Increasing The Statutory Limit On The Public Debt

Floor Speech

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Mr. MERKLEY. Mr. President, I rise today to talk about the challenge of putting our economy back on track and the type of leadership we need to take us forward. Much of this last year we have been absorbed in addressing the challenge of major financial institutions failing and the importance of preventing them from failing in order to not have the second Great Depression. So that has put a lot of attention on Wall Street.

But to go forward as a nation, we need to turn our attention to Main Street. We need to rebuild the financial foundations for our families. That is why I am rising today to oppose the nomination of Chair Bernanke for a second term as head of the Federal Reserve.

I want to take a moment to explain why, when his nomination was in the Banking Committee, I voted against that nomination. I voted against that nomination because I believe Chair Bernanke is not the right person to take us forward.

I will acknowledge he has been quite handy with the fire hose; that is, he has been quite handy in addressing and putting out the fire that has affected our economy over this last year. We are not in a great depression, but we are in a severe recession. But do you hand the job of rebuilding a house that has been burnt down by a fire to the person who helped set the fire to begin with? And Ben Bernanke helped set the fire.

Ben Bernanke was on the Board of Governors of the Fed from 2002 to 2005. He was chair of the Council of Economic Advisers from 2005 to 2006, and he was Chairman of the Fed from 2006 until now. He has been at the table of economic policymaking in this country for 8 years, when mistake after mistake after mistake has been made.

That is how the house was set on fire. Now that it has burned to the ground, we do not need a fireman to rebuild the house; we need a carpenter. We need somebody who understands that short-term wealth on Wall Street is not the goal of our national economic policy. The goal of our policy is to build the financial foundations for our families, the success of our families.

Let me mention some of the things that happened while Ben Bernanke was sitting at the table making economic policy. First, there was an enormous explosion in derivatives. ``Derivatives'' is a term that is hard to get your hands around, but let me translate. It is essentially bets on the future aspects of the economy--bets on future interest rates, bets on future bond prices, bets on future stock prices. You can place bets on things you own yourself, and that is akin to an insurance policy, but you can also place bets that are not on assets you own, and then it is pure speculation. Those derivative contracts--those contracts that were essentially speculation on the future--created a web of risk tying one financial institution to the next financial institution, setting them up like dominoes, so if one failed, they endangered the next failing. While this derivatives market exploded--and there was not a clearinghouse, and there was not an exchange--we heard nothing from Ben Bernanke about the need to address that risk.

Then there is the question of leverage, that the Securities and Exchange Commission lifted the leverage requirements on the five largest investment banks, and they proceeded to invest with 30-to-1 leverage ratios. If you have $1, and with that $1 you can borrow $30 and invest those $30, when things go up in value you are going to make enormous money, enormous profit. But, just as assuredly, when they go down in value, you are going to lose your money instantly--very quickly.

We do not know when the markets will go up and when the markets will go down, but what we do know is they will go up and down over time, and you need to have a system that is not designed just to reap great benefits on the way up and blow up on the way down. We heard nothing from Ben Bernanke about this risk.

It is during this period that proprietary trading increased dramatically. What is proprietary trading? We think of our banks as organizations that take in deposits and make loans. But they also can trade on their own account, and they can borrow money to trade on their own account. You can think of them as day traders in the financial world, only at levels of extreme size, very large size. The risks that are taken in proprietary trading can produce tremendous profits and, when the markets go down, when the bets go bad, enormous losses. Again, we did not hear from Ben Bernanke about the risk that proprietary trading was placing on our depository, lending, banking institutions.

Let's address consumer protection. The Fed has the mission of consumer protection. But under Mr. Bernanke's leadership, the responsibility for monetary policy was in the penthouse; safety and soundness were on the upper floors; and consumer protection was put deep in the basement, never to be heard from again.

Why was this so important to our financial system? Certain practices grew that completely imperiled our financial system based on consumer protection issues. Specifically, one of those was prepayment penalties in home mortgages and the other was steering payments.

