Floor Statements

Mr. President, I know we are in morning business. But at the conclusion of morning business I will be offering an amendment which I understand is the next one in order. Since there is nobody taking the morning business time, I will take that time to begin the discussion of that amendment.

The amendment which I am proposing goes to this whole issue of who the taxpayers of America should bail out. I personally don't think they should bail out anybody, to be honest with you. They certainly should not be bailing out financial institutions that have gotten too big. They should not be bailing out automobile companies that have overextended themselves and are doing a poor job. They should not be bailing out other countries. They certainly should not be bailing out States and local governments that are about to default on their debt.

It is very hard to explain to a citizen of New Hampshire or Illinois, Connecticut, New Jersey, Pennsylvania, why their tax dollars should go to bail out a State which is about to default on the debt it has run up because it has been irresponsible in its spending. The obvious State that comes to mind is the State of California, which has very serious problems. But they are self-inflicted problems. These are not problems which were created as a result of some general problems across the country, and they were not problems created, for example, by an event-- an environmental event or emergency such as Katrina.

They were totally self-inflicted problems. The question is, Should the American taxpayer, all the rest of us in this country, be put in a position where we have to bail out that State? I do not think we should. That is what my amendment is going to go to.

But I see now the Senator from Florida has arrived. He has the morning business time we are in.

I reserve the remainder of my time and yield the floor.

Mr. President, I sort of did a trailer version of this bill a few minutes ago while we had some time in morning business. But let me discuss the amendment again.

I call up amendment No. 4051 and ask unanimous consent that the pending amendment be set aside.

Mr. President, I ask unanimous consent that the reading of the amendment be dispensed with.

Mr. President, this amendment is pretty simple. It says American taxpayers should not be put on the hook for States which have been profligate. It says, specifically, that: Federal funds cannot be used to purchase obligations of States or local communities that are in default or are about to default, unless those States have gone through some sort of crisis such as the Katrina situation.

But if the default that the State or local community is about to experience is the function of their failure to discipline their fiscal house, then we are not going to ask the taxpayers across this country to support that error in judgment and that misguided fiscal policy of that State or that local government.

If we do not have this type of rule in play, basically we will be setting up a situation where the American people will become the guarantor of inappropriate actions across this country by legislators and city governments. You will have this untoward situation where you will basically create an atmosphere that there is an incentive for State governments and local communities to not be fiscally responsible.

It is this moral hazard issue. We debated it at considerable length when we discussed too big to fail in the banking system. This bill has a lot of issues, as far as I am concerned, but one of the things it actually handles reasonably well is the issue of too big to fail. It does need some adjustment. But it basically handles that issue pretty well.

We have designed language in this bill between Senator Dodd and Senator Shelby, which essentially says: No longer will the American taxpayer be presumed or in any way expected or have any obligation at all to support a financial institution which has gotten too large and has taken on too many risky decisions and is therefore in fiscal distress. That institution will fail. Its stockholders will be wiped out. Unsecured bondholders will be wiped out and the American taxpayer will not come in and defend that situation.

Too big to fail ends with this bill, hopefully. But it should apply also to States and local governments. We should not create the moral hazard of having taxpayers in New Hampshire or taxpayers in Nebraska or taxpayers in New Mexico responsible for profligate activity in other States.

In fact, many of our States, of course, have balanced budget requirements. In fact, in Nebraska, they do not even allow any debt, period. They have a constitutional amendment that says, there can be no debt. So they are extremely disciplined, these States, in the way they handle their budgets.

The taxpayers and the citizens of those States expect their leaders to be disciplined. So how can we ask those taxpayers and those citizens in those States that have been disciplined, who have elected people who are willing to live within their means as they govern, whether it is at the community level or at the State level, how can we ask those citizens across this country to go in and bail out other States and our communities that have been totally undisciplined in managing their fiscal house and have put themselves at huge distress and have defaulted on their debt or are about to default on their debt?

This is not acceptable. If we are going to have a bill which addresses the issue of too big to fail, it should apply to this type of a situation. So I have offered this amendment. It is very simple, as I said. It prohibits Federal funds from being used to purchase or guarantee obligations of States and local communities that are in default or about to go into default.

It is a pretty strict standard, pretty clear. If you have a State that for reasons of its own making has created a fiscal mess of inordinate proportions and cannot pay its debt, it cannot come to Washington and say: We want you to bail us out.

That is not right. That is not appropriate. So this bill bans that sort of an event from occurring. Why do we need to do this? It is pretty obvious. There are a couple States in this country that have been irresponsible in their spending, that have not disciplined themselves, and that, I think, are expecting everybody else in this country to bail them out.

I sure do not want to be part that. I do not want my taxpayers in New Hampshire to be part of that. It is not fair that they should be part of that. Those States are going to have to figure out how to straighten out their own fiscal house. They should have to do that within the terms of their own spending streams and their own revenue streams.

They should not expect the Federal Government to come in and take them out of their distress, which was self-imposed and self-created. There is an exception in this bill. There is this language so that if a State is put into severe distress because of an emergency situation, such as a Katrina-type situation, this would not apply. Obviously, it should not apply then.

If it is a self-imposed event, simply resulting from the human nature of legislators and city councils to sometimes spend a heck of a lot more money than they have and that they can take in under their structure, they should have to pay for it and figure out how to deal with it themselves. They should not pass that problem on to the American people by financing it through Washington. It is consistent with the theme of this bill that there should be nothing that is too big to fail in this country, including State governments and local governments or financial institutions. I hope my colleagues will support the amendment.

I reserve the remainder of my time and yield the floor.

Mr. President, first, let me thank the Senator from Missouri for his thoughtful and substantive discussion of this amendment. As a former Governor, I think he appreciates how tough it is to maintain balances in the State budget, and you have to make the very difficult decisions to make sure your State does not get its fiscal house into disarray and end up defaulting on debt. That would be the worst thing that could possibly happen if you were a Governor--or one of the worst things. In any event, he certainly did that when he was Governor. I tried to do that when I was Governor.

Mr. President, I ask unanimous consent that after the Senator from Connecticut has used up the time that was originally allocated to him, the remaining time between now and 12:05 be divided equally between the two sides.

Mr. President, I ask unanimous consent to speak on that remaining time.

I think the Senator from Missouri has made a superb case that it is inappropriate to set up a structure where States can be profligate or communities can be profligate and then basically throw the problems they have created on the rest of the country and the taxpayers of the rest of the country--whether they are from New Mexico or Missouri or Connecticut or New Hampshire. There is no reason why our taxpayers should pay for inappropriate fiscal actions by some other State or some other community. Rather, those States and communities should have to straighten out their own financial house and not expect that they can come to the Federal Government for a bailout if their problems have been self-inflicted, created by their own failure to discipline their fiscal house.

As I said earlier in the discussion, a lot of States have a balanced budget amendment. I am not sure whether Missouri did--New Hampshire did not--but we understood if we did not run fiscally responsible budgets in New Hampshire, we would find our debt downgraded. That is what we were worried about--to get to the point where you might actually default, which would be, as I said, a totally terrible situation.

But in States that have balanced budget amendments, States which have worked very hard to keep their fiscal house in order, the taxpayers of those States should not have to suddenly step up and take care of the taxpayers of another State that has failed to do that. It is not fair. It is not equitable. You certainly do not want to create that atmosphere because if you have an atmosphere where one State can throw its problems on to every other State, then you create an incentive for States to be profligate and irresponsible.

Amendment No. 4051, as Modified

With those comments, Mr. President, I ask to modify my amendment. I believe the modification is at the desk.

Have we shared the modification with the Chairman?

Yes.

That is correct.

A parliamentary question: Mr. President, don't I have the right to modify without asking for unanimous consent?

I thank the Chair.

I reserve the remainder of my time.

Mr. President, I admire the Senator from Connecticut and I appreciate what he has done in his efforts to stabilize the financial industry in this country. At the core of what he has done, of course, is to say: No more bailouts. That is essentially what this bill is about: No more bailouts; the taxpayers of this country will not step up and bail out large financial institutions which have taken actions which have put them at risk financially, and the only people who should bear that burden are the stockholders and the unsecured bondholders of those institutions.

What this bill also says is no bailouts, no bailouts for States which are in default or about to default on their debt. They are doing it not as a result of some external event forcing them into dire straits but because they simply spent their way into a fiscal situation where they can't pay their own debts. Why should the people of Connecticut, the people of New Hampshire have to bail out the people of California-- let's be honest about this; this is about California, the people of California--because their government has been totally irresponsible in spending for a large number of years, has created a massive obligation, especially in their public pension programs, which they can't afford to pay? Why did they run up those obligations? So that people who were running for office in California could get elected. Just promise this, promise that, promise this, promise that. Then, the people in New Hampshire are supposed to pay to help those people get elected on those promises which they could never fulfill and for which they created obligations to pay for? I don't think so. I don't think that is fair or right.

If the people of New Hampshire and the people of Connecticut and the people of New Mexico have been fiscally responsible in the managing of their towns and their cities and their States

and their counties, why should they suddenly have to pay for California which hasn't been? Clearly, they shouldn't. If we are going to have a no bailout bill, it ought to apply to California as well as to large financial institutions that have acted inappropriately and unwisely.

That is all this says. It doesn't say you are not going to be able to get your usual Federal assistance that comes through the usual course of action. That is a bit of hyperbole. I appreciate the intensity and energy of the Senator from Connecticut, but that is hyperbole. This is about not having Federal funds be available to States that are in default or about to go into default on their debt as a result of the actions of the State leadership as elected by the people of that State and not asking the people in the rest of the country to have to pay the cost of those inappropriate actions and those actions which were fiscally irresponsible. It seems like a proposal which is totally consistent with the basic purpose of this bill, which is to end bailouts.

I reserve the remainder of my time.

Mr. President, how much time remains?

Mr. President, I really think the Senator from Connecticut is sort of reaching in his arguments here. This is really about a State like California defaulting and the rest of us having to pay for it. That is what this is about. This is about a State that has been irresponsible, to be kind, with its spending and now finds itself in a situation where it cannot pay its debt. You know the legislators of that State are saying: Let's go to Washington and get the money so that we can get reelected on the basis of spending all this money. That is not fair. That is not how a federalist system is supposed to work. You cannot argue that the American system was set up so that when one State would be profligate, another State would have to pay for the cost of that profligateness.

The Senator's bill uses this same language. The Senator from Connecticut had phraseology that claimed my language as inappropriate on the issue of default and how he defined it, and it basically mirrors his language in title II. If it works in title II, it ought to work here.

The real issue is that we should not set up a situation where States and communities can expect to spend a lot more than they can take in, know they are spending more than they are taking in, run up a lot of debts they cannot pay, and then come to the rest of America and say: You pay our debts because we want to get reelected. That is what this is about. It is limiting the ability of States to act in a fiscally irresponsible manner and expect the country will stand behind them and bail them out.

I reserve the remainder of my time.

Mr. President, I ask unanimous consent that the time run equally against both sides.

I yield the floor.

Mr. President, I ask for the yeas and nays.

Reserving the right to object.

I make a point of order that a quorum is not present.

Do I have the right to object?

Can you do a quorum for a second?

I am reserving the right to object and asking the Senator if he can put us in a quorum for a minute or two so we can clear this issue on our side.

Mr. President, I rise in support of the amendment of Senator Chambliss from Georgia and to express my very serious concerns about the language which has been brought forward by the chairmen of the committees--both the Agriculture Committee and the Banking Committee--relative to derivatives.

