Prior to the vote on final passage of Senate Democrats’ financial reform bill, U.S. Senator Richard Shelby (R-Ala.), ranking Republican on the Banking, Housing, and Urban Affairs Committee, delivered closing remarks detailing his reasons for opposing the legislation. The full text of Shelby’s speech, as prepared and included in the record, is as follows:
“Mr. President, we are nearing the end of the Senate’s consideration of an historic piece of legislation. In response to the most significant financial crisis this country has seen in a generation, we have been engaged in a debate about the future of our financial system.
“Nearly two years ago, our economy came to a grinding halt. Credit markets shut down, business activity seized up, and world trade virtually collapsed. Millions of Americans lost their jobs and their homes, and they saw trillions in savings wiped out.
“Mr. President, as a witness to the near collapse of our financial system and the economic devastation it has wrought, I am fully aware of the fundamental importance of the legislative effort we are soon to complete.
“Because the financial system serves as the heart of our economy, this legislation will have a profound effect on the economic future of this country. The decisions we have made will have an impact on the lives of Americans for decades to come. Furthermore, the impact of this legislation will extend far beyond our shores.
“For these reasons, we must get this right.
“In the end, we will be judged by whether we have created a more stable, durable, and competitive financial system. That judgment will not be rendered by self-congratulatory press releases, but rather by the marketplace. And, the marketplace does not give credit for good intentions.
“So, knowing that millions of Americans suffered greatly because of the financial crisis and that generations of future Americans are relying upon us to get this right, how did we go about proceeding?
“Did we conduct a thorough review of every facet of the crisis? Did we look at the structure of our markets, examine the role of the regulators, and determine how the existing regulations drove certain market actions?
“Did we investigate the GSE’s, examine their capital and leverage, address the inherent weaknesses in their dual and conflicting objectives of maximizing returns for private owners while serving a public housing mission?
“Did we explain Bear Stearns and the causes of its collapse, along with the SEC regulatory program entrusted with its oversight? Did we collect and analyze data regarding the areas hardest hit by foreclosures?
“Did we determine whether there were any specific loan types, however characterized, that led to the foreclosures? Did we take time to learn lessons from the debacle of the AIG Financial Products division, or securities lending operations, or of overheated tri-party repo activity?
“Did we analyze how maturity transformation allowed the shadow banking system to, in effect, create money out of AAA rated securities? Did we analyze how activities in the shadow banking system led to an increased concentration of inherently runable activities?
“Did we analyze liquidity buffers at broker dealers?
“Did we wait for the Financial Crisis Inquiry Commission – a creation of Congress – to deliver lessons that it learned about the financial crisis, so as to inform our deliberations?
“Mr. President, the answer to all of these questions is: No. In my view, this represents a fundamental failure of this body to do its own due diligence before we even attempt such a significant undertaking. Millions of people lost their jobs, their homes, and trillions of dollars in wealth.
“The American people expect more, and certainly deserved more from us.
“Nonetheless, Mr. President, it certainly didn’t take much investigation to know that at the heart of the crisis were massive failures in our mortgage underwriting and securitization system. Therefore, the most incredulous shortcoming of this bill is the lack of any serious attention being paid to the Government Sponsored Enterprises, Fannie Mae and Freddie Mac.
“Yesterday, one of my colleagues on the other side of the aisle said that we are not dealing with the GSEs in this bill because it’s ‘too hard.’ I have to say, Mr. President, we certainly have come a long way – in the wrong direction.
“There was a time, not too long ago, when we did things because they ARE hard and because they are worth doing. What a difference a few decades makes.
“Mr. President, it is simply a failure of will that nothing is being done to reform the GSEs, or, at the very least, cap the allowable losses. This bill has twelve titles, totaling well over 1500 pages. It has been amended dozens of times.
“Yet, the bill does nothing to affect the ongoing, unlimited bailouts of Fannie Mae and Freddie Mac that, to date, have cost the American taxpayer $146 billion – one of the largest bailouts in history.
“Our distinguished Chairman, the Senator from Connecticut has expressed his outrage on a number of occasions that consumers paid around $40 billion in overdraft fees in 2009. The GSEs have now cost American taxpayers over three-and-a-half times that amount – and counting. To quote my old friend, and former Majority Leader, Bob Dole: ‘where’s the outrage?’
