Mortgage Lending

Floor Speech

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Mr. MERKLEY. Madam President, this morning I met a friend who is visiting, and he told me he was planning to go out and visit the FDR Memorial. I thought maybe the entire membership of the Senate should go out and visit the FDR Memorial.

Essentially, FDR did three things in response to the Great Depression: one was to create jobs, a second was to fix housing, and a third was to repair the banking system. All three were essential. We have been immersed in all three components now, responding to the great recession we experienced and the great explosion of the economy in 2008 that we are dealing with every day.

What did Roosevelt do in response to the banking challenge? Two main things: First, he made sure American families could safely put their money back into banks. That is the origination of the deposit insurance. Second, President Roosevelt made sure banks didn't engage in high-risk speculation that would put the banks and the American economy at risk because he understood the critical role of banks in lending to families and lending to small businesses, and the last thing one wants in a recession is to have investment houses making speculative investments go down and then take the banks down with them. So you compromise the lending to small businesses and to families at the same time that the investments go awry. That is why he separated those activities--highly risky investments separate from the lending that would continue to fuel our economy.

Well, because of these regulations in the Roosevelt administration, the wages of American families grew steadily right alongside the productivity of our economy. Our economy was thriving and our middle class was thriving. Indeed, we should judge the success of our economy not by the gross domestic product, not by the size of the bonuses in boardrooms on Wall Street; we should judge the success of our economy by the living wages paid to working families and whether those wages are keeping pace with productivity our workers are bringing to the economy. By that standard, we are not doing well.

By the 1980s and 1990s, Wall Street convinced Washington that we don't need those Roosevelt-era regulations anymore, we don't need those walls that protect lending from high-risk investing. Instead of having oversight and accountability, we should just let Wall Street make their own rules. This is a little bit like a traffic system in which we say we are kind of tired of those traffic lights. We don't really like those stop signs and lane markers. It is a waste of paint. We can do without them. For a short time, everybody can just kind of speed down the road and not worry about any rules to abide by until shortly thereafter when everyone crashes.

That is exactly what happened in our financial system over this last decade. The SEC took down the leverage limits. The five largest investment banks were told to set their leverage wherever they wanted. We had Bear Stearns in a single year going from leverage of 21 to 41. So for every dollar they were investing, they were betting $20 by the start of the year, but by the end of the year, as the SEC granted them permission, for every dollar they held, they were betting $40. They make a tremendous amount of money on the way up when they can bet $40 for every dollar they hold, but they crash in a spectacular fashion when the market goes down in that situation.

Then, again, we had the Fed. The Fed puts monetary policy in the penthouse and safety and soundness on the upper floors. But what do they do with their responsibility for consumer protection? They put it down in the basement and they seal the doors. They let no daylight in and they let little communication occur between the consumer protection side and the safety and soundness and the monetary side.

They did absolutely nothing when a new product was invented in 2003, a new form of subprime that had a 2-year teaser rate, a prepayment penalty that locked the family into that loan and prevented the family from escaping from that loan, and that had exploding interest rates that would destroy the family. The Fed did absolutely nothing. Then Wall Street said: You know what. These loans are worth so much because we can pull so much money out of families with these loans, so we are going to pay a bonus to a broker if the broker ties a family into one of these loans. And those steering payments resulted in tons of families who qualified for prime mortgages being steered into subprime mortgages. By a Wall Street Journal study, 60 percent of families who were in subprime mortgages qualified for prime mortgages, but their broker persuaded them that the best mortgage was one that was not in their best interests.

Then we had the rating agencies. The rating agencies had magic all their own. They didn't develop their own models to evaluate BBB bonds that were mixed and sliced and diced into new packages of bonds. No. They took their models from Wall Street, and based on those models they said: If you take BBB bonds from over here and BBB bonds from over here and you mix them together, we will rate 80 percent of the resulting bonds as AAA. Well, that is a money-making machine, but it also undermined one of the key instruments the financial world depends on; that is, accurate credit ratings.

Then we had lots of tricks and traps buried in the small print, stripping families of their capital. Things were happening in the credit card industry such as sitting on a person's payment for 10 days even though it had arrived on time, sitting on it for 10 days and then posting it as late and charging a late fee. As a constituent from Salem said to me, where is the fairness in that? American citizens are saying time and time again, when clauses written in the fine print defy fundamental fairness, where is the fairness in this?

So at every level we had a breakdown in our financial system. We know what happened. The deck was stacked against the ordinary citizen. It turned a banking system that is designed to help families, strengthen families, strengthen small businesses into a casino for Wall Street's big bets. When those bets went bad, the taxpayers--you and I--were left holding the bag.

Now, as the effort to restore fair rules of the road to Wall Street heats up here on the floor of the Senate, there are those on Wall Street and those on this floor who want to block reform. They don't want to fix any of these things I have been describing. Indeed, recently the minority leader met with more than two dozen Wall Street executives and hedge fund managers and urged them to elect members of his party who would stop these reforms that serve the American people. Then he came back down here and he whipped out his talking points from Frank Luntz and he said: This bill won't work. Why did he say that? Because he doesn't want a bill to reform Wall Street and fix these rules and restore prosperity to our economy. He wants to take this election year instead and serve a powerful constituency that doesn't want any rules restored to the road.

Folks, that is just wrong. We have a responsibility. Just as our ancestors not so long ago fixed the problems of the Great Depression, fixed the banking system, and restored a banking system that would take us forward in an orderly fashion and allow business to thrive in America, to be the envy of the world in America, we have the responsibility to do that today.

There are some who have said: Well, we want a free market. Let me tell my colleagues, a free market thrives with rules that allow orderly conduct because those rules create the integrity that gives people the faith to utilize those markets. We saw with the stock market reforms that people believe stocks are traded fairly in America, and therefore they are willing to invest and, by investing, power up the companies that are issuing public stock. It works when there is integrity in the market. Foreign investors will come and put their dollars in America if they believe there is integrity in our system.

That is what these rules are about--rules that create a free market with integrity so that it can power up the economy of America. That is what this is about. We are not talking about what some of my colleagues across the aisle are talking about: preserving the status quo, which means freedom from oversight, freedom from accountability, freedom to translate BBB bonds and AAA bonds with a magic evaluation system; free to blow up the economy, which destroyed families' savings, families' retirements, families' jobs, often families' health care, and pretty much tore the foundation out from under the American working family.

This bill creates a consumer financial agency that will say: No more trips and traps on basic financial products.

We need to have that mission no longer locked in the basement. We need to have that mission in an agency that says we will not allow those tricks and traps and scams that have been perpetuated over the last decade, so that Americans will not say: Where is the fairness in that? Instead, they will say: Thank goodness these contracts are fair and serving our families and our economy.

The PRESIDING OFFICER (Mr. Udall of New Mexico). The Senator has spoken for 10 minutes.

Mr. MERKLEY. Is that my full allocation of time?

The PRESIDING OFFICER. Yes.

Mr. MERKLEY. Thank you. I will close by saying this bill must get done because we have a responsibility to restore the foundations for our Nation.

I yield the floor.

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