Financial Reform Bill

Ms. KAPTUR. Madam Speaker, tonight I want to devote extra time to talking about the proposed financial reform bill and the conference committee report that is being worked on this moment that is likely to come before the House later this week. And I wanted to put the discussion tonight into a broader context in hopes that my colleagues will listen and consider the bill to be brought before us.

Let me begin with this statement: bankers hold a very privileged position in our society because in fact they hold the awesome power to create money. Their use of that power can advance our society, or their use of that power can harm us greatly. We are living through a period of great harm. And so we have to ask, When bankers are given power, how much power do we give them and what do we give them power to do?

As we are discussing this this evening, the Financial Services Committee is meeting to take out a proposal that had been a part of the bill that would tax the banks that have done so much harm to us as a society. It is another example of too much power to too few, especially the few institutions that have hurt our entire Nation. So I rise tonight to offer comments on the so-called regulatory reform conference report, and I want to outline some principles that I hope Members and the American people will consider as this bill is debated later in the week.

One of the key principles that we should seek in trying to correct what is wrong is the type of power that we give to these institutions to create money. Will in fact the power to create money be more broadly distributed across our society, or will the bill concentrate power in the hands of those few banks that have too much power? Will in fact the power to create money and credit accumulation be redistributed to Main Street--to where all of us live--or remain closely held by about six Wall Street and Charlotte-based megabanks? And here are their names: CitiGroup, Goldman Sachs, HSBC, Wells Fargo, Bank of America, Morgan Stanley.

They have a whole lot more power than the people in my community in the financial realm. And why is that? Because chances are, if you talk to your relatives and neighbors, you will find that over half of the money that they are spending to pay for their mortgage or pay for their car loan doesn't go to a local financial institution in the town in which you live. It goes to a distant institution somewhere else that sucks money, sucks wealth, sucks power away from your community and places it somewhere else.

So this is a really threshold question. What does the bill do with the power to create money? It's shocking, but today, two-thirds of the financial assets of this country are held by those six institutions. Before the financial crisis of 2008, they only held a third of the power. Now they have two-thirds of the power. I say that's way too much. That's not a competitive financial system. That's what economists would call an oligopoly, very few having very much and taking it away from the rest of us. So this issue of banking power is critical, and Members, as they read this very long conference report, ought to say, To whom does this devolve power?

Another threshold question is whether the proposed bill will encourage prudent lending or will it allow greater moral hazard by the bill itself pretending to be reform but actually offering the easy money creation of a recent history led by the big banks. What do I mean by that? It used to be when America had a strong middle class, we had a financial system that allowed credit, the creation of money, to be broadly distributed across our country. Probably, to the people in the gallery and people listening on their televisions, you actually knew bankers in your community that started banks, and you'd have several--dozens of banks locally and there was real credit competition. We've seen all that change as the banks became eaten up by bigger banks and bigger banks yet, and States lost money center banks, and power gravitated to Wall Street and Charlotte, North Carolina, banks.

But in the days when we had really competitive credit in this country, there was a law of our land that said to banks, When you get $1 in deposit, you can't lend more than $10. You can't blow money up more than 10 times because, you know what? That's imprudent, and you might make a mistake and, therefore, you have to have very careful underwriting and very careful servicing of those loans. That's all changed.

One of the reasons we're in this financial mess is the Wall Street institutions took a dollar and they blew it up into $100 where there was no underlying value, there was no way that loan could perform. It would not rise in value if it was a home. Or if it were a commercial loan, it could never produce 100 times more than it was worth at the beginning. So this issue of prudent lending versus moral hazard is an important question in the bill that will be before us.

Thirdly, we have to ask about conflicts of interest in the bill between the credit rating agencies, like Moody's and Standard & Poor's and the banks that employ them to rate them. Will there be a tight fence line that's laid between them or will it simply be finessed? So this issue of ``Is conflict of interest really addressed in the bill and shuts the door tight between the rating agencies and the banks, is it sufficient?'' Members have to weigh whether it is or not.

Next I would like to turn to derivatives. This is where Wall Street really created money where there's no underlying value. And you can check this in your own community, because now a majority of mortgage loans in this country are actually--the home is not worth as much as the loan is valued at. They call that underwater. They sell overvalued real estate through the derivative instrument and through the way that the loan was leveraged through the bonding of the security. We're all paying the price for this now as home values start to go down, and this year, another 2.4 million Americans appear to be on the verge of losing their homes.

So the question becomes: What kind of margin calls will there be in the bill--capital margin requirements will there be in the bill on derivatives, and how will those derivatives be traded? Will all of them be on exchanges? Will they all be transparent and electronic? What will be exempted? And who will own the exchanges?

From what I hear, it is the same big banks. They're not going to put an exchange in Toledo, Ohio, the largest city that I represent. And this is a big concern because, in fact, if what I've heard, that the capital margins in the bill are 15 to 1, that's a 150 percent increase over what we formally had as the prudent lending rules that existed in banks when we had a solid middle class and a banking system that was functioning for all the people. When it was $1, you could get $1 in your bank and you could loan $10. Now we're seeing the capital margins on derivatives are 1 to 15. Very interesting.

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