“Perhaps what is most disappointing about the lack of attention to Fannie and Freddie is the fact that there is no end in sight. Losses continue to mount and taxpayer exposure is unlimited. For example, in a recent SEC filing, Fannie Mae reported a need for another $8.5 billion from taxpayers.
“Hard-working Americans in Alabama and throughout the Nation will be asked to pony up again and again until we do something to stop it. When will it stop? According to my Democrat friends, not yet. The best they can do for the American people in this bill is a study! That, Mr. President, is simply incredible.
“The GSEs should have been our primary focus. Instead, they were ignored and further enabled by the Administration when they raised the cap on losses in December of last year.
“In an attempt to do something, Senators McCain, Gregg and I, joined by several of our Republican colleagues, introduced an amendment that would have ended these bailouts. However, just as they prevented action to rein in Fannie and Freddie in the past, Democrats once again embraced the status quo and blocked the road to GSE reform.
“Once our amendment failed, several of my Republican colleagues and I, led by Senator Crapo, decided that if we could not end these unlimited bailouts, we would try to cap the losses and provide for a true accounting of the costs. Our amendment would have capped these bailouts at $400 billion.
“Yet, even at nearly a half of a trillion dollars, the Democrats could not bring themselves to stop the hemorrhaging at Fannie and Freddie.
“How much will the GSEs have to lose before my Democrat friends will say enough? Will a half trillion dollars be enough? Will Democrats allow reform of Fannie and Freddie before it costs the taxpayers $1 trillion? How much is too much?
“Mr. President, the supporters of this bill have argued that it will stabilize our financial sector. I am not sure, however, it can stabilize anything when it does nothing to address the two largest destabilizing forces of the crisis, Fannie Mae and Freddie Mac.
“The fact that it is costing taxpayers nearly seven billion dollars every month should be enough to convince anyone that something needs to be done, and done now. Unfortunately, the Democrats, led by the President, are telling the American people that they are going to have to pony up and wait – again.
“Mr. President, the failure to address the GSEs is the most glaring omission in this legislation. There are, however, many things that are in this bill that raise similar concerns for the future of our economy.
“A major component of the bill deals with the creation of a massive new consumer bureaucracy, along with a separate Title 12 which is a liberal activist’s dream come true. Provisions in this title will compel financial institutions to provide free services to selected community groups.
“This is the exact same model that led us to the crisis in the first place, except for one distinct difference. The government bailout is built in from the beginning through the use of taxpayer guarantees.
“Mr. President, the American people are being misled.
“The authors of this bill are telling them that this legislation has been drafted to address the recent financial crisis and that it will ‘tame’ Wall Street. I am afraid that they are going to be disappointed.
“By the Democrats’ own admission, the most important facet of this legislation is the creation of a massive new consumer bureaucracy. It has been described by my Democrat friends as the ‘third rail’ of this bill.
“During our negotiations on the consumer bureaucracy, my Democrat friends were not focused on the mortgage market. Their sights were set on the rest of the economy.
“Mr. President, make no mistake, behind the veil of anti-Wall Street rhetoric is an unrelenting desire to manage every facet of commerce under the guise of consumer protection.
“They may be interested in protecting consumers, but they are more interested in managing them. All one has to do is read the academic writings of the authors of this new bureaucracy and it becomes very clear what their goals are.
“The Democrats’ new bureaucracy is an enormous reach across virtually every segment of our economy and a massive expansion of government influence in our daily financial lives.
“Mr. President, the people of America have been clear. They do not want a massively intrusive, continuously growing, and overly expansive government. They do not want a continuation of our unsustainable government promises, government spending, government deficits, and government debt.
“They saw what happened to Greece when it over-promised and overspent. And Americans do not want to leave a European fiscal legacy to their children.
“Yet, this bill does not listen to the American people. It promises massive government over-reach into even routine daily financial transactions of ordinary Americans and businesses, large and small.
“Why does the federal government need information on ‘pertinent characteristics’ – whatever that might mean – of persons covered by the new consumer bureaucracy?
“This new consumer bureaucracy will become massive, populated with thousands of bureaucrats who will create, within the new bureau, what Administration officials have referred to as a correct ‘culture’ of consumerism.
“The new consumer protection bureaucracy is funded by more than half-a-billion dollars per year, funded through an Argentina-style raid on our central bank.
