U.S. Senator Blanche Lincoln, D-Ark., chairman of the Senate Agriculture, Nutrition and Forestry Committee today gave a speech on the Senate floor discussing the derivatives title in the Dodd-Lincoln Wall Street reform bill.
Below are Lincoln’s remarks on the Senate floor as prepared for delivery.
“Mr. President, I rise today to speak in support of the Boxer amendment. The Boxer amendment sends a strong statement that no taxpayer funds will ever again be used to bail out the risky gambles that too many on Wall Street have conducted. The amendment should pass with 100 votes.
“I would also like to speak about the derivatives title, which is the bipartisan product that was reported out of the Senate Agriculture Committee two weeks ago. Specifically, there have been statements in the press and here in the Senate Chamber that I believe need to be corrected regarding Section 716.
“As Chairman of the Senate Agriculture Committee, I am proud to have included this provision in Wall Street reform legislation approved on a bipartisan vote by our committee two weeks ago. I am also proud that it is included in the Dodd-Lincoln legislation that we are considering today.
“This provision seeks to ensure that banks get back to the business of banking. Under our current system, there are a handful of big banks that are simply no longer acting like banks. Surely every member of this body is aware that the operation of risky swaps activities was the spark that lit the flame that very nearly destroyed our economy.
“In my view, banks were never intended to perform these activities, which have been the single largest factor to these institutions growing so large that taxpayers had no choice but to bail them out in order to prevent total economic ruin.
“My provision seeks to accomplish two goals: first, getting banks back to performing the duties they were meant to perform — taking deposits and making loans for mortgages, small businesses and commercial enterprise; and second, separating out the activities that put these institutions in peril.
“This provision makes clear that engaging in risky derivative dealing is not central to the business of banking. Under Section 716, the Federal Reserve and FDIC will be prohibited from providing any federal assistance and funds to bail out swap dealers and major swap participants.
“Currently, five of the largest commercial banks account for 97 percent of the commercial bank notional swap activity. That is a huge concentration of economic power, which is why I am in no way surprised that several individuals are seeking to remove it from the bill.
“This provision will ensure that our community banks on Main Street won’t pay the price for reckless behavior on Wall Street. Community banks are the backbone of economic activity for cities and towns throughout the country. They don’t deal in risky swaps that put the whole financial system in jeopardy. Instead they perform the day-to-day business of banking– making the smart, conservative decisions that banking institutions should be making.
“Unfortunately, Mr. President, we saw the five largest banks begin to fail in part because of risky swaps activity – activity that should never have been part of their operation in the first place. Sadly, it was our community bankers and their depositors who were left footing the bill.
“Community banks were forced to pay for a problem they did not create. Mr. President, small banks are still paying the price. In 2009, we saw 140 bank failures and now the costs of FDIC insurance premiums are skyrocketing for community banks. Higher insurance rates mean less lending.
“Less lending means that now individuals and small businesses are also paying the price. The FDIC reported that in 2009 the bank industry reduced lending by 7.4 percent, the biggest decrease since 1942.
“I am a strong believer that you build an economic recovery from the ground up and if small and medium-sized businesses aren’t getting the capital they need to grow their businesses, something is wrong. The economy simply will not recover unless we free up lending.
“Unfortunately, Wall Street lobbyists are doing everything they can to distort this provision – spreading misinformation and untruths.
“Mr. President, the suggestion that this provision will force derivatives into the dark without oversight, is absolutely false. The Dodd-Lincoln bill makes it abundantly clear that all swaps activity will be vigorously regulated by the Fed, the Commodity Futures Trading Commission and the Securities Exchange Commission.
“My good friend from New Hampshire, Senator Gregg, my friend from Tennessee, Senator Corker, Wall Street lobbyists, and others in recent days have somehow argued that by pushing out risky swaps from the nation’s largest banks, like JP Morgan, Bank of American, Wells Fargo, Goldman Sachs or Citigroup, that somehow swaps will no longer be regulated.
“This is just plain wrong.
“Just because these swaps desks will no longer be overseen by the FDIC does not mean that they will not be subject to the bill’s strong regulation by the market regulators – the SEC and CFTC. In short, they simply ignore the strong provisions included in the rest of the underlying bill. Convenient for their argument, but not so convenient when seeking the truth.
“Let me reiterate – every swaps dealer and major swap participant will be subject to strong regulation.
“Wall Street lobbyists have also argued that this will prevent banks from using swaps to hedge their risks. Again, completely false.
“Banks who have been acting as banks will be able to continue doing business as they always have. Community banks using swaps to hedge their interest rate risk on their loan portfolio will continue to be able to do so and, most importantly, we want them to do so. Community banks offering a swap in connection with a loan to a commercial customer are also still in the business of banking and will not be impacted.
“Using these products to manage risk and designing exotic swaps – which have led to the financial demise of places like Jefferson County, Alabama, Orange County, California, and the country of Greece – are two very different things. Hopefully, this is something my colleagues will understand.
“Mr. President, Wall Street lobbyists have also said this provision will move $300 trillion worth of swap activities outside of the banks. My question is, why is this activity there in the first place?