Let's begin with what our purposes should be. Let's remember that derivatives, as has been said before on this floor numerous times--the Senator from Alabama said it extraordinarily well--are a critical part of how Main Street maintains its economic vitality. You know credit is what makes America work. One of the great geniuses of our society is that we are able to produce credit in a fairly ready manner which is reasonably priced and which people who wish to take risk can take advantage of in order to create economic activity and jobs. The oil that basically keeps the credit available in the American capital system is derivatives, for all intents and purposes.

As has been pointed out, if you are manufacturing an item somewhere in America and you enter into a contract to sell that item--let's say overseas--there are a lot of risks on how you are going to make money on that item which you have no control over.

Let's say you make it one day and you are going to sell it 6 months later. You enter into a contract when you get the order and you produce it 6 months later. There is a lot of risk there over which you have no control. You know how to manufacture. You know how to create it. If it is credit, you know how to produce it. But you do not have control over the exchange rates you are dealing with. You do not have control over the cost of the raw materials you are using. You do not have control over whether the various parties that enter into this transaction as it moves through the commercial stream survive or go out of business or experience some huge economic upset.

Well, in order to avoid all of that and just be the person who wants to produce the good and sell it, you buy derivatives, which are essentially insurance policies, to make sure you have insurance against the risk which you cannot control. That is derivatives in their simplest form. It also affects all sorts of other instruments, of course, financial instruments, commodity instruments. But basically it is the capacity of someone to make an

agreement with somebody else and know that agreement is not going to be affected by outside events or, if the outside events do occur, there is going to be a vehicle in place to protect you from the risks that outside event may create for you. So derivatives are crucial to our capacity as a society to be economically vibrant.

We also know that during the economic downturn, during the very severe financial crisis we had, the fact that we had so many derivatives in place which were based off of contracts which were not properly supported created a huge cascading event which almost forced our entire financial structure to come to a halt--in fact, it did on one evening--and was about to put our economic house into extreme distress because the derivatives markets had not been properly regulated or managed.

Now, that wasn't the primary cause of the event of the late 2008 period. The primary causes of the events of the late 2008 period were very bad underwriting--in fact, virtually no underwriting standards in some instances--for the loans which were being made, easy money, and regulatory arbitrage. But the accelerant which took those causes and basically turned them into an event of immense proportions which almost shut down America and would have caused massive dislocation in our Nation had it been allowed to go uncontrolled, had the Fed and Treasury not stepped in and taken very definitive action, the accelerant was the derivatives market.

The classic example of that, of course, is the AIG situation, which has been cited here on the floor numerous times as the example of what was wrong with an unregulated market, where essentially you had a company which was issuing insurance based on its good name and virtually nothing else behind the insurance besides its good name. When that insurance started to get called because the contracts started to fail and the counterparties became concerned, there was no capacity to support the insurance.

So our purpose here should be to reorganize our regulatory structure so that type of an event doesn't occur again--I mean, that should be our purpose--while at the same time recognizing that we need a very robust and vibrant derivatives market if we are going to be successful as a nation, if we are going to continue to have economic vitality as a nation. So our goal should be, one, to put in place a structure which as much as possible foresees and limits systemic risk caused by the derivatives market or that could be caused by the derivatives market and, two, maintains an extremely vibrant derivatives market where America remains the best place in the world to create capital and get credit.

Unfortunately, the pending bill undermines the second part of that effort. It could be argued that the first part of the effort-- foreseeing and trying to anticipate systemic risk--is addressed in this bill, but it addresses it in such an unwieldy and unmanageable and in some ways counterproductive way, it actually undermines the basic goal, which is to keep the system sound and also keep credit markets vibrant.

Why is that? Well, there are a number of reasons for it, but the two most difficult parts of this proposal relative to getting it right are the fact that it forces the swap desks to be spun off from the financial houses and it essentially forces instant movement from and basically almost total coverage of derivatives from clearinghouses into exchanges. In both those instances, you are basically going to create fairly close to the opposite result you are seeking if you pursue this course.

I would predict that if this bill were to become law in its present form, it would be likely that, one, a large amount of derivative activity would move overseas; two, a large amount of derivative activity which presently occurs and which is necessary for commerce would have to be restructured in a way that would be extraordinarily expensive for the people who are doing that commerce and would therefore significantly curtail commerce; three, the credit markets would inherently contract by a significant amount of money, probably as much as $\3/4\ trillion; and four, the institutions which would be responsible for creating the derivatives market would actually be less stable. The market makers would be less stable than what we presently have today.

You do not have to believe me to understand the seriousness of this and accept this as a statement or an assessment of what the present bill does. I mean, granted, I am just one Member of this body who has an opinion on it. But we do hire people, as a government, to take a look at something like this and say, does this work or does that work, and they are charged with the responsibility of accomplishing the two goals I mentioned: one, avoiding systemic risk, and two, having a vibrant credit market.

One of those agencies is the Federal Reserve. They have taken a look at this language in the Dodd-Lincoln bill and they have concluded: Section 106 would impair financial stability and strong prudential regulation of derivatives, would have serious consequences for the competitiveness of U.S. financial institutions, and would be highly disruptive and costly both for banks and their customers. That is the conclusion of a fair umpire, the Federal Reserve.

Now, there are a lot of people around here who do not like the Federal Reserve. But we pay them. Their job is to look at something like this and say: Does this work or does that work in making our markets more stable, more sound, more risk averse, and more competitive? Their conclusion is this language does just the opposite-- would be highly disruptive and costly for both banks and their customers.

But if you do not like the Federal Reserve, listen to the FDIC. The FDIC, under Sheila Bair, during the crisis we have just gone through, has probably been one of the best performing agencies in our Federal Government. They really have stepped in on numerous occasions and stabilized banks, which had far overextended their capacity and had gotten into very serious liquidity positions, and basically settled those banks out in a way that very few customers lost anything.

What does the FDIC say when they look at this, because their responsibility is to maintain safety and soundness of banks. The Chairman of the FDIC, Sheila Bair, said in her letter to--I am not sure to whom it went; I will check that--I think it was to Members of Congress:

By concentrating the activity in an affiliate of the

insured banks, [and that means spinning them off under the

proposal under this bill] we could end up with less and lower

quality capital, less information and oversight for the FDIC,

and potentially less support for the insured bank in a time

of crisis. Thus, one unintended outcome of this provision

would be weakened, not strengthened protection of the insured

bank and the deposit insurance fund, which I know is not the

result any of us want.

Then we have Chairman Volcker, who I think everybody agrees is a fair arbiter around here, and he has also said this language in this bill overreaches and does not work.

I ask unanimous consent to have printed in the Record the Volcker letter.

So we have these independent arbiters, these fair umpires of what we should be doing in order to maintain financial stability and strong credit markets saying: Listen, do not do it this way. Do not do it this way.

There are ways to do this, however, ways to make sure we have a strong derivatives market which is also safer, more sound, and is not subject to systemic risk. Senator Chambliss's amendment accomplishes that in a very effective way.

How do you basically do it? Well, in concept, you do it this way: You make sure that for the most part, all of the derivatives are cleared. They go through a clearing process. What does a clearing process mean? Well, it basically means that you get counterparties having to put up margin. They have to put up actual assets, margins, liquidity, in order to be sure there is something behind their position so that if they have a problem and they have to be called on to pay up their position, they have the capacity to do it and it is there. That is why you have a clearinghouse, because the clearinghouse becomes basically the place where that occurs and it becomes the process by which that occurs. And you make sure the clearinghouse itself, because it stands in and basically is the guarantor, for lack of a better word, of the contract, has the capital and the adequacy to make sure those contracts will not fail.

So as a very practical matter, you can do this by creating a proper structure using clearinghouses. You make sure the clearinghouses have proper oversight from the SEC or the CFTC. And then as these instruments, these various types of derivatives--there are lots of different types of derivatives--become more standardized--and a lot already are standardized--you move them over to an exchange, which is the ultimate process of making sure you do not have an issue of solvency behind the instruments. So as you move them to an exchange, you are able to create an even stronger market. But you do not mandate that everything goes through an exchange right out the door because if you did that, you would end up with a lot of derivatives which are still too customized to be able to move to an exchange and they would simply not be able to be brought forward, and thus you would contract the market again.

You also don't take the swap desks and move them out of the financial house because, in doing that, you would have to create a whole new capital base for the swap desks, which is the concern expressed by the Fed and by the FDIC and by Chairman Volcker, which would inevitably force a massive contraction in credit because that capital would no longer be available to underwrite credit. In addition, you would have much weaker institutions standing behind the swap desks, which is again a point made by the Fed, the FDIC, and Chairman Volcker.

It is not necessary to go down the route outlined in this bill in order to accomplish the goals which we all have. In fact, if you go down the route presented in this bill, you actually undermine the goal which we all have, which is to have a derivatives market which is less prone to systemic risk and which is strong, sound, and vibrant.

Rather, what Senator Chambliss has proposed makes the most sense, which is a comprehensive reform of the derivatives market in a way that insists that for the vast majority of derivatives, they end up going through a clearinghouse process and that if they are standardizable, they end up on an exchange. If they are for purely a commercial purpose, a single-purpose commercial undertaking, then they are able to be exempt from the clearing activity. This would create a much more robust undertaking of a creation of credit. It would maintain the vitality of the derivatives market while at the same time protecting and making sure we had a sound derivatives market. It would avoid what I believe the inevitable outcome of this language will be under the Dodd-Lincoln bill, which is that we would weaken the derivatives market, weaken the systemic protections, and end up forcing overseas a large amount of economic activity which appropriately should be done in the United States and which is very important to our Nation's capacity to be competitive on Main Street. Remember, this is about Main Street.

I certainly hope Members will support the Chambliss amendment. It makes a lot of sense. It is well thought out. It is not exactly what I would do were I writing this myself, but it is a very good piece of legislation. It should be supported. I hope my colleagues will do so.

I yield the floor.

I would ask for 5 minutes.

Madam President, first off, at this point I congratulate the Senator from Vermont and express my appreciation for his very constructive approach to this issue. I had very serious reservations regarding his original amendment, but he has worked with Members of this side of the aisle, the chairman of the committee, and members of the administration and the Fed and has come up with an extremely responsible amendment.

The Senator's amendment gets to the issues which he is concerned about, which are totally legitimate; that is, the question of transparency and making sure, to the fullest extent possible, the American people know what is happening with this very significant agency that impacts our lives but which we know little about--a lot of Americans don't--and that is the Federal Reserve.

I also wish to congratulate Chairman Bernanke--he and his staff--for stepping forward and aggressively pursuing a resolution to this issue in a manner which I think will be very positive for both sides.

So I intend to support the amendment of the Senator from Vermont, as amended, and appreciate his offering it and appreciate his responsible effort. I do have, however, deep and severe reservations and strongly oppose the amendment of the Senator from Louisiana. The issue here isn't transparency any longer with the amendment of the Senator from Louisiana. The issue is whether we have a Federal Reserve which can function and can pursue its primary purpose, which is maintaining the integrity of the currency of the United States.

When the Federal Reserve was created back in 1917, there was a huge debate--a huge debate--raging in this Nation, and had been raging since the great depressions of 1897 and 1907--about how to manage the currency of this country. The central figure in that debate was William Jennings Bryan, a man of immense proportions in our history. He was a populist in the extreme, and he believed genuinely that there should be a monetary policy in this country which allowed for free money to be produced, essentially. His Cross of Gold Speech was, of course, historic. His view was, basically, those who were in control of the government--public elected officials--should have control over the currency. But what had been learned over time was if you turn control of the currency over to elected officials, the currency becomes at risk because there is a natural tendency by elected bodies to want to produce money arbitrarily to take care of spending which they deem to be in the public interest.

