Ben Cardin - Senator for Maryland

THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT

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I rise today to congratulate my colleagues in the Senate and the House for completing the conference report to accompany H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

Over the past 30 years, our regulatory framework did not keep pace with financial innovation.  It was particularly impotent with regard to oversight of the so-called shadow banking system, which evolved in large part simply to avoid regulation

 

Decreased regulation led to irresponsible behavior by financiers, investors, lenders, and consumers.  Collectively, we failed to mitigate risk and we ignored established principles of finance - prudence, solvency, and accountability.   We can shift risk, but we can't make it magically disappear.   Bubbles do burst eventually.

 

Everyone played a part in the crisis.  Together, we suffer the consequences.  No man is an island; we are all connected.

 

Risky mortgage lending - practices including "no-doc" or "stated income" loans, no down payments, and subprime lending led to unprecedented foreclosures.

Consumers securing mortgages beyond their means and horrible predatory lending practices permeated our culture.

 

Even responsible consumers suffered at the hands of aggressive lenders with dubious intentions.

 

The mortgage lending system was seriously flawed.   America got hit by a tidal wave of foreclosures.   Declining home values affect everyone in the community.

 

And problems in mortgage lending became exacerbated when these bad mortgages were packaged into securities and sliced and diced and sold to investors with AAA credit ratings.

 

Careful underwriting went out the window because the loan originators sold the notes as fast as they could write them.

 

The bill the Senate is considering goes a long way to restore the order we need in the financial markets, improve oversight of the mortgage industry, and address the numerous other issues that led to the worst financial crisis since the Great Depression.   This bill holds Wall Street more accountable and provides the strongest consumer protections ever for American families and small businesses.

 

I know t here are partisan disagreements on some parts of this legislation and it was a challenge to get to this point, but the chairman and ranking member of the Banking Committee did an outstanding job on this bill and are to be commended for their effort.   This is a landmark bill, like Sarbanes-Oxley and the original Securities & Exchange Commission Act.   The lesson we had to learn (again) is that business - especially big business - cannot regulate itself adequately.   I think H.R. 4173 strikes the right balance in reigning in the financial services industry without being unduly burdensome.

 

I would like to take the time I have to review some of the provisions I worked on that have been included in the bill:

 

Deposit Insurance Reforms

 

Senators Enzi and Brownback joined me in proposing changes to the deposit insurance program.   The Independent Community Bankers of America (ICBA), the American Bankers Association (ABA), and the National Credit Union Association (NCUA) all supported our amendment - now found in Section 335 of the bill - to make the temporary increase in the federally-insured deposit limit from $100,000 to $250,000 a permanent increase.   An increase in the Federal Deposit Insurance Corporation (FDIC) and National Credit Union Share Insurance Fund (NCUSIF) limit is significant because deposit insurance has been the stabilizing force of our nation's banking system for 75 years.

 

By raising the limit permanently, we provide safe and secure depositories for small businesses and individuals alike.   FDIC insurance prevents bank runs and has been proven to increase public confidence in the system.   FDIC insurance limits are especially significant to community banks, which rely on deposits much more heavily than larger banks.   On average, smaller banks derive 85 to 90 percent of their funding from deposits.   Ensuring a stable funding source for community banks helps these institutions to continue providing crucially important capital to the small businesses whose growth is at the heart of our economic recovery.

 

Enhanced Supervision for Nonbank Financial Companies

 

During Senate consideration of the bill, I introduced an amendment with Senator Mikulski to ensure that mutual funds and their advisers are not inadvertently subjected to unworkable standards in the unlikely event the Financial Stability Oversight Council designates them as systemically risky.   In Section 115 of the bill, the new Council is given the flexibility to consider capital structure, riskiness, complexity, financial activities, size, and other factors when determining heightened regulatory standards.   This is important for addressing the unique characteristics of companies that are structured differently from banks and bank holding companies.  

 

Whistleblower Protections

 

I am gratified the House and Senate conferees saw fit to retain an amendment (S. Amdt. 3840) Senator Grassley and I offered to the bill to extend whistleblower protections to employees of Nationally Recognized Statistical Rating Organizations (NRSROs).   The provision is Section 922 (b) of the bill.

 

NRSROs are the companies (such as Moody's and Standard & Poor's) which issue

credit ratings that the U.S. Securities and Exchange Commission (SEC) permits other financial firms to use for certain regulatory purposes.   There are 10 NRSROs at present, including some privately-held firms.

 

The NRSROs played a large role - by overestimating the safety of residential mortgage-back securities (RMBS) and collateralized debt obligations (CDOs) - in creating the housing bubble and making it bigger.   Then, by making tardy but massive simultaneous downgrades of these securities, they contributed to the collapse of the subprime secondary market and the "fire sale" of assets, exacerbating the financial crisis.

 

A Permanent Subcommittee on Investigations (PSI) hearing made it quite clear that competitive pressures and inherent conflicts of interest affected the objectivity of the ratings issues by the NRSROs.  

