Freeing Families from the Bad Bets of the Big Banks

By Senator Jeff Merkley (D-OR).

Congress is shifting gears. The paralysis on health care is ending with the President’s signature on the main bill and the Senate up/down vote on a list of House improvements occurring this afternoon. Now it’s time for the spotlight to shine on Wall Street reform.

And it’s high time. It’s a year and a half since reckless behavior – from defects in humble family mortgages to massive high-leveraged Wall Street gambling on mortgage-related instruments -- blew up our economy and cost Americans billions in taxpayer bailouts, lost jobs, foreclosed homes, and evaporated savings.

On Monday night, the Senate Banking Committee sent a financial reform bill out of committee. The financial rules in the bill need to be further strengthened, but I supported voting the bill out because I think we have a better chance of improving it on the floor of the Senate.

To restore accountability and oversight to Wall Street and put an end to taxpayer bailouts for the bad bets of the big banks, I believe that we need to do three key things:

Investment Gambling Out of Banks

The Dodd bill does have a “Volcker Rule” section, laying out a pathway for regulators to consider limitations on high-risk investing by banks. I don’t think this is strong enough. Senator Carl Levin and I introduced a bill two weeks ago to implement the “Volcker Rule” to separate high-risk, hedge fund-style investing from the common depositing and lending services that Americans use every day. Our bill lays out clear boundaries rather than leaving those boundaries up to regulators, and I am hoping we can get this clearer and stronger approach incorporated into the Dodd bill on the floor.

Consumer Protection

Consumer protection is incredibly important for two reasons.

First, the goal of our financial system should be to help families build strong financial foundations, improving quality of life and building opportunity for our children. We should ban tricks and traps designed to strip wealth from working families.

Second, good consumer protection greatly diminishes risk to our financial system. Elizabeth Warren, Professor of Law from Harvard and Chair of the Congressional Oversight Panel for TARP, has observed that simply banning prepayment penalties on subprime mortgages would have done a lot to prevent the current bubble and bust. She is right. These prepayment penalties were designed to lock families into sub-prime loans with exploding interest rates so that the loans could be sold for more on Wall Street. And because they were worth more, lenders started paying incentive payments to brokers to talk families into signing these loans, corrupting the most important financial transaction most families ever make.

So here is the good news: The Dodd bill passed out of committee contains my amendment for banning pre-payment penalties on sub-prime loans.

In addition, it features an improved plan for a Consumer Financial Protection Agency. The agency would set rules for the full-range of financial products and help prevent scams like prepayment penalties from threatening our working families in the first place.

The bad news is that the Dodd bill houses the CFPA in the Federal Reserve—the same Fed that has had an abysmal record on consumer protection. Some groups apparently want the CFPA in the Fed hoping that Wall Street aficionados will continue to water down consumer protection. I want it out of the Fed – for exactly the same reason.

To ensure that consumer protection doesn’t remain at the bottom of the priority list, I’ll continue to fight for an independent CFPA because it is absolutely imperative that we have an agency whose sole purpose is to protect our working families from financial tricks and traps.

Ban Big-Bank Bailouts

In my lifetime the taxpayers have bailed out powerful financial institutions twice: First with the S&L scandal of the 1980s and again with Big Bank Bust of 2008-2009.

The goal of this financial reform should be to make sure this doesn’t happen again. The pattern works like this: 1) Congress and regulators remove limits and accountability; 2) financial institutions take enormous risks with lots of short-term borrowing; 3) the bets go bad so they can’t repay all of that money they borrowed; 4) and the taxpayer is asked to clean up the mess because if we don’t repair the damage, our entire economic ship will go down.

Here’s how we can prevent this cycle from repeating: Get the high risk investing out of lending banks. Strengthen consumer protection. Make sure investment firms have adequate capital to back up their bets. Fix the broken bond rating system. Moreover, we should also consider a cap on size that ensures that when an investment house does fail, it doesn’t bring everything else down.

And finally, we need a form of bankruptcy for the really big financial institutions, funded by those firms themselves, so they can go down in an orderly way that doesn’t torpedo the “real” economy or require taxpayer bailouts.