Thanks to the leadership at that time of a number of thoughtful people, including people such as Woodrow Wilson, the decision was made to create a separate entity called the Federal Reserve, which would manage the currency of the United States and decide how much money was printed. The printing presses would be taken away from elected officials.

This decision has probably been one of the best decisions we ever made as a nation in order to determine a strong fiscal future and a strong economy because it has allowed us to have a currency which has basically been protected from the winds of the politics of the day. That is absolutely critical. It is as important today as it was when the Federal Reserve was created, if not more important today.

We have seen a world where there is a tremendous amount of pressure on the currencies of almost every nation, certainly every developed nation with the exception of a few. That pressure inevitably leads to populist outrage on occasion or to popular decisions which can request that the currency be devalued in order to produce what some people see as a better lifestyle or in order to address concerns a nation may have. But you cannot do that at the whim of elected officials. It is absolutely critical that the currency of the Nation be protected from the day-to-day activities of politics.

We have created this Federal Reserve System which accomplishes that. The essence of that system is the Open Market Committee, which decides essentially how much money there is going to be in circulation in this country. We have always believed that system should have integrity, be kept separate from the political process; that Members of the Congress should not have the ability, either directly or indirectly, to influence the decision of the printing of dollars in this Nation. It is a good decision and we should not abandon that course of action.

Yet the Vitter amendment, couched in all sorts of----

I ask for 4 minutes out of the time of Senator Shelby.

The amendment offered by Senator Vitter unfortunately has, as its essence, the disassembling of this independence. It would give the Congress the ability, through the GAO--and because the GAO is an arm of the Congress, our accounting arm--to go in and investigate what happens with the Open Market Committee. That is clearly going to create consequences which would be inappropriate in the decisionmaking process of the Federal Reserve. It would influence their ability to make decisions in the sense they would be concerned about Congress coming in and investigating them. It would open activities which, if they are not done in some level of confidence, inevitably end up disrupting the markets. So it is absolutely critical that the Congress not be allowed to go into the Open Market Committee and audit that part of the Federal Reserve activities--absolutely critical if we are going to maintain the integrity of the dollar.

Remember, this is about Main Street. Whether that dollar you take on Main

Street to buy clothing or food or a car--whether that dollar has the value you think it has depends entirely on whether there is confidence it is not going to be inflated arbitrarily. If the political process starts to influence the decisions as to how much money is printed in this country and therefore affects the inflationary value of the dollar, you will see your dollars devalued as you try to buy items on Main Street. The effect of that will be devastating on your ability as an American citizen to have confidence in the dollars which you earn and what they are going to buy and what they are going to mean when you save them--which is even more important.

We cannot have a system which allows Congress to influence the decisions in this critical area. All the rest of the activities the Federal Reserve undertakes should be open, should be audited by the Congress, and should be available for public inspection on a regular basis. That is essentially what the amendment of Senator Sanders does. There is already a lot of audit activity at the Fed, but what it does is expand that and make it more transparent and more available to the American people. But in this one area which Congress has specifically by law exempted from review for the very logical and appropriate reason that we do not want the politics of the day to influence the decision as to the value of our currency, in this one area we need to keep the exception and give the Fed that type of protection.

I strongly oppose the Vitter amendment. I hope those who are concerned about maintaining the integrity of our currency will also oppose this amendment.

I yield the floor.

Mr. President, I wish to rise also and first I want to associate myself with the words from the Senator from Georgia. He is absolutely correct in his history of how Freddie and Fannie got started and what their purpose was and the fact that they are a great idea that went wrong, unfortunately--or went ``awry'' would be a better term, not wrong. The concept remains a good idea.

I rise to support Senator McCain's proposal because what he is suggesting is a way out of a very deep and dark hole of debt for our Nation and our American taxpayers, which is being generated by the legacy and the present activities of Freddie Mac and Fannie Mae.

Part of this amendment in which I played a role primarily is the issue of bringing on-budget and, therefore, into the light of day just how much the American taxpayers owe as a result of the situation that has occurred in those two businesses. It is estimated that the American taxpayer will end up picking up somewhere around $400 to $500 billion in costs as a result of the activities of Freddie and Fannie.

As far as the American taxpayer knows, this will be something that comes out of the sky. I mean, nobody is aware of it. Nobody is thinking about it. Nobody is talking about it. But these are actual debts that are going to get put on our books and which will affect our credit worthiness as a nation and which all Americans will have to pay back.

Why is this going to happen? It is going to happen because during the halcyon days of taking on debt, or taking on obligations in the area of mortgages which were not properly underwritten--and there will be a later amendment by Senator Corker which I will support in the area of underwriting--but which were not properly underwritten and which were securitized and basically insured, for all intents and purposes, by Freddie and Fannie, we ended up with a situation where they own a lot of paper which does not have the value it is supposed to have and which is not being paid back at the rate at which it was supposed to be paid back.

Unfortunately, there was a tacit understanding that grew up in the markets that the American taxpayer was going to stand behind that paper. It was never explicit, but it became tacit, and people expected that. Then when the actual event occurred, as these defaults started to accelerate, it became real and the American taxpayer is now having to stand behind all of this debt.

It is certainly going to come as a shock to most Americans that they owe approximately $\1/2\ trillion--$\1/2\ trillion--because of very bad decisions that were made by a group of people who were underwriting and basically securitizing these loans.

Why did that happen? Well, there will be a lot of recrimination on this subject. But the basic reason was that the Congress decided that Americans should own houses whether they could afford the houses or whether the houses sustained the value of their loans, Americans should be able to go out and buy houses. So a lot of houses were sold which did not have the underlying value necessary to support the loans which were made on them, and which the person who bought the house and took out the mortgage did not have the income over the extended period of time of that loan to pay it back. Everybody knew it at the time the

house was bought. Everybody knew it at the time the mortgage was made. But they figured: Well, appreciation will always occur in real estate prices. So that will not bother us with the value of the house. Well, maybe this person who got the loan for the house, maybe their income will increase, or when the reset day occurs on that mortgage they will be able to take care of it in some way.

So nobody faced up to the problem at the time, and literally millions, millions of homes were purchased under that basic scenario. That is what caused the implosion, basically, of our financial markets back in late 2008, and Freddie and Fannie are a large part of that implosion. But a lot of the initiative for that came from the Congress, basically asserting that people should be able to get those types of loans, and pushing Freddie and Fannie from using what had been very standard and traditional underwriting standards in the 1990s into much more aggressive standards as they moved into the early 2000 period.

As a result, we had this proliferation of loans which simply did not have the underlying value and did not have the capacity to be repaid. They were all securitized by Freddie and Fannie. So now the American taxpayer ends up with this huge bill.

I think we have an obligation as a Congress to at least be honest with the American taxpayer on this and tell them this is how big the bill is. And it is huge. It is huge.

So this bill is now hidden in the drawer under the Federal accounting system where we do not even acknowledge that it exists under the Federal budget, even though we know we owe it, even though we know it is going to be put on the books of the Federal Government, even though we know the American taxpayer is going to have to end up picking this up in the long run. We do not even acknowledge it. It is stuck in some drawer somewhere in Washington.

Well, that should not happen any longer. We just had an amendment about transparency with the Federal Reserve. Everybody voted for it. Everybody voted for the transparency amendment on the Federal Reserve. This is the transparency amendment on Freddie and Fannie. This amendment will tell the American taxpayer just how much they really do owe. It will bring on-budget the issue of the debts of these two corporations, which are now the obligations of the Federal Government and therefore the American taxpayer. Absolutely last to be done.

I thank the Senator from Arizona for including in his amendment this language which brings this on-budget the way it should be. It opens the light of day so that the American taxpayer can understand just how much risk has been piled on their backs, how much debt has been piled on their backs as a result of the irresponsible activity, which in large part was initiated by this Congress over the years, forcing out loans and pushing a public policy that these loans should be made.

Secondly, I congratulate the Senator from Arizona for bringing forward an idea, a proposal for how we unwind this situation and how we get out of this situation by putting us on a path, a path toward basically decoupling Freddie and Fannie from the American taxpayer, having those two organizations no longer be dependent on the American taxpayer and having the American taxpayer no longer having to pick up the debts of mistakes made by those two corporations, even when those mistakes were caused, to some significant degree, by the Congress taking actions which were inappropriate--or which were bad policy, not necessarily inappropriate, but definitely bad policy.

So I congratulate the Senator from Arizona. I think this is a good amendment. As has been said, how can we take up financial reform if we do not take up the single biggest entity, the single biggest two entities, when combined the single biggest entity, that affects the financial markets relative to real estate lending in this country, which is what caused the downturn and the crisis at the end of 2008.

We cannot do it. We cannot claim we have done financial reform if we do not take on and address this issue. I understand that the administration said: Well, we will do it next year. Well, we do not have time. It needs to be done now. We need to address this now. It is a critical issue, and it is at the essence of whether we can get our house right and our ducks in the correct order relative to financial reform.

If we do not straighten out Freddie and Fannie and its relationship to the Federal Government, and specifically its relationship to the American taxpayer, we really have not done anything to solve the long- term problems of how we get our fiscal house in order because that issue of how to make real estate loans in this country is at the essence of how we correct the financial structure of this country.

This amendment, coupled with the amendment that is coming from Senator Corker on the issue of underwriting, are the two key amendments to this bill which address the two elements which are not addressed but which have to be addressed if we are going to have effective, comprehensive, lasting, and meaningful reform.

I yield the floor.

Mr. President, I ask unanimous consent that after Senator Corker finishes his remarks, Senator Isakson be recognized and then I be recognized. If Senator Shelby wants to be recognized, he should be recognized before Senator Isakson. Senator Shelby should start, then Senator Isakson, and then myself.

That would be totally reasonable.

Mr. President, I wish to join in congratulating Senator Corker, Senator Isakson, Senator Shelby, and others who have come together around this issue of better underwriting standards.

It is hard for me to understand why this would be resisted in this bill because this has been outlined both by Senator Corker and by Senator Isakson. It was underwriting that created the problems which led our Nation to the brink of a fiscal collapse.

The way I have described it is this: What we had was an inverted pyramid. We had this situation where an individual made a loan to another individual or a corporation made a loan to an individual based on the value of a piece of property. Unfortunately, when that loan was made, it was made in a way where nobody looked at the value of the property relative to the loan and nobody looked at whether the person who was getting the loan could pay it back because the system no longer had strong underwriting standards.

Then that loan was taken and it was syndicated, it was securitized, it was synthesized, and it became multiplied, as the Senator from Tennessee said, into $600 trillion of notional value. We ended up with this huge pyramid of debt built on the basis of this loan down here at the bottom between this corporation and this individual, this loan which was based on value which was not there, and ability to repay, which was not there once the rates of the loan were reset.

Why did this happen? Why was this loan so inappropriately made? It was inappropriately made because we had a breakdown in underwriting standards. I have been through three of these events in my professional career: once in the late seventies when I was involved in representing a bank in New Hampshire, once in the late eighties when I was Governor of New Hampshire, and now. Three major financial disruptions which were created almost entirely by a failure in underwriting standards, where people were making

loans that couldn't be paid back based on asset value which wasn't there. It just was aggravated radically this time because of the way the system suddenly took these loans and exploded them through the securitization process and the syndication process.