Let me explain those a little bit. A steering payment is a payment that a group that is lending the funds makes to a broker to reward them for steering a client into a very expensive loan.

As an American family buying a home--say, for example, you have come from your real estate broker. Your real estate broker follows a very strict code of conduct and makes sure everything is absolutely disclosed in a straightforward manner and makes sure you understand whether they are representing the seller or the buyer or both of you. You go to your broker. You are paying your broker, and you think that broker is going to do the best by you.

Indeed, your broker might say to you: Home mortgages have become very complicated, and I will serve as your financial adviser. So I will make sure you get the best loan. But what you do not know is that broker is taking a huge fee, a huge steering fee, if you will, to convince you to put your name on a loan that is not in your best interest--a loan that has an exploding interest rate, a loan that has a triple option that will go to a low payment, to a high payment, and a loan that has a prepayment penalty that keeps you locked into that loan and unable to refinance it without several pounds of flesh.

Those practices were very valuable to the lender. That is why they paid these payments to the broker, because they could then sell that loan to Wall Street and say: Look how valuable this loan is. The interest rate is going to go way up and the homeowner cannot get out of the loan. That is a valuable asset. Wall Street took those subprime loans and they proceeded to turn them into securities, and they started to sell them to financial institutions throughout the world.

So the failure to protect the homeowner from these abusive practices led to systemic risk, not just here in America but financial institutions throughout the world. That responsibility for consumer protection was the Federal Reserve's responsibility.

I want to note several things. The first is, I have found, in dealing with Chair Bernanke, that he has been very forthcoming in conversations. He has been very professional. He has been very knowledgeable. And he has been very likable. So nothing I am saying right now is based on any sort of personal feelings. Instead, it is about this: How do we put this economy on track for our families, for the financial future of our families?

I have to say, our families have suffered enormously as our national economic house has burned down. They have lost jobs. They have lost their savings. They have often lost their health care that went with their jobs. They have often lost their retirement accounts because the value of the assets they had plunged in that retirement account. Folks who had planned that they were going to have some golden years now are thinking they might have to keep working as long as they are able. Families have lost a great deal. Families are stressed about the future. So these economic mistakes had a huge consequence.

We need to have a Chair of the Federal Reserve who will lean into the wind; that is, when something is unpopular but important to address systemic risk, someone who is willing to say to powerful economic entities: This practice is not acceptable. The lack of reserves is not acceptable. Prepayment penalties and steering payments in mortgages are not acceptable. Undisclosed derivatives that tie financial institutions together in a web of risk is not acceptable. Proprietary trading that can make huge profits for a depository-lending institution in one quarter but bring down that same institution in the next must be regulated. We must have a Chairman of the Federal Reserve who will lean into the wind and say these things are important, these lane markers are important, these traffic signals are important. We can think of it akin to a traffic system. You do not want a stop sign on every corner. You do not want paralyzed traffic from overregulation. But you also do not want to strip away the traffic signals, strip away the lane markers, and have the sort of chaos that results in all kinds of traffic accidents and wreckage. Yet that is what happened in our financial system over the 8 years Ben Bernanke was at the table of economic policymaking.

You may think that maybe I am overstating the mistakes that were made. I would encourage anyone to look up the Washington Post article written on December 21, 2009, a month and a half ago. This article is an extensive review of decisions the Fed made and their impact in the system. I thought I would give you a sampling from this one article of things you might find interesting and important in this conversation about the economic leadership we had.

The article starts out noting that:

Foreclosures already pocked Chicago's poorer neighborhoods but the downtown still was booming as the Federal Reserve Bank of Chicago convened its annual conference in May 2007.

Quoting further from the article:

The keynote speaker, Federal Reserve Chairman Ben S. Bernanke, assured the bankers and businessmen gathered at the Westin Hotel ..... that their prosperity was not threatened by the plight of borrowers struggling to repay high-cost subprime loans.