Making the Economy Work for Main Street

The effort to reform our financial system won’t be easy. The big banks and their lobbyists have been fighting tooth and nail to weaken reform. Last year alone, the financial industry spent $382 million on lobbying and I don’t expect them to slow down one bit.

It is time to measure our prosperity not by the short-term profits of Wall Street, but by the enduring financial success of our families. We need a well-ordered financial system to accomplish that goal.

Comments

  • steve Novick (unverified)
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    Keep up the fight, Jeff!!!! Today's New York Times, by eh way, profiles the woman who should head the new, INDEPENDENT consumer protection agency.

    http://dealbook.blogs.nytimes.com/2010/03/24/behind-consumer-agency-idea-a-scourge-of-wall-st/

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    I had zero doubt that Jeff would be in the thick if it around consumer protection as it relates to banking. Bring up Elizabeth Warren's comments just made it a little better.

    I'm with Steve too. There is no one better qualified than Ms. Warren to head up an independent consumer protection agency; and no one shakier than Chris Dodd to get us there on the legislation.

    Only hoping that this legislation doesn't go the way of healthcare "reform". Still trying to master my gag reflex on that one.....

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    Shucks and Darn. forgot to close the bold thingy and have never had any luck fixing it in a follow up comment

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    Senator Merkley, on the issue of “too big to fail,” you say “we should also consider a cap on size that ensures that when an investment house does fail, it doesn’t bring everything else down.” I agree.

    When Berkeley Economic Professor (and blogger) Brad DeLong (see here) spoke at Reed College in November (2009), he “suggested $50 billion capitalization as the maximum size a financial firm should have, but stressed the difficulties of getting any such legislation through the US political system.” (see here). That sounded good to me then. Still does.

    What caps on size are being considered? What are their political prospects?

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    Jeff's guest column should be on the front page of the Oregonian. Well done Senator. Keep up the good fight.

    In your spare time please think about the $2.5 billion shortfall in the state budget for 2011-13. So many states are in the same situation. Can the states turn to the federal government again for assistance?

  • Tim McCafferty (unverified)
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    Here we are yet again. How often was it that we had to suffer through the smug arrogance of a smart suit, and polished demeanor on a CEO, after CEO, mouthpiece after mouthpeice telling us that Congress, or a bureaucrat would not be smart enough to qualified to regulate them.

    They had their way in all things. The lobbiest's wrote our energy policy, tax policy, financial policies, and not only wrote the rules but decided whom would regulate them. They did this with our complacent consent.

    So, here we are and these "Masters of the Universe" turn out to be just arrogant. We are left with the distruction of unfettered arrogant greed so profound as to threaten a world economy. I'm not exaggerating, and all whom read this know it. We find ourselves with only names of the worst of them to remember this by.

    Bernie Madoff, one man whom never actually proved his mettle was able to make money swindle the richest, and supposed smartest amoung us of $65 billion dollars. So, we should let them have their way with government, tax dollars, retirements without regulation? Seriously?

    They fix themselves the lowest tax burden in a century for our corporations, they became multi-national conglomerates presuming to be above the law of any nation. We've been reduced to accepting the parking of American wealth in foreign banks for tax avoidance.

    A company like Haliburton/KBR gorging themselves on tax payer dollars, while avoiding the income taxes of the US of A by becoming a foreign corporation of the Cayman Islands is what, patriotic? What a country!

    I think we are trying to put the cork back on the genie's bottle, and as these stories when playing out in reality, and for your entertainment, is sure to be very messy.

    I think we are fortunate to have Jeff Merkley in the Senate as he seems focused and aggressively persuing the restoration of appropriate banking regulation. To get the banks out of Wall Street Trading, and get the retirements of millions away from the insane risk they have been exposed to over the decades of this fiasco.

  • Jason (unverified)
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    "The paralysis on health care is ending with the President’s signature on the main bill and the Senate up/down vote on a list of House improvements occurring this afternoon."

    Who is he kidding? Healthcare will be the crux of what I predict will be one of the most cantankerous and bloody mid-term elections we've seen in decades.

  • Dutch (unverified)
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    PROGRESSIVES = SOCIALISTS = COMMUNISTS = LEFT-WING RADICALS = ANTI-CAPITALISTS = UNAMERICAN = Senator Jeff Merkley (D-OR).