So if you are going to fix this problem, if you are going to put in place a regulatory reform system which actually fixes the issues which caused the crisis, you have to address underwriting standards. That is why the Corker amendment is so critical, because this bill does not address underwriting standards in any other way, in any significant manner. So if you are going to have a legitimate effort to try to make sure this type of an event doesn't occur again, you have to put in place underwriting standards which establish the rules of the road, which say that in the future America will not allow this sort of proliferation of lending which is not properly secured, where we know that the person getting the loan can't repay the obligation. Ironically, in this situation, these loans were made, in some instances, with the full understanding that this wouldn't happen, that they couldn't repay and the value wasn't there. Why? Because we separated underwriting standards from the process of actually making the loan. The people making loans were only interested in making a fee. They were not interested in making sure there was value of the security. They weren't interested in making sure the people could repay. They were just interested in the fee.

This should stop. The language Senator Corker has put before us would accomplish that. It would put in place not unusual underwriting standards, not new underwriting standards, it would simply go back essentially to the types of standards--and they are not quite as strict, honestly--we had at a prior time when we didn't have this kind of risk in the marketplace because people knew when they borrowed money to buy a house they were going to have to put money down, and if they didn't put the full amount of the value down, they would have to have insurance to cover the difference. They knew their creditworthiness was going to be checked, and thoroughly checked, and their ability to pay the loan was going to be checked. So it is a totally reasonable approach.

If you are going to do one thing in this bill to avoid a future event like the one we confronted in late 2008 where basically the entire financial industry of this country almost melted down, if you are going to do one thing to prevent that event, you should adopt the Corker amendment. This should be a bipartisan amendment. I don't understand any opposition to it. I don't understand the concept which would oppose it because it is basically good banking and good lending. It is also good for the people who borrow money because they are not going to get money just arbitrarily but only if they have the value in the asset they are borrowing on and if they have the ability to repay. So I certainly hope this amendment will be approved.

Madam President, today I wish to recognize Marc Morin of Bow, NH. Since December 20, 2000, Marc has been a member of the New Hampshire Board of Professional Engineers and has ably served as its chairman since July 15, 2004. In August of this year, he will step down from that position, and I would like to take this opportunity to thank him for the professionalism and dedication he has demonstrated over the last 10 years.

The Board of Professional Engineers has the important mission of protecting the public's safety and insuring the State's engineers follow the proper operating rules and regulations. Because of his reputation as an environmental engineer in the private sector, Marc was an excellent choice as board chairman. His educational accomplishments, such as holding a master of science in water resource engineering, underscore his ability to understand and apply the often complex licensing and due process requirements the board must oversee.

My wife Kathy and I have had the pleasure of knowing Marc's wife's family for many years. He has ben a great example of the strong commitment to public service and volunteerism for which New Hampshire is so well known. While his leadership on the

Board of Professional Engineers will be missed, I know we can continue to rely on the insight, sound judgments and guidance he displayed on the board. Thank you Marc!

Has all the time been used in opposition?

Mr. President, I don't understand this Brown amendment. Basically what it says is if you are successful--we are not talking about too big to fail here, we are talking about entities, businesses that are big, yes. They are actually not as big as a lot of the international banks they compete with, and that we as a Nation compete with, but they are large and they are successful. You are going to break them up. Where does this stop? Do we take on McDonald's? Do we take on Wal-Mart? Do we take on Microsoft? Do we take on Google? Should we set a standard that we as a body can step in and unilaterally decide that some company has gotten too large and deserves to be broken up, even if it is healthy?

If it is a systemic risk because it has overextended itself and put itself into a situation where we have a question of whether it can survive, then we have the resolution authority to take care of that. But why would we--we 100 people--think we know enough to start breaking up businesses in this Nation which are profitable and which make us competitive as a Nation? It doesn't make any sense to me.

Mr. President, I rise to speak about another part of the bill. I congratulate the chairman for the work he and Senator Shelby did on reaching this resolution on too big to fail. It is an important step forward on a critical part of the legislation. I think it shows that there are a lot of places where we can reach a bipartisan consensus in this bill.

It is my sense that the great and very positive work done on resolution authority will--I would hope it will carry over to things such as the derivatives issue, which needs to be worked on, and issues such as underwriting standards and how the regulatory structure is created and how the chairs are moved around in that area. I think all of these issues are fertile ground for reaching consensus. I know the Senator from Connecticut has been constructive in his efforts to reach across the aisle.

This bill can be a very strong and positive piece of legislation. I hope it ends that way. I think this is a strong and good step in that direction, with the announcement by the chairman on the agreement of resolution authority.

I want to speak about a part of the bill that has been ignored because there have been so many big issues. That is what happens when you bring a bill this large to the floor. It is 1,400 pages, and it has a lot of language in it. It had to be a large bill because it deals with a complex issue. Included in the bill is language that was sort of baggage thrown on the train--that is the way I describe it--in the area of corporate governance. To a large degree, by its own definition, it has virtually nothing to do with financial regulatory reform. This language does a series of things: It primarily federalizes corporate law relative to the manner in which stockholders and directors and executives of corporations are treated.

It is not limited to financial institutions but to any publicly traded company. It guarantees what is known as proxy assets under Federal law. That is a right traditionally set up by States. It sets up standards for how directors are elected under Federal law for all companies. That is a right that has usually been reserved to the States. It even puts in place a requirement that corporations disclose certain information that has absolutely no relevance at all to financial reform because it deals with every company in America

that is publicly held, such as the ratio of compensation between different workers within a company and the manner in which boards of directors are elected, whether it is all at once or under staggered terms.

It is a major push by the Federal Government into an arena that has always, historically, been primarily the role of States. It steps all over States rights, in my opinion--the right of shareholders to have companies they are comfortable with and are being well managed for the purpose of returning a reasonable return to the shareholders. It will undermine shareholders' rights, in my opinion, not increase them.

If we look at the proposal specifically, let's take proxy assets. This is a term of art that essentially says that any group of shareholders will be able to put on a proxy statement a proposal for how the company should be run. If someone wants to balkanize a company, there is probably no quicker way to do it than to have unilateral proxy assets for any issue that is of concern or interest to some group that buys shares. This type of language is essentially put in to promote special interest activity. We all hear about how terrible special interests are. This language is special interest language for the purpose of promoting special interest groups--starting with the trial lawyers, of course, but followed up by various people who have a social justice purpose relative to some corporation.

Let's take a group or a company such as McDonald's. Say a group believes they are selling too much food that creates the opportunity for people to eat too much and causes obesity.

You could have a special interest group that was concerned about that buy stock and force a proxy statement on what type of food McDonald's should sell. It does not stop there. Of course, there are all sorts of issues about which special interest groups want to promote and change corporate governance.

How you manage a corporation is supposed to be primarily in the hands of the boards of directors who are answerable to the stockholders. The purpose, of course, is to increase the value of the stockholders as a whole and their return on their investment. In most instances, that is the primary purpose of a corporation. But this Federal access, this proxy access is all about the opposite. It is about pushing agendas onto the management of corporations, through the boards of directors, through the proxy process that is very special-interest oriented and very narrow in its purpose and is not necessarily directed at return on the investment for the stockholders. It has just the opposite effect.

Short-term objectives become the standard of the day under this type of approach rather than a long-term view, which is what most of our boards of directors are supposed to take relative to these decisions. The cause of the day, the cause du jour, could be any number of things. If it happens to be the activist view of the day, it becomes the issue under corporate governance versus the purpose of managing the corporation well over the long term in order to get adequate return to the shareholders.

It is an inappropriate idea, especially inappropriate for the Federal Government to bury it in this bill. This language applies to every publicly traded corporation in America, not just the financial institutions. Why is it buried in this bill? It should not be in there.

The same can be said of the way this bill, this language approaches directors and what the shareholders' rights are relative to directors. These have historically been State decisions. In fact, the State of Delaware, which is obviously the leading State on the issue of corporate governance and has developed a uniform corporate governance structure which a lot of States have adopted, including my State of New Hampshire, which basically tracks Delaware to a large degree--that has been the law of the land for all intents and purposes, settled law, predictable law, the purpose of which is to have fair and adequate corporate governance, where the directors are responsible to the shareholders under a structure that everybody knows the rules and which is controlled by the States.

Yet this bill comes in and does fundamental harm to that. For what purpose? Because there is an agenda in this Congress to usurp States rights to be able to manage corporate law and to put in place of it opinions and ideas which are only supported by a very narrow group of special interests that basically have gotten the ear of people in this Congress. That is the ultimate special interest legislation.

The implications for these companies is, it is going to be darn expensive, if you are a small- or middle-sized company, to deal with this type of Federal interference with the management of the company and the proxy process. It is a very inappropriate initiative.

Furthermore, this creates an atmosphere where nobody is going to know who is governing what because you are going to now have State law and you are going to have Federal law and you are going to have the SEC whose responsibility will increase dramatically. We already know the SEC is strained to do what we have asked them to do. They have some big responsibilities. They have big responsibilities in the financial reform area. They have big responsibilities in corporate governance, generally. To push this further burden on them is going to be very difficult for them to meet. I happen to be a very strong supporter of having a robust SEC, but we should not burden them unnecessarily with a whole new set of corporate governance rules, which are already adequately and appropriately addressed by State law, primarily Delaware State law but other States which have their own corporate rules.

More important, we should not undermine the rights of stockholders across this country to be able to get a reasonable return on their investments by being reasonably assured that their management-- specifically, the directors of the company--are working for the purposes of the company's financial return and strength versus for the purpose of some special interest group that comes in and wants to put special interest legislation in the middle of the corporate governance effort, which is exactly for which this language is proposed. That is why it is here.

The reason this language is put forward is because there are a lot of self-proclaimed social justice groups in this country that decided they want better access to corporate boards and have this Federal proxy access which will basically balkanize, as I said earlier, the process of governing and leading these businesses in which most Americans are invested.

The vast majority of Americans in this country either have a pension fund, IRAs, 401(k)s or are personally invested in the stock market. Why do they invest? They invest to get a reasonable return on that investment, either in the way of appreciation or in the way of dividends or maybe a combination. That is what they do. Most of the savings--a lot of the savings in this country are tied up in that.

Why would this language appear which will basically undermine those stockholders' rights and ability to presume and expect that their directors are going to be managing for the purposes of the stockholders-at-large versus for a single interest group within the stockholder group that happens to want to put a social justice agenda into the management of that corporation? It makes no sense at all, unless you happen to be a special interest group.

We rail around here all the time. I hear, ironically, from a lot of groups that are sponsoring this language, such as Public Citizen, that they are against special interests. Yet here we have the most significant piece of special interest legislation in this whole bill, an attempt to bootstrap special interest groups' social agenda and force them on corporations and stockholders who would otherwise not pursue their agendas because they are interested in getting a return on their investment. It is going to, as I mentioned earlier, make it much more difficult for us to have a vibrant stock market and a corporate structure in this country which is rational, and it certainly will undermine significantly States rights in the area of corporate governance, which historically had primary responsibility for setting up the rules by which our corporations operate.

I hope that as this bill moves down the road, this type of language, which is extraneous--totally extraneous--to the financial reform effort because it affects all public corporations and,

ironically, the three financial corporations which are at the core of the problem we had in 2008 relative to visibility--AIG, Lehman, and I believe one other, maybe Citibank--had a couple of these rules in place anyway. Obviously, they had nothing to do with reducing the implications of the event. Rather, this language is simply put in because some group got somebody's ear. I hope it will be taken out before we get to the end of the day.

