of England, describes it.

The notion that the most recent crisis was a ``once in a century'' event is a fiction. Former Treasury Secretary Paulson, National Economic Council Chairman Larry Summers, and J.P. Morgan CEO Jamie Dimon all concede that financial crises occur every 5 years or so.

Without clear and enforceable rules that address the unintended consequences of unchecked financial innovation and which adequately protect investors, our markets will remain subverted.

These solutions are among the cornerstones of fundamental and structural financial reform. With them we can build a regulatory system that will endure for generations instead of one that will be laid bare by an even bigger crisis in perhaps just a few years or a decade's time. We built a lasting regulatory edifice in the midst of the Great Depression, and it lasted for nearly half a century. I only hope we have both the fortitude and the foresight to do so again.

Madam President, I ask unanimous consent that the Banking Committee be discharged from further consideration of H.R. 2194, the Iran Refined Petroleum Sanctions Act of 2009, and the Senate then proceed to its consideration.

Madam President, I ask unanimous consent that the substitute amendment, which is at the desk and is the language of S. 2799 as passed by the Senate on January 28, 2010, be considered and agreed to, the bill, as amended, be read three times, passed, and the motion to reconsider be laid upon the table; that upon passage, the Senate insist on its amendment, request a conference with the House on the disagreeing votes of the two Houses, and the Chair be authorized to appoint conferees on the part of the Senate with a ratio of 4 to 3, without further intervening action or debate.

I yield the floor.