Washington, D.C.–(ENEWSPF)–April 28, 2010. The following remarks are attributable to Senator Carl Levin (D-Mich.).
Mr. President, yesterday the Senate Permanent Subcommittee on Investigations, which I chair, held the fourth in our series of hearings to explore some of the causes and consequences of the financial crisis. These hearings are the culmination of nearly a year and a half of investigation.
The freezing of financial markets and the collapse of financial institutions that sparked our investigation are not just a matter of numbers on a balance sheet. These are numbers reflect millions of Americans who lost their jobs, lost their homes, lost their businesses a in a recession that the housing crisis sparked, the worst economic decline since the Great Depression. So behind these numbers are American families who are still suffering the effects of a manmade economic catastrophe.
Our goal has been to construct a record of the facts in order to try to deepen understanding of what went wrong; to inform the legislative debate about the need for financial reform; and to provide a foundation for building better defenses to protect Main Street from Wall Street.
Our first hearing dealt with the impact of high- risk mortgage lending, focused on a case study, as our committee does, this time Washington Mutual bank, known as WaMu, a thrift whose leaders embarked on a reckless strategy to pursue higher profits by emphasizing high-risk loans. These are not loans that were just likely to fail. These loans also created real hardships for the borrowers as well as the risk for the bank itself. There was basically a conveyor belt that fed toxic, bad, reckless mortgages into a financial system just like a polluter dumps poison into a river. The package that they came downstream in was a mortgage-backed security that WaMu sold to get the enormous risk of these mortgages off its own books and shifted it to somebody else.
The second hearing examined how federal regulators at the Office of Thrift Supervision watched, observed WaMu, saw the problems year after year and did nothing to stop them. Supervision that should have been conducted at arm’s length, instead was done arm in arm with the bank it was supposed to be regulating.
The third hearing dealt with credit rating agencies. These are specific case studies of Standard & Poor’s and Moody’s. And while WaMu and other lenders dumped these bad loans, credit rating agencies were assuring everybody that the poison water was safe to drink. Triple-A ratings were slapped on bottles of high-risk financial products. So that was the third hearing. We’ve got to do something about the inherent conflict of interest that is involved when credit rating agencies are paid by the people whose products they are rating. There is an inherent built-in conflict of interest.
Yesterday’s hearing explored the role of investment banks. We focused on the actions during 2007, when the housing bubble burst, of Goldman Sachs, one of the oldest firms on Wall Street. Goldman’s documents made it very clear that it was betting against the housing market while it was aggressively selling investments in the housing market to its own clients. It was selling to clients high-risk, mortgage-backed securities and what they call CDOs and synthetic CDOs that they wanted to get off their books. They wanted to get securities off the books. They were selling them. They were reaching out with one hand to prospective buyers and saying, here. But with the other hand they were betting against those same securities.
The bottom line is, what we discovered in this investigation, saw yesterday at our hearing, is that there is a conflict of interest too often between what’s in Goldman interest, what’s good for their bottom line, and what is in its clients’ interests. These are deeply troubling findings. There not only was a collapse of a housing market. There was a collapse of values. And extreme greed is the thread that connects these events, starting with those mortgages that were sold out there in the state of Washington by Washington Mutual Bank, extreme greed that indeed involved the people who were supposed to be doing the credit rating, being paid and doing a lousy job, rating the financial instruments. The greed that was involved in Wall Street, selling, securitizing financial instruments which they believed were not good, they were betting against at the same time they sold them to their clients and customers.
So what we’ve got to do is build defenses against these kinds of excesses. And I think most of us that are at the hearing, most of us, Democratic or Republican senators, who are on my Permanent Subcommittee on Investigations saw the problems right from the beginning where the upstream mortgages were created, downstream where they landed in Wall Street securities. We see the problems. Americans see the problems. Americans cannot understand how a company can design and build a product and sell that product to its clients while at the same time they are betting that that product will fail. It just runs contrary to common sense. Kind of a common ethic.
If you’re going to sell somebody a pair of shoes, if you know or believe that that pair of shoes is defective, if you bet against that pair of shoes, so that your profit is not just the profit you make on that sale, but when the pair of shoes fails that there’s some way a profit comes to you as well, when you’re betting on the failure of the product and will make money from that bet when that product fails, most Americans — and I think most members of the committee hopefully, maybe all of us — say to ourselves, that kind of a conflict of interest has got to be stopped.