“I agree that regulated, transparent swap activity is a necessary part of our economy – it just has no place inside of a bank where too many innocent bystanders are put at risk.
“Mr. President, despite what those on Wall Street may be saying, this provision is an important part of real Wall Street reform. It has broad support from the Independent Community Bankers of America, The Consumer Federation of America, AARP, Labor Unions, and leading economists like Nobel Prize winning Joseph Stiglitz, among others.
“Let me read what these groups and individuals are saying about this provision.
“Americans for Financial Reform which includes groups such as the AFL-CIO, NAACP, Consumers Union writes – The over 250 consumer, employee, investor, community and civil rights groups who are members of Americans for Financial Reform (AFR) write to express strong support for Section 716 (“Prohibition Against Federal Government Bailouts of Swaps Entities”) as part of the Dodd-Lincoln substitute to the Restoring Financial Stability Act of 2010.”
“It is now almost universally recognized that the fuse that lit the worldwide economic meltdown in the fall of 2008 was the $600 trillion, severely under-capitalized and unregulated and opaque swaps market, dominated by the world’s largest banks. Section 716 is designed to ensure that the American taxpayer is not the banker of last resort, as was true in the bank bailouts in 2008-2009, for casino-like investments marketed by large Wall Street swap dealer-banks. Section 716 is a flat ban on federal government assistance to “any swap entity,” especially in instances where that entity cannot fulfill obligations emanating from highly risky swaps transactions.
“Section 716 will require the five largest swaps dealer banks to sever their swaps desks from the bank holding corporate structure. Those five banks are: Goldman Sachs, Morgan Stanley, J.P. Morgan Chase, Citigroup, and Bank of America, the institutions involved in well over 90 per cent of swaps transactions. Under Section 716 a “swap entity” and a banking entity could not be contained within the same bank holding company, if the bank holding company has access to federal assistance.
“By quarantining highly risky swaps trading from banking altogether, federally insured deposits will not be put at risk by toxic swaps transactions. Moreover, banks will be forced to behave like banks, focusing on extending credit in a manner that builds economic strength as opposed to fostering worldwide economic instability. Finally, the spun off swaps entity will be sufficiently isolated to permit the kind of careful prudential oversight mandated by Title VII of the Act as a whole. Title VII ensures that the spun-off entities will both be regulated as institutions under the most rigorous prudential standards, and that almost all of the swaps instruments will be subject to standards for capital adequacy, full transparency, anti-fraud and anti-manipulation.
“Nobel Prize Winning economist and former chairman of the Council of Economic Advisers during the Clinton administration Joseph Stiglitz writes – One provision holds particular promise — and has the banks especially riled up. This is the idea that the government should not be responsible for the "counterparty risk" — the risk that a derivatives contract not be fulfilled. It was AIG’s inability to fulfill its obligations that led the U.S. government to step into the breach, to the tune of some $182 billion.
“The modest proposal of the agriculture committee is that the U.S. government (the Federal Deposit Insurance Corporation) stops underwriting these risks. If banks wish to write derivatives, they would have to do so through a separate affiliate within the holding company. And if the bank made bad gambles, the taxpayer wouldn’t have to pick up the tab.
“This change would help fix the current system, where those who buy this so-called "insurance" enjoy the subsidy of the essential, free government guarantee; and where competition among the few issuers of these risky products is sufficiently weak that they enjoy high profits.
“The Fed and the Treasury seem to object to the agriculture committee’s proposals. These objections show once again the extent to which the Fed and the Treasury have been captured by the institutions that they are supposed to regulate, and reemphasize the need for deeper governance reforms of the Fed than those on the table.
"To be sure, banks’ high profits from derivatives would help with recapitalization, offsetting the losses they incurred from the risky gambles of the past. But that doesn’t mean that the policy of allowing banks to issue derivatives — and laying the risk of failure onto the taxpayer — is right.
“Bank recapitalization should be done in an open and transparent way, consistent with sound economic principles.
“The Independent Community Bankers of America writes – ICBA strongly supports Section 106 of the derivatives bill. This section prohibits federal assistance, including federal deposit insurance and access to the Fed’s discount window, to swaps entities in connection with their trading in swaps or securities-based swaps.
“Main Street and community banks have suffered the brunt of the financial crisis, a crisis caused by Wall Street players and not community banks. Assessments to replenish the Deposit Insurance Fund have increased dramatically for community banks. Large financial players have received hundreds of billions in financial assistance while community banks have been allowed to fail.
“Section 106 of Senator Lincoln’s derivatives legislation would be an important provision to help ensure that taxpayers and community banks are not on the chopping block should another financial crisis occur. We strongly urge retention of this provision during markup this week. Thank you for keeping the views of community banks in mind. ”
“Mr. President, I ask Unanimous Consent that these letters from Americans for Financial Reform, Professor Stiglitz and the Independent Community Bankers be entered into the Record.
“I look forward to working with my colleagues to ensure this legislation remains strong and new loopholes are not created on behalf of Wall Street.
“I yield the floor.”