I quote from Mr. Bernanke. He said to the audience:

Importantly, we see no serious broad spillover to banks or thrift institutions from the problems in the subprime market. The troubled lenders, for the most part, have not been institutions with federally insured deposits.

The article goes on to note:

The Fed's failure to foresee the crisis to require adequate safeguards happened in part because it did not understand the risks that banks were taking, according to documents and interviews with more than three dozen current and former government officials, bank executives and regulatory experts.

So that is one example.

A second example is, Bernanke had reached a conclusion that essentially the financial system would self-regulate. Reading from the article now:

Bernanke said the economy had entered an era of smaller and less frequent downturns, which he and others called ``the great moderation.''

It notes--and I make this as a third point from this article:

The Fed let Citigroup make vast investments without setting aside enough money to cover its eventual losses.

This article goes on to explain the story with Citigroup and that the reserves were tied into a decision by the Fed; specifically, that a decision was made under accounting rules that when they bought into a pool of securities, those securities were viewed as so stable they didn't need to set aside significant reserves. Here is the interesting point: Even though they had bought those securities and then sold them, they had pledged to cover losses if borrowers defaulted. So they had a significant risk even after these securities had been sold, but that risk was not taken into account when the reserve requirement was set.

We can turn to another piece of this. There was a report done by the Fed called the ``Large Financial Institutions' Perspectives on Risk'' and it found: ``No substantial issues of supervisory concern for large financial institutions.''

As you all might recall, many financial institutions were doing regulatory shopping, looking for the regulator who would give them the best deal or the regulator who knew the least about their affairs so they could hardly even ask the right questions. That was certainly a factor in AIG going down. The Fed regulators looked at National City's books and its management and again found nothing amiss.

In reality, the bank was ailing. Its subprime borrowers were starting to default on their loans. Less than two months after the Fed approved the merger, National City reported a net loss of $19 million. The company never returned to profitability.

I am, again, quoting from that Washington Post analysis:

The Fed's failure to see the rot inside National City resulted from the central bank's reliance on others to identify problems.

They weren't asking the right questions. They didn't have a team who was going out making sure they understood what was going on.

There was another example of this:

In January 2005, National City's chief economist had delivered a prescient warning to the Fed's board of governors: An increasingly overvalued housing market posed a threat to the broader economy.

This message, the article says, was not well received. One board member expressed particular skepticism, and that board member was Ben Bernanke. Bernanke said:

``Where do you think it will be the worst,'' he asked, according to people attending the meeting. ``I'd have to say California,'' said the economist. Bernanke replied, ``They have been saying that about California since I bought my first house in 1979.''

Ben Bernanke did not think there was an issue even to be thoroughly explored and wrestled with.

There is additional information in this article about the Fed's power when mergers occur and it notes:

The Fed's power to reject a merger application involving Golden West and Wachovia was a potentially important check on the wave of mergers that created banks so large that their distress would threaten the economy. But from 1999 through last month, the Fed approved 5,670 applications to create or buy a bank and in that time denied only one.

Well, that power of the Fed regarding mergers was not utilized.

Then, finally, let me note an issue regarding Basel II. Again, I quote from the Washington Post Analysis:

Even on the verge of the financial crisis, the Fed continued to push for new international rules that would let many large banks hold less capital. Under the proposed rules, called Basel II after the Swiss city where they were drafted, regulators further increased their reliance on the bank's risk assessments.

Sheila Bair, Chairman of the FDIC, warned as follows. She said the new rules ``come uncomfortably close to letting banks set their own capital requirements.''

Again, Ben Bernanke, this last year, has done a good job with the firehose, but now we need to rebuild the economic house for the prosperity of our families. The person to rebuild this house is not the person who sat at the table and made mistake after mistake after mistake over an 8-year period that led to this financial house of ours burning down, with catastrophic results for our families across this Nation. This is why I opposed Ben Bernanke's nomination to again be Chairman of the Fed when I was in the Banking Committee last month, and this is why I will oppose this nomination on the floor of this Senate.

Thank you very much.

I note the absence of a quorum.

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