I yield the floor.

Mr. President, will the Senator yield for a second?

I ask unanimous consent that after Senator Brown speaks, Senator Mikulski be recognized and then I be recognized.

Mr. President, I wish to speak briefly on the bill that is before us and how I think it can be improved.

First, I congratulate the chairman of the committee, working with the ranking member. I understand they have reached an agreement on how to do the issue of resolution, which addresses the issue of too big to fail, which is a very critical part of this bill. I congratulate them for making that type of initiative. I hope the rumors are true and that such an amendment will address strong too-big-to-fail language so the American taxpayers will not be on the hook for institutions that overextend themselves and take on too much risk but are institutions that are so large it is felt they are too big to fail, that concept will no longer be part of our lexicon, and we will essentially put an end to that. I congratulate the chairman and ranking member.

There are, however, other major issues in this bill that need to be addressed. They are substantial and rather complex. A few that are not even in the bill--for example, how we address Fannie Mae and Freddie Mac. We know that the American taxpayers today are on the hook for somewhere between $400 billion and $500 billion--$400 billion to $500 billion--that we are going to have to underwrite in order to stabilize those two entities on the credits which they have run up which have gone bad and they have purchased. That is serious.

There will be a proposal that comes from our side of the aisle. It will not totally be structured to Fannie and Freddie. It should. I would like to see that. It is too complex to do in this bill. It will at least address some of the core issues that ought to be addressed. For example, we ought to tell the American people upfront and forthrightly how much they owe. It should be put on budget. We ought to put on budget what the obligations are, because they are scoreable, relative to the costs the American taxpayers are going to have to bear to bail out and maintain Fannie and Freddie. It is going to be somewhere around $400 billion to $500 billion additional debt. It is coming. We do not want to talk about it because it affects other debt obligations of this country in a lot of different ways, primarily in crowding out.

Second, the bill has language on underwriting but it is not strong enough. If you want to look at what caused this event at the end of 2008, what caused this traumatic event which almost brought the entire financial system of America down, which almost put us into a depression and put us into a very severe recession, cost a lot of people their jobs--and there are still a lot of people experiencing trauma because of it--there are three or four main causes. I have talked about them before:

One, of course, is that I believe the money was made too easy to get, at too low a price, for too long by the Fed.

Another was the fact that the Congress specifically encouraged and, in fact, forced lenders, for all intents and purposes, to lend to people who couldn't afford the homes they were buying because it became congressional policy to do that.

Another was that people were shopping for the weakest regulators. This is what happened in the derivatives market, and the derivatives were not structured in a way that actually put capital or liquidity or margin behind derivatives.

The fourth and I think probably the most significant was that there was a total breakdown in underwriting standards. In other words, the people who were making the loans on subprime mortgages and on other types of exotic instruments so that people could buy houses who couldn't afford them were making those loans and not looking at the underlying value of the asset, and they weren't looking at the ability of the person to pay back that loan. What they were doing, quite simply, was making the loan because they were going to get a fee for it and then they were going to sell the loan, securitize it. It was going to be chopped up, sent out, and syndicated, and they didn't really care what the loan did because they were basically making a loan for the purpose of making a fee. Those were the one-off lenders.

In the banking industry, you had a complete breakdown. Banks were lending to people they knew couldn't repay when these loans reset, and they knew the value of the asset could only support that loan if there was an appreciation in the market, which was a gamble.

This happens every time we go through one of these events, by the way, one of these real estate-driven recessionary events. It happened in the late 1970s; it happened in the late 1980s when I was Governor of New Hampshire and New England went through a horrific contraction as a result of an expansive effort of lending money in the real estate markets--underwriting standards break down.

There needs to be a clear national definition of what proper underwriting standards are. Senator Isakson and I and a number of other people--Senator Corker--are going to put forward an amendment in that area.

One of the core areas here that needs to be addressed and hopefully will be included in this bill and improve the bill in this area--one area of this bill that simply has to be changed if it is to be effective in doing what it is supposed to do is the language of derivatives.

Most Americans don't understand derivatives. It is understandable. They are complex products. But basically think of it this way: You are on Main Street, and you have a business--usually a fairly large business--and you are making a product. You want to be able to sell that product to somebody at the price you quote that person and make the profit you expected at that quoted price.

But there are a lot of things that affect that product that you can't control. If you are selling it to another country, you can't control what the dollar is going to do in relationship to the currency of that country--for example, if you are selling it to Brazil, whether their currency goes up or down vis-a-vis the dollar. If you enter into a contract today and can't sell your product for 6 months, your whole profit could be wiped out by the market devaluing as relates to that currency. The materials you buy to make that product may change in value or viability. The person you are getting a loan from to allow you to expand your business to build that product may have financial troubles and you may have an issue there or, vice versa, you may have an issue with that person. All of these are things which are usually beyond the ability of the individual who is making the product--and in this case, I am talking about making products--to control.

So there is something called a derivative, which is an insurance item. Basically, someone insures for you over those risks. There is a lot of complexity to this because these insurance items mutate into all sorts of different instruments. They can affect financial instruments, they can affect commodities, they can affect goods, they can affect just plain currencies, but they are critical instruments--derivatives-- for making the economic engine work. They are sort of the grease you put in the economic engine to make sure it doesn't seize up, to allow the economic engine to move down the road. They are so critical, in fact, that they are approximately $600 trillion--trillion--of notional value. Notional value is not really what the risk is because there are underlying assets here, but that is a big number--a big number.

So we have to make sure that when we amend the derivatives section of this bill to try to have a stronger derivatives industry, we don't make big mistakes and basically undermine the ability of people to use this type of instrument to get credit and to make the markets work and to create jobs on Main Street because these all tie back to jobs on Main Street. Even if you are not working for the company that uses the derivatives, you are probably working for somebody who does business with a company that does derivatives. In Nashua, NH, there are a bunch of big companies that do derivatives. There are a lot more smaller companies that sell products to those companies on Main Street. So it will affect Main Street if we do this wrong because credit will contract.

The unique advantage America has is that we are the place in the world where, if you have a good idea and you are willing to take a risk yourself and you are an entrepreneur, you can usually get capital and credit to allow you to do that idea, to take that risk and thus create jobs, which is the bottom line for all of us; we want to create jobs. So derivatives play a large role in making that system work. This bill, unfortunately, adopted language which was put forward in the Agriculture Committee which literally undermines the safety and soundness of the derivatives market and, secondly, the ability of America to be a leader in the derivatives market.

Our goal here should be very simple. Our goal should be two steps: One, make our banking and financial system safer, sounder, and a system which will, to the extent we can anticipate it, avoid systemic risk. While doing that, our second goal must be to have a vibrant credit market and capital market and be the primary place in the world where people come to create credit and capital because that gives us a competitive advantage over the rest of the world. That creates jobs here in the United States. Unfortunately, this bill, as structured, doesn't accomplish that. In fact, it undermines that.

A good derivatives reform bill would essentially create an atmosphere where derivatives are more transparent, where the pricing is more transparent, and where there is standing behind the two parties to an agreement on a derivatives contract--assets, liquidity, margin-- something that can be turned to should one of the parties fail to perform on the contract. This can be done by creating a reasonable exception for end-use derivatives--those are the ones where you basically have a purely commercial purpose--and if people don't fall into that reasonable exception, then requiring essentially all the other derivatives to go through what is called a clearinghouse.

The clearinghouse becomes basically the situation where the two parties to the contract--there are multiple parties to the contract-- essentially put up collateral, margin, liquidity, so that the contracts are supported--the counterparties are supported. The clearinghouse itself also has to be collateralized adequately, capitalized adequately, so that it doesn't become a risk because it is going to be the insurer, basically, of these contracts--all very doable through new regulatory restructure or a modified regulatory restructure.

Then, as these contracts become more standardized or are standardized, they move over to an exchange. A lot of them could do that right now, but some simply can't because their contracts are too customized to move directly to an exchange. But over time, most of them probably will. And that is the way it should be structured.

Unfortunately, in this bill, it is directed that we set up a new process for doing these derivatives by taking basically the market makers in these derivatives--which are the swap desks--and moving them out of the financial institutions into separate institutions. Where this idea came from is hard to fathom because on its face it makes absolutely no sense. I mean, it is so counterproductive to the purpose of making the derivatives market safer, sounder, and more efficient and, as a result, a better market which creates credit in a transparent, fair, effective, and sound way. It is so counterproductive to that on its face, you would think anybody who suggested it would have it immediately pointed out that this doesn't work. But for some reason, it has found its way into this bill.

The practical effect of doing this is that you will create these separate entities. These separate entities are going to have to be capitalized because you have to have capital behind these derivatives desks. That is the whole point. You have to have something standing behind these desks to make them viable so that you don't end up with an AIG. What was the AIG problem? There was nothing behind the derivative contracts except for the name AIG. You don't want to do that again. You want capital.

It is estimated that it would cost $250 billion to set up these separate desks. What does that mean? That means that capital is not going to be available for the creation of credit. You will see an immediate contraction. It is estimated by the industry--and again, this is an industry number, not mine, so you can take it with a grain of salt--that will cause a $\3/4\ trillion contraction in credit. That is Main Street not being able to get credit. Let's even say they have exaggerated. Say it is only going to contract 80 percent. That is still $600 billion to $700 billion of credit that is not available on Main Street to do business, to create jobs, to take risk. It is foolish to do that type of contraction and to set up this structure.

Plus, you have nobody who is going to oversight this as effectively as the people who oversight the present derivative market makers. The FDIC won't be able to get on top of this. The Fed probably will have trouble getting on top of this. You will create a less stable platform from which to view these markets, when the whole purpose of the bill was to make it more stable. It makes absolutely no sense.

This is section 106 in the Agriculture bill. I think it is section 714 in this bill. And you don't have to believe me on this. I mean, two of the major, premier regulatory agencies--which are the fair arbiters here, really; I mean, they are the umpires--have come out in a very unusual way, because they do not usually comment in the middle of a legislative process such as this, and said that this--this is my paraphrasing--is a stupid idea, a counterproductive idea, the type of idea which, if it were to be put in place, would be cutting off your nose to spite your face and we would end up with a less sound system.

Let me read to you from the commentary of the Federal Reserve staff on section 106, which is now, I believe, section 714. Here is what the Federal Reserve staff said about this approach:

Section 106 would impair financial stability and strong

prudential regulation of derivatives; would have serious

consequences for the competitiveness of United States

financial institutions; and would be highly disruptive and

costly, both for banks and their customers.

That is pretty specific. That is pretty damning testimony as to the effect of this language. It is going to reduce our competitiveness because a lot of these derivatives will go overseas. It is going to make it much more difficult to have sound regulatory policy toward derivatives, and it will be highly disruptive and costly not only for the banks but for their customers. That is called Main Street--the people who create the jobs. This is a very inappropriate idea that has been put in this bill.

But don't just rely on the Fed if you are a Fed hater--and there appear to be a number in this body, for reasons I still have trouble fathoming. They must have something against having a sound money policy. But if you don't like the Fed, listen to the FDIC. I don't think anybody around here doesn't give great credibility to the way Sheila Bair, the Chairman of the FDIC, handled the bank crisis. Very honestly, they stepped in, they settled out a lot of major banks, and they did it in a way that was extraordinarily professional. As a result, the markets remained calm, people got their money back, and deposits were not at risk.