“Of course, this opens the door for unlimited federal taxpayer funds for community organizers and groups like ACORN.
“Mr. President, I favor consumer protection. This new bureau, however, promises to be more abusive than protective. And by abuse, I mean that the bureau will lower the living standards of Americans.
“This new consumer bureaucracy is intended by its architects in the Treasury to begin the process of financial regulation with the intent of changing the behaviors of the American people.
“Mr. President, I have faith in the American people and their ability to make good choices. Granted, we do not always choose well. But, I believe that a poor choice freely made is far superior to a good choice made for me.
“I am afraid that the architects of this bill do not share this sentiment. Nor do they share my faith in the American people.
“They view us as victims in need of their guidance. They view us as ‘fallible’ and in need of a government bureaucrat to protect us from ourselves. It is a bit ironic, however, that the sponsors of this new bureaucracy seem to believe that regulators do not share the same fallibility of ordinary Americans. Tell that to the hundreds of Bernie Madoff victims.
“Mr. President, this is the world view that is driving this bill and it should concern every American. It seems, increasingly, that the view of Democrats toward virtually all of American business is a cynical view that Americans are out to take advantage of one another. I do not share that view either.
“My presumption is that Americans are honest and hard working, and history has shown that to be true.
“Mr. President, this bill promises to slow economic growth and kill jobs because it will place onerous regulatory burdens on businesses large and small.
“It will stifle innovation in consumer financial products and reduce small business activity. It will lead to reduced consumer credit and higher costs for available credit.
“Less credit at a higher price will dampen the very small-business engines of job creation so desperately needed right now, when unemployment hovers near double digits nationally and is at 11% in my home state of Alabama.
“I cannot support legislation that threatens business conditions and the potential for job creation, especially at a time when we are crawling out of a severe recession.
“Aside from onerous new consumer regulations, another avenue through which this bill will slow economic activity is in the treatment of derivatives.
“This bill will chase risky financial trades overseas and further into the unregulated shadow banking system, thereby magnifying, not reducing, unmonitored systemic risks.
“This bill demonstrates an imprudent disregard for the economic effects of a severely misguided approach to derivatives. Given the treatment of derivatives in this bill, end users – everyone from candy bar makers to beer brewers – who rely on these financial instruments to manage their risks will face massive increases in costs.
“Because risk management will now be significantly more expensive, we can expect lower business investment which, again, means fewer jobs.
“Why are we increasing costs to ordinary end users of derivatives, such as your home heating provider or makers of candy bars?
“There seems to be an irrational desire to make all financial products of certain types ‘standard’, whether that can or should be done. Once again, the attitude seems to be: we are government and we know best.
“That attitude will almost surely lead to massive concentrations of risks in central derivatives clearinghouses. It will also, ironically, chase derivatives activities overseas and into the unregulated shadow banking system.
“Mr. President, who will back up those clearinghouses at the end of the day should market stresses prove to be severe? The Federal government and the Federal Reserve will back them up, promising even more bailouts in the future – this time for clearinghouses.
“The approach to hedge fund oversight in this bill is symptomatic of an overall careless approach to assigning regulatory responsibility. Hedge funds have not been identified as a cause of the financial crisis, but hedge funds have been identified as a potential source of systemic risk.
“However, rather than subjecting hedge funds to a systemic risk oversight regime, hedge fund advisors will be subject to a registration regime and the investor-protection oriented requirements that go along with it.
“On its face, registration sounds reasonable.
“The SEC, however, is not a systemic risk regulator, and when it tried to be one through the Consolidated Supervised Entity program, it failed. Yet, now, we are doubling down on the SEC, the very agency that failed us to begin with.
“An unfortunate consequence of the treatment of hedge funds in the bill is that investors will likely treat SEC registration as an SEC seal of approval. Fraudulent hedge fund advisors will be virtually invited to use registration as a marketing tool.
“Investor protection is an important job for the SEC, but its resources are not endless, and the SEC has been notoriously unable to inspect advisors on a regular basis.
“Limited SEC resources should not be diverted from regulated public investment companies, such as mutual funds, to the monitoring of hedge fund advisors, as the reported bill proposes to do.
“If the SEC is spending its resources in this manner, it will not be long before investors that do not meet the accredited investor threshold start demanding to be allowed to invest in hedge funds.
“It will be hard to counter the argument that they should have access to such investments when the SEC is on the case.