 

Since NRSRO ratings are used for various regulatory purposes such as determining net capital requirements and the soundness of insurance company reserves, it makes sense to extend whistleblower protections to employees who might come across malfeasance at a credit rating agency.

 

There are many reasons for the massive failure of the NRSROs.   The Wall Street reform bill contains several provisions to improve SEC and Congressional oversight of the NRSROs and how they function.   Extending whistleblower status to the employees of these firms enhances the provisions already in the underlying bill.

 

Energy Security Through Transparency (ESTT)

 

My distinguished colleague Senator Lugar and I worked particularly hard on the "Energy Security Through Transparency" provision in this bill, which is Section 1504 - Disclosure of Payments by Resource Extraction Issuers.   I am especially grateful to Senator Leahy, who championed this provision in the conference committee.

 

The geography and nature of the oil, gas, and mining industry is such that companies often have to operate in countries that are autocratic, unstable, or both.   Investors need to know the full extent of a company's exposure when it operates in countries where it is subject to expropriation, political and social turmoil, and reputational risks.

In Nigeria, for example, American companies have had to take oil fields off-line because of rebel activity and instability in the Niger Delta.   Last year, Nigeria was producing almost a million barrels of oil less than it was able to produce because of conflict and instability.   With so much production off-line, American oil companies such as Chevron and Exxon have laid off workers and paid higher production costs because of added security.

 

This bipartisan amendment goes a long way to achieving transparency in this critical sector by requiring all foreign and domestic companies registered with the U.S. Securities & Exchange Commission (SEC) to include in their annual report to the SEC how much they pay each government for access to its oil, gas, and minerals.   This amendment is a critical part of the increased transparency and good governance that we are striving to achieve in the financial industry.

 

Our amendment is vitally important.   Transparency helps create more stable governments, which in turn allows U.S. companies to operate more freely - and on a level playing field - in markets that are otherwise too risky or unstable.

 

Let me point out three key results we expect from this provision:

 

1.       Enhancing U.S. Energy Security - the r eliability of oil and gas supplies is undermined by the instability caused when local populations do not receive the benefit of their resource exports.   Enhancing openness in revenue flows allows for greater public scrutiny of how revenues are used.   Increased transparency can help create more stable, democratic governments, as well as more reliable energy suppliers.  

 

2.       Strengthening Energy Markets - t he extractive industries are capital-intensive and dependent on long-term stability to generate favorable returns.   Leading energy companies recognize that more transparent investment climates are better for their bottom lines.  

 

3.       Helping to Alleviate Poverty - too many resource-rich countries that should be well-off are home to many of the world's poor instead.   This is a phenomenon known as the "resource curse."   Oil, gas reserves, and minerals don't automatically confer wealth on the people who live in countries where those resources are located.   Many resource-rich countries rank at the bottom of most measures of human development, making them a breeding ground for poverty and instability.   Revenue transparency will help the citizens of resource-rich countries hold their governments more accountable and ensure that their country's natural resource wealth is used wisely for the benefit of the entire nation and for future generations.

 

The wave of the future is transparency, and these principles of transparency have been endorsed by the G8, the International Monetary Fund (IMF), the World Bank, and a number of regional development banks.   It's clear to the financial leaders of the world that transparency in natural resource development is vital to holding the rulers in these countries accountable for the needs of their citizens and preventing them from simply building up their personal offshore bank accounts.   I'm proud to stand here today and say that the United States is now the leader in creating a new standard for revenue transparency in the extractive industries.

 

These are some of the provisions I worked on, but they are a small part of the overall bill, which is very strong.

 

Conclusion

 

Forty years ago, conservative economist Milton Friedman wrote a New York Times Magazine article entitled "The Social Responsibility of Business is to Increase its Profits."   In this article, quoting from his earlier book Capitalism and Freedom [1962], he concluded: "There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

 

Even this minimalist position suggests that markets need rules.   And yet we embarked on a 30-year path to deregulate financial services, to ease the rules, and remove the watchdogs.   We have learned a bitter lesson that markets aren't self-correcting - at least not without catastrophic consequences.   Millions of Americans have lost their jobs, their savings, their homes, and their retirement security.   Businesses have been wiped out.   We have gone from easy credit to no credit.

 

Now that the financial hurricane has wreaked its devastation, it's time to rebuild.

 

H.R. 4173 is part of that process.   The bill creates well-organized, commonsense regulatory structures to protect our Nation from another financial crisis.   Chairman Dodd and Chairman Frank have produced a bill that addresses the feasibility of our reliance on credit rating agencies, our appetite for systemic risk, and the need to limit the regulatory burden on our small institutions.   They have produced a bill that provides strong investor and consumer protections, encourages whistleblowers, reduces interchange fees for small businesses, and   places limits on institutions deemed "too-big-to-fail".   I know that Maryland banks and investment companies appreciate the attention paid in this bill to their concerns regarding bank and thrift oversight, systemic risk regulation, and the effects of the mortgage crisis.

 

While Members of Congress may not agree on every aspect of this bill, it is worthy of our support.   Indeed, given the stakes, it is imperative that we pass H.R. 4173.

Press Contact
Sue Walitsky: 202-224-4524

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