This is an agency which has high credibility, and this is what Chairman Sheila Bair has specifically said about this:

If all derivatives market-making activities were moved

outside the bank holding companies, most of the activities

would no doubt continue, but in less regulated and more

highly leveraged venues.

In other words, be much more risky.

Such affiliates would have to rely on less stable sources

of liquidity which--as we saw during the past crisis--would

be destabilizing to the banking organizations in times of

financial distress, which in turn would put additional

pressure on the insured banks to provide stability.

In other words, bad idea. It undermines the banking industry to do it this way.

Finally: ``Thus, one unintended''--actually, this is not finally. The whole letter is three pages long and has a lot of strong points. But the final part I am going to read:

Thus, one unintended outcome of this provision would be

weakened, not strengthened, protection of the insured bank

and the Deposit Insurance Fund, which I know is not the

result any of us want.

That is pretty specific. So you have the Fed on one side, one of the major regulators, saying this idea doesn't work, it will undermine the structure of the banking industry. You have the FDIC on the other side saying this proposal doesn't work, it is going to undermine the insurance deposit system.

So you do not have to listen to myself or others who pointed out the failure of this section. Listen to these regulators. This section has to be removed from this bill.

There are other things that need to be done in the derivatives areas which would improve the language. For example, once you are on a clearinghouse, you should not be mandated to go directly to an exchange because it simply will not work. There needs to be an intermediary step as standardization and then the best thing to do would be to require regulators to look at these different instruments and then, if they feel they can be standardized, tell the people producing them they can be standardized and then move them over. To unilaterally say everything has to go to an exchange is, I think, going to be counterproductive and again push a lot of business offshore.

But clearly this one section is damaging to our efforts to produce a safer, sounder, more transparent derivatives regime which has adequate liquidity and capital behind it and which keeps America as the primary place to do credit in the world so our entrepreneurs can get credit at a reasonable price, so they can go out and take the risks to create the jobs in America.

I ask unanimous consent to have both these statements printed in the Record, and I yield the floor.

Mr. President, I wanted to rise to speak further about this financial reform bill. Yesterday, I talked at some length about the problems I saw with the bill relative to section 106 in the derivatives language. Today, I want to talk about things that are not in the bill that should have been in the bill.

The reason I am rising to talk about this bill, which is a very complex bill, and intricate, is because we on our side feel very strongly that we should be involved in the negotiations of a better bill. We are not asking that there be no bill; just the opposite. We are saying there is a lot in this bill that just plain needs to be improved.

For example, in the area of too big to fail, we have to make absolutely sure, if a company is large and it gets into trouble and it overextends itself, that it fails; that the American taxpayer doesn't come in and support that company in the financial sector, or anybody else, as a matter of fact, such as the automobile sector. So that language in the bill needs to be tightened up. It doesn't accomplish that as effectively as we think it should.

The derivatives language has some serious problems. I talked yesterday about one of them, but there are a whole series of problems. The purpose of the derivatives part of this bill should be, No. 1, to reduce systemic risk and make sure that, prospectively, we do everything we can to make these instruments--which are critical to the ability of the economy to be liquid and produce credit--are as safe and as sound as possible, while at the same time making sure we do not overreact and create a situation where this market--which is so crucial to manufacturers across this country and especially to Main Street, which basically benefits from the credit generated by derivatives-- doesn't artificially contract due to excessive regulation, or that it doesn't go overseas. So we lose the fact that we are today at the center of capital and credit. We want to be the best place in the world to create capital and to create credit, and we should have a bill that accomplishes that.

I have been outlining concerns I have in the derivatives area-- yesterday I talked about section 106--and I could highlight a number of other areas. For example, the immediacy with which derivatives are pushed from a clearinghouse into an exchange situation, which I don't think will work under this bill. I think, basically, it would contract the market dramatically.

But what I want to speak to specifically are the things left out of this bill that should be addressed in order to make sure we don't have happen again what happened in September of 2008 and on into the rest of that year, which was that tremendous trauma that our Nation went through and is just now coming out of--and for some people it is still a trauma because they don't have a job, which is the worst trauma of all for somebody. That trauma was caused by some very distinct and specific events that occurred, and a lot of them were the responsibility of the Congress.

If we want to look for who is the cause of the downturn and the crisis in the subprime market, we can look at ourselves in the mirror and say: We are, to a large degree. Easy money was also a problem. But I think right at the center of the problem was the collapse of underwriting standards in this country.

It used to be, up through the 1990s, you couldn't get a loan for much more than 85 percent of the value of the home. You had to put some money down, and you had to be able to show to the person who was lending you the money--the mortgagor--that you could pay the money back. Well, we went into this huge expansion in lending which was driven in large part by two things: One, the monetary policy of the Fed, which basically allowed for easy money to flow out there very quickly into the market; and, secondly, the Congress, specifically insisting everybody should be able to have a home whether they could afford it or not or whether the home was properly valued. Those two factors lead to an explosion in home ownership, equally leading to an explosion in mortgages which, first, did not meet the value of the underlying asset and, in fact, in some instances were actually valued at more than the asset even at the time they were issued.

Almost all these subprime mortgages presumed there would always be an appreciation of real estate prices, so they could loan at 100 percent and at some point you would be down to 85 percent or 90 percent of the value. That didn't happen, of course. The value went down, and so the mortgages went underwater in terms of their basic value. Secondly, the monies were lent to individuals who, because of the way they structured these loans for the first 2 or 3 years, could pay the interest or the mortgage payment, but as soon as these loans reset to a realistic interest rate, they couldn't pay it. Everybody knew it when they did the loan.

Now, why did people do that? Why was there this collapse in underwriting standards? Well, there were a lot of reasons. I happen to think probably the primary one was that we separated the owner of the loan from the actual loanmaking process. Therefore, the people who were originating the loans weren't interested in the underlying security. They were not even interested in whether the person could pay it back. They were only interested in the fees they were generating. So we had a collapse in the underwriting standards. We had an inverted pyramid, with this person down here borrowing money from this entity over here on a piece of property which wasn't worth the value at which money was being borrowed. The person borrowing the money couldn't pay it back, but nobody cared because that loan was then taken and sold and securitized and subdivided and syndicated and sometimes put into a synthetic instrument, or had a synthetic instrument mirroring it. So we had this loan down here, and this massive structure from the churning of that loan on top of it, and the loan wouldn't support all that structure over it. So it all collapsed on us in late 2008.

This bill, however, doesn't address that issue of underwriting standards in any effective way. Senator Isakson and I have spoken about this on the Senate floor a number of times, and we are going to offer what we hope is a bipartisan proposal. But it will improve the bill because it will basically be taking us back to the underwriting standards that used to be in place in the 1990s, not only for the origination of the loan but also for the securitizer of the loan. This is critical. If we are going to fix this problem--and the purpose of the bill should be to fix the problem that created the crisis and make sure it doesn't occur again--if that is the real goal, then there should be underwriting standards.

The second issue in this bill that is not addressed is Fannie and Freddie. These two entities have trillions of dollars of outstanding liability, outstanding notes, and it is estimated that the taxpayer has a $400 billion to $500 billion--that is $\1/2\ trillion--of liability because a lot of these notes aren't ever going to be paid back. Yet Fannie and Freddie are still operating almost in a business-as-usual mindset, pushing money out the door, buying up bonds and notes and mortgages, and doing it almost as if there is no end to the taxpayers' pocketbook.

In fact, we don't even put Fannie and Freddie on the Federal balance sheet. We know, since we own 80 percent of those companies that the taxpayer is on the hook for this debt--this $400 billion to $500 billion of debt. This bill acts as if it doesn't even exist, and yet that was one of the primary drivers of the economic collapse of 2008, from which we are all suffering and have suffered. So this bill should have at least an initial step into the arena of how we are going to handle this issue of straightening out the GSEs, as they are called.

The first step is that we ought to bring their liabilities onto our books so that the taxpayers aren't being lied to; so that we are telling the truth to the American people as to how much it will cost to straighten this out and we have started thinking about how we are going to straighten it out. Yet this bill doesn't do that. That is a place where we, as Republicans--and I think a lot of other people--would like to see this bill improved, and that is why we are opposing going forward with the bill in its present form until we are allowed to participate in the negotiations on improving it. That is what this is all about.

The third issue, of course, is the credit rating agencies. We know without

any question that the credit rating agencies failed miserably, and people relied on their information, their credit rating of varied securities. That is one of the primary reasons people were willing to buy a lot of the instruments that were floating around. They believed, generally, when the credit rating agency said it was a triple-A rated security, that they had done their due diligence and it was a triple-A rated security. It turned out it wasn't, in many instances.

As a result, it was sloppy underwriting again, by people or financial houses that were willing to buy these securitized products, the CDOs and various other products. They didn't do the heavy lifting of everyone going and looking at the actual assets which were backing up these products. They relied on the rating agencies, and the rating agencies didn't do their job either.

So we have this serious issue with rating agencies that needs to be addressed. It is not effectively addressed in this bill. But we cannot correct the problems which created the 2008 crisis and caused this very severe recession and put this country through this tremendous trauma unless we address that issue, along with underwriting standards, GSEs, and credit rating agencies. So Republicans are saying: Let's look at that and try to fix that. That is why we don't want to go forward until we are brought to the table and allowed to address that issue.

Another question: They have filled this bill with all sorts of extraneous things that had absolutely nothing to do--absolutely nothing to do--with the housing crisis and the economic meltdown that followed. A lot of corporate governance rules that have been kicking around this city for a long time and that are the agenda of certain groups in this city that have a political agenda dealing with wanting to have control over corporations--a lot of it influenced by organized labor--have been thrown into this bill willy-nilly. They had nothing, and they have nothing, to do with the overarching issues that affect protecting the market and making and giving us a sound financial system. Yet they are in this bill. They shouldn't be in this bill or, if they are going to be in the bill, they should be significantly adjusted.

So these are some of our concerns. People ask: Well, why are the Republicans stopping this bill at this point? Because we want a better bill, and we have specific proposals for accomplishing that. We want language which does accomplish too big to fail and ends that policy. We want language which makes the derivative market not only safe and not a systemic risk but a sound and strong force for credit in this country. We want language which addresses better underwriting standards. We want language which addresses the issues of the GSEs. And we want language which addresses the failures of the credit rating agencies. We don't want a lot of extraneous language which is simply brought along because the train was leaving the station and it was thrown on it, and which, in many instances, in my mind at least, undermines rather than becomes a constructive force for a better financial system in this country.

So those are our concerns, and that is why we are continuing to insist that we be allowed to be at the table to negotiate these very critical issues on this very complicated bill.

I thank the Senator from North Dakota for showing me the courtesy of allowing me to go first, and I yield the floor.

Mr. President, I rise to speak on the bill. This is such a complex piece of legislation, it is difficult to debate in a sense that is understandable because there is so much of a technical aspect to the bill.

Let's start with the purpose or what I believe the purpose should be. Our purpose should be, one, to do as much as we can to build a regulatory regime which will reduce the potential for another event, the type of which we had at the end of 2008 where we had a massive breakdown in the financial system and, as a result of huge systemic risk being built into the system, which wasn't properly regulated and certainly was not handled correctly by either the financial institutions or by the Congress--the Congress maintains a fairly significant responsibility for the meltdown that occurred at the end of 2008, for the policies that we had running up to that period in the area of housing. That should be our first goal, prospectively, trying to reduce systemic risk as much as possible in the system and putting in place policies which will accomplish that.