“Mr. President, there are dozens of problems with the Lincoln-Dodd over-the-counter (OTC) derivatives title, which I would be more than happy to document. In the interest of brevity, however, I will point out just a few of the most egregious examples:
“The Lincoln-Dodd derivatives title does not provide regulators with access to the information they need to do their job.
“The title is unworkable. In a six-month marathon rule-making session, regulators are to make massive changes in a huge market without the usual notice-and-comment that allows for broad public input.
“Neither the SEC nor the CFTC has the staff that it needs to write the rules, let alone implement them. Companies, including Main Street businesses, all across the United States will also face operational, legal, and financial challenges as they strive to come into compliance with record keeping, reporting, capital, margin, clearing, and business conduct requirements.
“Key provisions in the Lincoln-Dodd derivatives title directly contradict key provisions in other titles and current law. Section 716, for example, would preclude a clearinghouse – even one that does not clear swaps – from receiving access to the discount window. This is directly contrary to Title 8, which empowers the Federal Reserve to grant discount window access to clearinghouses.
“The proposed regulatory framework in the Lincoln-Dodd derivatives title poses new risks to the system. For-profit clearinghouses will have an incentive to clear as many swaps as possible.
“If they do not properly assess and collect margin for risks associated with these products or do not have sufficient operational capacity, an unanticipated event in the market could topple a clearinghouse and send shock waves throughout the rest of the system.
“The Lincoln-Dodd derivatives title will benefit big dealers who can shift their swaps business overseas over small dealers who cannot.
“The so-called end user exemption contained in the Lincoln-Dodd derivatives title is illusory. Main Street businesses will not be able to continue hedging their business risks as they now do.
“Many end users will find themselves subject to clearing mandates, bank-like capital requirements, and extensive dealer-like business conduct requirements. As a result, Main Street businesses will face higher costs that will ultimately be borne by consumers.
“Consumers will be paying more for everything from electricity to candy bars. The Lincoln-Dodd derivatives title will work as an anti-stimulus plan that will pull resources out of the economy, hurt growth, and slow job creation. The derivatives title has real world consequences that cannot be wished away with a few technical fixes at the margins.
“Mr. President, those are but a few of nearly one hundred flaws in the derivatives title. Yet, there is another title – Title 8 – which has received less attention than derivatives, but is equally troublesome.
“Title 8 would give a stability Council broad power to identify financial market utilities, payment, clearing, or settlement activities that it deems to be now, or likely to become, systemically important. Those entities and activities would then be subject to risk regulation by the Federal Reserve Board of Governors.
“This title is another example of an inappropriate delegation of Congressional responsibility to decide who should be regulated and by which regulator. The extent of delegation is left uncomfortably open, as it depends on open-ended language in which key terms are undefined.
“The definition of ‘payment, clearing, and settlement activities,’ for example, include any ‘activity carried out by 1 or more financial institutions to facilitate the completion of financial transactions.’ With definitions like this one guiding the Council, it could decide to assign any aspect of the financial market to the Fed.
“Lack of regulatory accountability contributed to the recent financial crisis. Title 8 exacerbates the problem by allowing the Council to bring the Fed into significant sectors of the financial system as a back-up regulator. If a problem arises, both the Fed and the relevant supervisory agency will have someone else to blame. And both will be able to blame Congress for its careless delegation of its own responsibilities.
“Yet another troublesome title is Title 9, which could appropriately be labeled the ‘Grab-Bag’ title, since it is a grab-bag of items on the years-old wish lists of special-interest groups.
“These items are not designed to respond to problems identified in the last crisis or likely in any crisis, and have not been considered in hearings.
“The grab bag includes puzzling items, like a provision that would create a redundant office at the SEC and another provision that requires disclosure of the ratio of the median employee’s compensation to the chief executive officer's compensation.
“It looks to me like the way is being paved to achieve so-called ‘social justice’ in income distribution. This is another disturbing example of the government getting its nose under the private sector’s tent.
“The grab bag also includes anti-investor provisions. The proxy access provision, for example, enables special interest groups to push their agendas at the expense of the rest of the shareholders.
“It also includes a surprising self-funding provision that will give the SEC complete control over the size and allocation of its budget. Let me repeat that, Mr. President, the Democrats are going to give the SEC virtual budget autonomy from Congressional oversight after the SEC dropped the ball in the Madoff and Stanford frauds, and in the wake of the SEC's pornography scandal.