  • Tim McCafferty (unverified)
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    Dutch had drank the coco at Glenn Beck's request.

    If Jeff Merkley finds himself in that equation, then count me in. I stand with Jeff.

    Use all the labels you like. Knock yourself out, please.

  • Dutch (unverified)
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    Tim,

    Who is Glenn Beck?

    Dutch

  • Dutch (unverified)
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    Tim,

    Check this out Commieblaster: http://www.commieblaster.com/

    Dutch

  • Walpurgis (unverified)
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    Hey, I was in favor of this bill, but when I saw Dutch's well-thought-out comments... he convinced me!

    Nah, seriously though, let's not forget an also-great and lesser-known provision of the bill: Uniform Credit Ratings!

    Big investment houses (and the rating agencies they're chummy with) like to stick it to states and municipalities by making them jump over higher financial hurdles for the same credit ratings as corporations. What does this mean to you? Billions of dollars a year (nationally) in extra interest payments for borrowing to build schools, roads, rail, etc.

    Since the provision found its way into the bill, Moody's announced it's going to preemptively voluntarily reset muni credit ratings. Let's hope that Fitch and S&P follow suit.

    I know this isn't the sexiest provision of the bill, but it's correcting a very stealthy scheme that's been ongoing for some time.

  • Jake Leander (unverified)
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    Dutch = troglodyte = Glenn Beck

  • Kurt Hagadakis (unverified)
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    Great. This is what progressives called for in September 2007. Didn't I write that first up, this morning?

    So, by all the recent logic that identified the blogs of persons who had attended a TEA party, and labeled the incoherent, babbling responses to those persons "TEA partiers", I guess "Dutch" is a "blueoregonite"!

    After all, as Carla points out, we know editors saw it and could have edited it... Perhaps your standards for free speech are higher. You only call on other people to edit their blogs.

  • Dutch (unverified)
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    Sorry Jake I just do not understand your comment. Who is this Glenn Beck?

    Beside I am not a progressive, so I can be a troglodyte = Andy Stern = SEIU = Cloward & Piven = Obama.

    Study the types of government: http://www.youtube.com/watch?v=N4r0VUybeXY

  • Dave Rosenfeld (unverified)
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    Right on, Senator Merkley!

  • JonB (unverified)
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    now one of the key things we need to do to improve the bill is to remove this crazy veto idea. the CFPA or CFPB, whatever it is, should have full rulemaking powers that aren't subject to a veto by a bunch of bank cronies.

    I would like to hear Senator Merkley say for the record he will fight to get rid of that element of the Dodd bill.

    I certainly comment Senator Merkley for the improvements he has already been able to get into the bill. Thank you!

  • Dutch (unverified)
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    Thanks Tim and Jake,

    I Goggled Glenn Beck, which is a great complement you have me! Look what I found; Stand Up - http://www.youtube.com/watch?v=83Het3H9iQI&feature=player_embedded

    This is great stuff http://glennbeckclips.com/ http://www.youtube.com/watch?v=qa_X7gyfLqU&feature=player_embedded I use Truth as my anvil and non-violence as my hammer!

    Dutch

  • JonB (unverified)
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    Dutch=Lambchop=Mr. Socko

  • Boats (unverified)
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    Dear Sen. Merkley:

    Who is going to save us all from your own fiscal recklessness?

    Thanks in advance for your non-response.

  • Kurt Hagadakis (unverified)
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    Posted by: Boats | Mar 26, 2010 8:02:40 AM

    Dear Sen. Merkley:

    Who is going to save us all from your own fiscal recklessness?

    Thanks in advance for your non-response.

    If right wingers aren't even going to pay attention to the data, as they are proven wrong, why should we listen? The stimulus package has been more successful than was hoped, is textbook best practices short-term economic management, and has ameliorated unemployment. When you're veering wildly out of control, having the feel of some control of the tiller is a nice first step.

    But you're still dittoheading the same lines you repeated the day it was passed.

    Totally with you about the non-response though. Fair enough, he's busy, so close the comments. Have to say other contributors have gotten much better about that. The heady feel of traction...

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