The second goal, however, should be that we maintain what is a unique and rare strength which America has, which is that we have the capacity as a country to create capital and credit in a very aggressive way so entrepreneurs who are willing to go out and take risks have access to capital and credit, that creates jobs, and that creates the dynamics of our economy.

We should not put in place a regulatory regime that overly reacts and, as a result, significantly dampens our capacity to have the most vibrant capital and credit markets in the world while still having safe and sound capital and credit markets.

The bill the Senator from Connecticut is bringing forward, I presume, is going to have a lot of different sections in it. I want to focus on one because it has become a point of significant contention, and that is the derivatives section. Derivatives are extraordinarily complex instruments, and there are a lot of different variations of derivatives. They are basically insurance policies on an underlying product that is occurring somewhere in the economy. Their notional value is almost staggering. There is $600 trillion of notional value out there in derivatives, which is a number that nobody can comprehend. But you can understand it is a pretty big issue.

Notional value means, of course, that if everything were to go wrong at the same time, you would have $600 trillion of insurance sitting out there that had to be paid off. That obviously is never going to happen. But the fact is, it shows the size of the market and what its implications are. There are all sorts of different elements to this market. It is not one monolithic market. It is not even a hundred, it is thousands--tens of thousands--of different and various things that are having derivatives written against them, although they divide into pretty understandable categories.

Within the bill that came out of the Agriculture Committee, there was, for lack of a better word, an antipathy expressed toward the entities which presently manage the derivatives market in this country, which are essentially the large financial houses. There was an equal antipathy expressed relative to the entities that use these derivatives, including large amounts of manufacturing companies in this country, people who are dealing with financial debt instruments in this country, people who are dealing with the housing markets in this country.

It was almost as if somebody sat back and said: We dislike these folks, and we are going to put in place a regime which will sort of gratuitously penalize them for the business they do because we do not like it. It is too big. It is too complicated. I think the people who wrote it felt it was not understandable and, therefore, they decided to put forward proposals which would fundamentally undermine the capacity to do derivatives in this country.

Is that bad? Yes, it is very bad because derivatives basically are used for the purpose of making commerce work in our Nation, of making it possible for people to borrow money in our Nation, of making it possible for companies in our Nation to sell overseas, of making it possible for people to put a product in the stream of commerce and to presume that when they enter into an agreement on that product, the price would not be affected by extraneous events, such as the fluctuation of currency costs or fluctuations in material costs. So it is critical we get the derivatives language right.

There needs to be a significant new look at the regulatory regime of derivatives. The essence of the exercise should be transparency, maintaining adequate capital for the counterparties and margins, liquidity. That should be where we focus our energy: trying to make sure the different derivatives products that are brought to the market are as transparent as possible and also have behind them the support they need in the form of collateral, capital, and margin, so if something goes wrong they will be paid off, for lack of a better word.

This proposal, as it came out of the Agriculture Committee, does not try to accomplish that. Rather, it tries to essentially eviscerate the use of derivatives as products amongst a large segment of our economy. It sets up something called section 106, where it essentially says the people who are doing derivatives today, which are, for the most part, financial markets, must spin those products off from their financial houses.

That sounds, in concept, like a reasonable idea, especially if you were in Argentina in the 1950s and working for the Peron government. But as a very practical matter, it is a concept which will do fundamental harm to the vitality of our economy. Why? Because you will not have a lot of derivative products in this country that will be able to pass the test of being spun off. You do not have to listen to me to believe this. Let me quote from a message that was sent to us by the Federal Reserve, which is a reasonably fair arbiter in this exercise. They do not have a dog in the fight other than the financial stability of our country. This is the Fed talking, not me:

Section 106 would impair financial stability and strong

prudential regulation of derivatives; would have serious

consequences for the competitiveness of the U.S. financial

institutions; and would be highly disruptive and costly, both

for banks and their customers.

That is about as accurate and succinct a statement as to what the effect of this section would be as I could have said. I did not say it. Nobody would probably believe me. The Fed said it. The fair arbiter said it.

Why did they say that? Well, it is pretty obvious if you know anything about the way these products work. But essentially, if you spin off these products, you are going to have to create entities out there to replicate the entities they were spun off of. So if a large financial institution is now doing derivatives, and you spin the derivatives desk off, the swap desk off, from that financial entity, that spun-off event is going to have to replicate the capital structure of the financial institution which was basically underpinning the derivatives desk. That capital structure is estimated to be somewhere in the vicinity of a quarter of a trillion dollars to a half a trillion dollars of capital, which will have to be created.

Well, what is the effect of that? When you start putting capital like that into the system, that capital comes from somewhere--assuming it comes at all--it comes from somewhere, and where it comes from, quite honestly, is the creditworthiness of other activity. It is not new capital. It is taking capital and recreating an event, a freestanding entity here, of which capital is not around.

It will also mean there would be a contraction--and this is an estimate not of the Fed but of the group of entities that actually do this business and, therefore, it can be called suspect, but I think it is in the ballpark, give or take a couple hundred billion dollars--it will also cause a contraction of about $700 billion of credit in this country, to say nothing of the fact that if you are looking for a derivatives contract and you cannot go to the financial houses that usually do it in the United States, and you are a commercial entity or a hedging group, you are going to go overseas and do it because they are not going to have these types of restrictions and you are going to be able to buy that contract in Singapore.

So a large amount of entities, a large amount of business, will move offshore almost immediately upon the passage of this bill, should this section be kept in it.

Is it necessary, is the question. Is it necessary to make the derivatives market work right in this country? Absolutely not. This is punitive language put in out of spite because there is a movement in this country, and in this Congress, unfortunately, which I call pandering popularism, which simply dislikes anything that has to do with Wall Street.

I am sure they did a lot of things wrong and they caused a lot of problems. But if you are going to apply the problems that occurred around here fairly, we should be looking in our own mirror, at ourselves, for some of the problems we caused to the American economy, by forcing a lot of lending in a housing market that could not sustain it. It is penal. That is the purpose of this: punitive. In the end, it is going to cut off our nose to spite our face because it will be our credit that contracts, and business can be done and could be done in a very effective way, here in the United States, overseas.

What should be done here? What should be done rather than this exercise, as the Fed has said, in causing a ``highly disruptive and costly'' effect on banks and their customers, and having serious consequences on the competitiveness of the United States? Remember, we are competing in the world. That may have escaped the attention of the Agriculture Committee when they wrote this language, but we are in a world competition. Derivatives are not a unique American product. They are a world product. So these are jobs that go overseas. This is credit that goes overseas. This is business that goes overseas. This is Main Street that will be affected by this language.

How should it have been done? Well, it should have been done in a rational way, not in a punitive way. We know the derivatives market was not transparent enough. We know there was not enough capital, liquidity, margin--whatever you want to call it--behind the products and the counterparties that were exchanging products in the derivatives market in the over-the-counter system. We know--because we have AIG as example No. 1--a tremendous amount of CDs, especially, were being written with nothing behind them except a name.

We can fix all that. It can be fixed in a way that almost everybody is comfortable with by, first, making sure the exempted products from going on a clearinghouse are only products which have a specific commercial use and are customized and are narrow, and that the people doing those products are not large enough in their business so there are systemic issues. Secondly, we put everybody else in a clearinghouse.

What does a clearinghouse mean? It essentially means there will be a third party insurer or holder of the basket of assets necessary to support the derivatives contracts so we are fairly confident when a trade is made in a clearinghouse, the counterparties have the liquidity in the margin behind their positions to support their trades. At the same time, the clearinghouse itself must be structured in a way that it has adequate capital.

Where is that capital going to come from? It can only come from one place. It comes from the people who trade in these instruments. They are going to have to put up the capital. The regulators--the SEC, the CFTC--will have direct access to controlling and making sure that capital is adequate in the clearinghouses and making sure the clearinghouses are adequately monitoring the contracts.

Then as the contracts become more standardized--and they can and they will; we all accept that--they move over to exchanges where they are basically traded like stock. Then you have absolute transparency, price disclosure, and you do not have the issue of the over-the-counter market that causes so much problem for us. That will happen. That will happen almost naturally, but you could have the regulators stand up and say: Well, we think this group of derivatives is standardized enough and you have to move it to an exchange. We could give that power to the regulators, and that makes sense. But it would happen naturally anyway as these clearinghouses become more effective and standardized in the products, and people become more comfortable with standardized products in these areas.

Of course, there would have to be real-time disclosure to the regulators of what the prices were, if they are OTC prices or clearinghouse prices, so they know what is going on. Then it would be up to the regulators to decide when that information should be disclosed to the markets, depending on how you make these markets. Sometimes you cannot disclose the information immediately; otherwise, you would not be able to make a market; otherwise, you would not be able to do the contracts and, therefore, you would not be able to do the business, which underlies the need for the derivative.

So all of that could be done. All of that could be done, and it does not require creating this entity or these series of entities out there which the Federal Reserve has described as impairing the ``financial stability and strong prudential regulation of derivatives.'' In other words, what the Federal Reserve is saying is, when you go in the direction of what is being proposed from the Agriculture Committee in the area of derivatives and set up this independent swap desk, you are not making things stronger in our financial structure; you are making them weaker. You are significantly reducing the strength of the regulatory arms that guide derivatives or oversee derivatives. You are also, as I mentioned earlier, creating an almost guaranteed-to-fail situation relative to the need for capital to support these derivative transactions. It is just--it just makes no sense at all.

To begin with, derivatives are, by definition, a bank product, so the idea that they have to be spun out of banks and financial institutions is, on its face, absurd, truly absurd, and counterproductive to the whole purpose of doing derivatives, which are very important. The Congress recognizes that. In Gramm-Leach-Bliley, we called derivatives a bank product. We understood that then. We seem to have forgotten it now.

I have been trying to figure out what is behind this type of language because it is so destructive to our competitiveness as a nation. This is the type of thing, as I said earlier, we would have seen in Argentina in the 1950s, this almost virulent populist attack on entities simply because they are large and because obviously there is a populous feeling against them, which ends up, by the way, significantly impacting Main Street in a negative way. Look at Argentina. In 1945, I believe, or 1937, somewhere in that period, they were the seventh best economy in the world, the seventh most prosperous people in the world. Now they are like 54th. It is because of this populous movement which has driven basically their ability to be competitive offshore. So now we have this huge populous movement here, and I am trying to think what is behind it. What is the rationale here, other than just rampant pandering populism? A vote occurred in the Budget Committee last week, of which I happen to be ranking member, which crystallized the situation. Senator Sanders from Vermont--whom I consider a friend and I enjoy immensely. He is a great guy. He has a great sense of humor, but we disagree on a lot of things. He runs as a Socialist. I run as a conservative. Senator Sanders offered an amendment which said that the government--and the government, I assume, would be four or five people down at Treasury or four or five people down at--I don't know where they would be, some new offices somewhere--has the right to break up large corporations. It didn't say break up large corporations which had problems, which had overextended themselves, which everybody agrees should happen. That is what Senator Warner was talking about. He has done extraordinary work in this area and I am supportive of his efforts on resolution authority, where if a big bank, a big financial house or a big entity gets into trouble, if they overextend themselves or they are essentially insolvent, they get broken up. There is no--the taxpayers do not come in, in any way, shape or manner and support that entity. That is what the Warner-Corker language does, and I believe the Senator from Connecticut has tried to incorporate a large amount of that. That should be our policy. But what the Sanders amendment said was anything--any financial house--could be

broken up simply because it was deemed to be big, no matter how resilient or strong it is; no matter if it is a major player for our Nation in being more competitive internationally.