“When the ‘grab bag’ title does attempt to address issues related to the crisis, it takes the wrong approach.
“With respect to credit rating agencies, for example, the effort to pull ratings out of the statutes and regulations is lost in a complicated new regulatory framework that only the big credit rating agencies will be able to navigate. This will stifle competition – the very thing we need to be encouraging. The failure of the ratings agencies was central to the crisis and this bill represents half-measures at best.
“The heightened liability standards, corporate governance requirements, and qualification standards for credit rating analysts will lull investors into greater apathy and discourage competition.
“With respect to securitization, rather than focus on the root cause of the housing bubble by establishing clear, tough, and fair underwriting standards, this title imposes a five percent risk-retention requirement across-the-board for securitizations.
“In combination with changes in accounting and bank capital rules, a risk retention requirement could force an entire securitization to be retained on a bank’s balance sheet for accounting and capital purposes. Securitization activity would then become economically unviable.
“This approach to securitization is a risky gamble to take at a time when our securitization markets are just starting to recover and show some signs of life.
“The whistleblower provisions are well-intentioned attempts to address the SEC's failure during the Madoff scandal.
“However, the guaranteed massive minimum payouts and limited SEC flexibility ensure that a line of claimants will form at the SEC's door hoping for some of the hundreds of millions in the whistleblower pot. The SEC will spend limited resources sorting through these claims that would have been better spent bringing enforcement cases.
“Title 9 devotes 250 pages to provisions that either have nothing to do with the crisis or purport to provide solutions that will not actually solve problems but, rather, promise to give rise to many new problems.
“Mr. President, this bill has been largely outsourced to Treasury officials and to regulators who have written key provisions to bolster their own power and authority.
“This bill reflects a series of deals made, not by lobbyists, but by the executive branch along with the existing financial regulators who failed to do their jobs during the last crisis.
“In negotiating key features of the bill, delays were the norm as responses to my offers or inquiries had to pass through a long and winding road of approval from Treasury, the Fed, the FDIC and on and on.
“Unfortunately, we have outsourced the writing of this legislation to the Fed, Treasury, OCC, SEC, CFTC, among other government bureaucracies.
“Let me give you an example, Mr. President. Consider the derivatives title in the bill. This title was largely authored by the CFTC. We see this manifested in numerous provisions that give the CFTC broad new authority, sometimes to the exclusion of other regulators.
“The CFTC used this bill as an opportunity to grab jurisdiction from the SEC, which was purposely excluded from the negotiating room during critical meetings.
“As a result, the derivatives title gives the CFTC regulatory authority over a wide swath of Wall Street and Main Street companies.
“The CFTC, in addition to its traditional role of overseeing the commodity futures markets, will be charged with protecting retail investors, assessing systemic risk, imposing capital requirements on manufacturing companies, regulating banks, and assessing the regulatory capability of the Securities and Exchange Commission.
“This is the sort of result you get when you hand the legislative pen to the regulators.
“My Democrat colleagues like to talk about the influence of Wall Street lobbyists, but the real influence in this process has been exerted by the bureaucracies. Mr. President, I thought that one of the main objectives of this legislation was to plug regulatory gaps and streamline our financial regulatory structure?
“We still have the Fed; the FDIC; the SEC; the CFTC; and the OCC. We have also added some new letters to the alphabet soup, as with the CFPB and the OFR.
“We have also seen a complete about face with respect to the Federal Reserve.
“The process seemed to have begun with a commitment to rein in their bailout powers and take away their consumer protection authority, given the Fed’s failures.
“By contrast, this legislation actually expands the Fed’s powers.
“Mr. President, Americans see developments in Europe, where a monetary union faces a severe test and market participants are running away from the debts of profligate governments. Americans are increasingly worried that the out-of-control spending here in the U.S. and the massive expansion of government will very soon test American fiscal viability.
“An appropriate response would be to rein in the costs and breadth of runaway government spending and bureaucratic expansion. The wrong response would be the financial regulation bill before us.
“Mr. President, from legislative process to the final bill language, this bill is flawed. This bill promises more government, more costs, slower economic growth, and fewer jobs. It threatens privacy rights and fails to address crucial elements of the recent crisis. I urge my colleagues to oppose final passage of this bill.”