That’s not what the Wall Street folks were telling us yesterday is making a market, bringing a buyer and a seller together. This is where the firm – where the person who is going to be betting is on one side of the deal. That person is Goldman Sachs. They in some of these deals were taking in instruments, securities from their own inventory that they wanted to get rid of, packaged them into a financial instrument, sell that instrument to their customers — so far so good, providing they disclose that it’s their own product that they’re selling; that’s okay — but then they make a bet. They make a bet against the very instrument that they put together to sell to their customers. That, to me, is incredible. And they also are engaged — and a lot of people were engaged in what we call credit default swaps, which are nothing more than casino bets as to whether something will happen or not.
People want to bet on that, let them bet. But when the government ends up paying the winning bettor, now you’ve got a problem. Where the company that is taking those bets, ensuring those bets, as in the case of A.I.G., is sure to fail, that’s a problem, when hey insure so many bets that if that private company fails, the economy is going to be terribly damaged as result and we end up, as taxpayers, paying off those bets. That has got to be stopped as well. They are just casino bets, and we shouldn’t be paying the winner.
Now, throughout these hearings we see lack of accountability. Executives at Washington Mutual make the reckless mortgage loans. Not held accountable. Executives at Goldman Sachs and their company who packaged many of these same loans into toxic securities and then take a conflict of interest position on it. No accountability. Regulators, credit rating agencies that were supposed to check these excesses, no accountability. In each case senior leaders managed to avoid responsibility for their contributions to a crisis which has caused millions of Americans to lose their jobs or their homes or their businesses.
Now, others may fail to take responsibility for their actions, but we must exercise our accountability. We must act. I do not understand how our Republican colleagues, knowing what they know about the crisis, knowing that there’s no real regulator on the beat on Wall Street, can continue to obstruct the start of a debate on reform.
The Dodd bill acts. It takes very, very significant steps relative to each of these areas, whether it is the banking area, the regulators’ area, the credit rating area. There are some critical steps taken in the Dodd bill. There are some people who say they don’t like portions of the Dodd bill. Okay, bring the bill to the floor and let’s debate it. Let’s legislate it. The legislative process is supposed to involve sooner or later a bill which comes to the floor and is open for amendment, and then you debate. There are a lot of areas in this bill that can be strengthened.
There are some areas in the bill that some people don’t like and would like to strike. We’ve been on this bill now in committees with jurisdiction for months. There have been hearings in those committees. I think we know what the issues are, and there’s no agreement on the resolution of this. There’s no unanimous consent, obviously, as to exactly what reforms should be put in place and how they should be written. But we can’t always operate in the middle of a crisis by unanimous consent. At some point where there are differences, we have to bring those differences to the floor and debate them and offer amendments on them and vote them up or down. That’s our responsibility, and it is not responsible — it is irresponsible – to block that process from taking place.
I think almost all of us say we want reform. The reform process has been thwarted by a filibuster. It is wrong, and the remedies that are offered can be debated and can be voted and are essential to avoid a repeat of this disaster.
These are complex issues. We all know that. But there’s been a huge amount of debate and attention and analysis on these issues. There’s going to be differences on these issues. But the place to resolve differences is finally here on the floor. Often we can resolve them before we get to the floor. Fine. But to stop a legislative process from taking place, it seems to me, is an irresponsible act when we’re in the middle of are a crisis and where the people of the United States want confidence that their legislators are addressing this crisis.
So I would hope that our Republican colleagues will allow this bill to come to the floor, to offer amendments. There are many amendments that are going to be offered. Senator Merkley and I have an amendment which we believe will strengthen it, just to give one example. That amendment has not yet been, quote, “worked out” with the sponsors of the bill. Hopefully we can get them to agree to language which will allow for a stronger step to be taken in an area which we think involves serious conflict of interest.
But if we can’t, quote, “work it out” in advance, okay. There’s such a thing as an amendment. It’s part of our rule book. We can offer amendments, if you want. You can’t always work out things in a back room somewhere. I don’t want to denigrate working problems out. I try to do it all the time as chairman of the Armed Services Committee. I don’t denigrate the process of working things out in advance. Lord knows, we work most things out in advance. But with a project, a threat of this size, which requires us to act, and where there’s been a good-faith effort to come to some kind of agreement in advance, where that proves not to be possible, for heaven’s sake, we’ve got to legislate. We’ve got to have the ability to move to the floor with a bill and to go through a legislative process with it. That’s what’s been thwarted.
That’s what’s been denied us because we don’t have 60 votes, and I just hope that our Republican colleagues will see the importance of this issue, the essential need for reform, and allow this bill to come to the floor and be legislated upon.