Remember, when an American company goes overseas, they want to use an American bank. They don't want to have to use the Credit Suisse or the Bank of Singapore. They want to use an American bank to follow them around the world, and those banks have to be pretty big to do that. Some of them are quite profitable and quite strong. Well, this language would have said no matter how strong and profitable you are and how robust you are and how much you contribute to the American economic system by giving us one level of financial services--which we need as a country, large financial institutions that can support very complex, sophisticated, international economic activity and domestic economic activity--that they would be broken up because a group of people in Washington didn't like them for social policy, social justice reasons. They didn't lend enough money to some group they wanted them to lend to or they lent too much money to some group they didn't want money lent to. For social justice reasons, we will go in and break up this company, even though it is totally solvent, strong, fiscally responsible.

That is the policy that was proposed in the Budget Committee. Ten people voted for that policy. Ten. Ten out of the twenty-two people who voted, voted for that policy. Incredible. Where does that stop? Where does that stop? Where does this section 106 stop? Do we break up Walmart because they are not union? Do we break up McDonald's because they sell food that some people think makes you too fat? Do we break up Coca-Cola because they have too much sugar in their products? Does anything that is big in this country get broken up because there is an attitude that big is bad, whether it contributes or not? Unless you happen to be big and union, in which case you get saved, of course, as the UAW was able to work out with GM and Chrysler.

That is the essence of this language. This language isn't about fixing the derivatives market at all. You can fix the derivatives market in a most comprehensive and substantive and effective way that keeps America the best place to create these types of products in the most sound and safe way. You can do that, and I have outlined pretty specifically how you would do it, without this section. I will close by reading one more time how the fair arbiter has defined it, the Federal Reserve. This is such a damaging section that it cannot be underestimated the damage to our economy were it to be approved.

Section 106 would impair financial stability and strong

prudential regulations of derivatives; would have serious

consequences for the competitiveness of U.S. financial

institutions; and would be highly disruptive and costly, both

for banks and their customers.

Remember, their customers are the people who work on Main Street for the companies that use derivatives, and almost every company in this country of any size uses a derivative to hedge their risks. Ironically, this is all done in the name of social justice because Wall Street is bad, so we are going to go out and cut off our nose to spite our face.

It is incomprehensible that a nation which has become as strong and as vibrant as we have by promoting a market economy would decide to go down this route, which is the antipathy of a market economy, but that is where we are. That is what has happened here, and that is the direction we are going. It is unnecessary, by the way, as I said earlier; unnecessary, because derivatives can be made safer and sounder by simply restructuring the transparency and the manner in which they are put on clearinghouses, limiting the amount of those that are subject to exemption, and pushing people toward exchanges, to the fullest extent possible and to the extent it will work. All that can be done without this type of language which is so destructive and, as the Fed has said, will have the exact opposite effect of what it is alleged to be doing.

Mr. President, I yield.

Madam President, I rise to talk about the same issue the Senator from Georgia has discussed. First, I congratulate him. This is a point we have been making on our side of the aisle. He has come up with a thoughtful and appropriate way to address what was one of the core drivers of our fiscal meltdown. If we look at what caused the financial crisis of late 2008, which has caused this significant recession, which has caused us to go through all these expenditures as a government and which has caused so many American people to suffer the consequences of the recession, there were three or four major events that generated this. One was money was too cheap for too long. That was a Federal Reserve decision. But right at the essence of it was the issue of underwriting, the fact that there was a decoupling of the people making the loan from the people who were responsible for the loan.

We had this whole service industry built up that was making money off of the fees for originating the loan and wasn't that concerned about the ability of the person to repay the loan or the underlying asset. What the Senator from Georgia pointed out--and the proposal he has brought forward is a very responsible way to address this fundamental problem, which is the failure of underwriting--is a point we have been making on our side of the aisle. We have a whole series of what we think are pretty good ideas as to how we can make financial reform work better. Certainly one of them is the idea of the Senator from Georgia.

I was impressed today to hear both leaders say they want to have a bill that is bipartisan, that is comprehensive, that is thoughtful, and that addresses the issues we confront in this regulatory arena.

Unfortunately, that is not the atmosphere around here that has been created. Regrettably, there has been a huge amount of hyperbole, especially in the last couple weeks. Most of it has not been directed at moving down the path of a thoughtful and mature and substantive approach to this issue. Most of it has been addressed at raising anecdotal events which then have been hyperbolized into single one- liners as to how you address them.

This issue of financial reform is far too complicated for one-liners. That is a fact. It is an extremely complex undertaking to make sure we accomplish what we need to accomplish in regulatory reform. Our goals should be two. First, we should do whatever we can to restructure the regulatory arena so we reduce, to the greatest extent possible, the potential of another systemic risk event. I will talk about what we need to do in that area in a second.

Second, while we are doing that, we have to make sure the regulatory environment we put in place keeps America as the best place in the world to create capital and get a loan for people who are willing to go out and take a risk, be entrepreneurs, and create jobs.

One of the great uniquenesses of our culture, what makes us different from so many other places in this world, what gives us such vibrance and energy as an economic engine, is that we have people who are willing to go out and take risks. We have people who are willing to be entrepreneurs. And we have a system of capital formation and credit which makes capital and credit readily available to those individuals at reasonable prices. So as we go down the road of regulatory reorganization, we have to make sure we do not suffocate that great strength of our Nation.

There are four basic issues before us today in regulatory reform, and none of them are partisan. Yet in the atmosphere around here, you would think they are all partisan, especially the

President's recent speech, which was over the top in its partisan dialog.

First is how you end too big to fail. We cannot allow a system to exist where there is a belief out there in the markets that the taxpayers are going to back up a company that has taken too many risks and has gotten itself in trouble. Why is that? Because if that happens, if there is a belief in the market that the taxpayers will step in and back up companies that are very large and systemic when they have taken too much risk and put themselves in dire economic straits--if there is a belief that the taxpayer is going to step up and back up that company--capital will get perverted. Capital will not be efficiently used. Capital will flow in an inefficient way to companies which have proved themselves not to be fiscally responsible. That is not a good way for an economy to function--certainly a market economy to function. So we have to end too big to fail.

This is not a partisan debate. Senator Dodd has brought forward a bill which he thinks ends too big to fail. In my view, it has some serious flaws. It is a good attempt, but it does not get there. Senator Corker and Senator Warner, from two different parties, have actually put together a concept--we call it resolution authority around here-- which actually does end too big to fail and does it the right way. It essentially says if a company, if an entity--which is a huge entity-- gets out of whack, overextends itself, gets too much risk, is no longer viable, well, then, we are going to resolve that company. The stockholders will be wiped out, unsecured bondholders will be wiped out, and the company will basically flow into bankruptcy and will not be conserved. That is a good approach, and it is a bipartisan approach.

Another big issue: how you address regulatory oversight to try to anticipate a systemic event. Again, the Dodd bill makes an attempt in this area, but there are ways we can improve it. We need to have all the different regulators who have an important role in this sitting at a table, most likely led by the Fed, who take a look at the broad horizon of what is happening in the marketplace and saying: OK, in this area we have a problem arising. We have too many people doing too many things which are at the margin of responsibility here. We are going to empower the agency which is responsible for that--the FDIC or the OCC or one of the other regulatory agencies--to go out and make sure that activity ceases or is abated, and they are going to come back and report to us so you have some oversight here.

That is the concept. It can be fleshed out in better terms. It goes to this issue which is raised by the Senator from Georgia--we should have better underwriting standards as part of this exercise so in the marketplace, real estate especially--residential real estate--we get back to the approach we should have taken to begin with, which is that we know the asset value that is being lent to exists and that the person can pay the loan back as the loan is adjusted over the years.

Thirdly, we have the issue of derivatives. Derivatives are a huge part of the market--massive. The number is $600 trillion of notional value--something like that; massive numbers. What do they do? They basically make it possible for American companies especially to sell their products around the world or to take and put their products into the market in a way that they are able to address issues which they do not have control over.

For example, if you are Caterpillar equipment and you are selling something in China, you do not know if the currency value is going to change--well, you do with China; that is a bad example--if you are selling something in Brazil, you do not know if the currency value is going to change, you do not know if there is going to be a change in the cost of your materials you are building that tractor with, you do not know a lot of different factors you do not have control over. So derivatives allow you to ensure over that.

That is a simple statement of what derivatives do. But that goes to all sorts of different activities--from financial entities, all the way across the board to producers of goods. So there needs to be a regime put in place that makes these derivatives sounder, where we do not get an AIG type of situation where basically we are backing up what amounts to an insurance policy for a company with a name but actually no assets.

Senator Jack Reed from Rhode Island and I have been working for months--literally months--on a daily basis to try to work out such a regime. We think we are pretty close. We think it is going to be a good proposal. Nobody is going to like it, which we know means it is going to be a good proposal. But it is going to accomplish what we need to do, which is to get more transparency and liquidity and margin in the market. There will be the opportunity to have end users who are exempt, but there will also be a primary incentive to put people on a clearinghouse. To the extent you can move from a clearinghouse to an exchange, that will happen also, without undermining the market.

But the key here is to put in place a regime which does not force companies to go overseas to do their derivative activity. This is a very fluid event. If we come forward with an overly regressive approach and an overly bureaucratic approach--one which basically responds to a hyperbole of the moment, which is that all derivatives are bad and not transparent and therefore must be put on exchanges, something like that--we are basically going to push offshore the vast amount of derivative activity that is critical to our industry in America being competitive. As a very practical matter, if we can develop a sound market--and we can develop a sound market--we want to be the nation where most people go to develop their derivatives because it is a big industry and it is something we should keep onshore.

The fourth issue: consumer protection.

My time is up?

Madam President, I see the Senator from Louisiana wants to speak. But the point here is pretty obvious. This is not a partisan issue. We can resolve the issue of financial regulatory reform if we sit down and do it in a constructive, thoughtful way, step back, be mature, and take an approach that is thoughtful versus wrapped in hyperbole and popularism of the moment. I certainly hope we will take that process and go forward.

I yield the floor.

Mr. President, I wish to thank and congratulate Virginia Beecher for her years of service to the people and State of New Hampshire. Kathy and I have known Gini for so long, it is best not to mention the specific number of years. She is a friend, confidant, and someone we greatly admire for her extraordinary commitment to public service.

Gini completes her work for New Hampshire as the director of Motor Vehicles, a position she has held for 15 years. Her leadership of this critical agency, which affects so many New Hampshire citizens, has taken it from the dark ages to a highly computerized, customer-friendly department. She has focused on providing the citizens of New Hampshire with their licenses and car registrations in an efficient and pleasant way. Her commitment has always been to bring the highest standards and a professional approach to the department.

This is only one stop in her exceptional career of service to New Hampshire. Kathy and I had to convince her to leave her beloved Department of Safety for a brief tenure in the Governor's office when I began my term as Governor. It was her unique knowledge of how the State government works that helped us get up and running effectively and quickly. After she straightened out the Governor's office, she returned to continue to be the force that made the Department of Safety one of the most professional and well run agencies in the State.

You cannot talk about Gini's influence without mentioning her total commitment to the North Country. It has always been a part of her being. Gini has a commonsense, no nonsense approach that characterizes that part of our great State.

New Hampshire government will obviously miss Gini's talent and enthusiasm. Kathy and I wish her the best as she moves on to other challenges. We are honored that our paths have been so intertwined over these many years and that she is our friend.

Thank you, Virginia Beecher, for your many years of service to the State of New Hampshire.