Mr. HENSARLING. Mr. Speaker, pursuant to House Resolution 391, I call up the bill (H.R 992) to amend provisions in section 716 of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to Federal assistance for swaps entities, and ask for its immediate consideration.
The Clerk read the title of the bill.
Mr. HENSARLING. Mr. Speaker, I ask unanimous consent that all Members may have 5 legislative days within which to revise and extend their remarks and include extraneous material in the Record on H.R. 992, currently under consideration.
Mr. HENSARLING. Mr. Speaker, I yield myself 4 minutes.
Mr. Speaker, America's economy remains stuck in the slowest, weakest, nonrecovery recovery of modern times. Millions of our fellow countrymen remain unemployed, underemployed. Many because of ObamaCare just had their hours cut, and millions lie awake at night wondering how they will make ends meet.
Regrettably, those who create jobs in America for our constituents are drowning in a sea of red tape which is preventing them from hiring new workers. I still vividly remember the day when one of my constituents in east Texas came to me as he shut down his small business due to red tape and he said, Congressman, it got to the point where I just thought my government didn't want me to succeed.
Mr. Speaker, today we have an opportunity to ensure that businesses succeed in America, succeed in hiring new workers. Today, just like yesterday, Mr. Speaker, Republicans and Democrats can again pass bipartisan legislation that will help grow our economy. This legislation is H.R. 992, and I commend the bipartisan group of members who introduced the bill: Mr. Hultgren, Mr. Himes, Mr. Hudson, and Mr. Maloney.
As chairman of the Financial Services Committee, I also want to thank the members of the committee who joined together and approved this bill on an overwhelmingly bipartisan vote of 53-6. Mr. Speaker, the vote was 53-6. This bipartisan bill will relieve manufacturers, farmers, ranchers, and Main Street businesses of unintended consequences of one section of the Dodd-Frank Act.
Many Americans may not realize it, but farmers, ranchers, manufacturers, and other employees use a financial product called a derivative to manage risk and protect themselves from extreme fluctuations in the price of things like fuel, fertilizer, and commodities.
For example, a company like John Deere will do an interest rate swap as they finance a tractor for a farmer in east Texas in my district, and that derivative is directly linked to the cost of that tractor for my constituent.
Companies like Southwest Airlines who operate in my hometown of Dallas, Texas, they will use derivatives to lock in cheaper fuel prices when the price of crude oil is on the rise. This keeps the cost of flying more affordable for customers, like the grandmother in Mesquite, Texas, who travels to visit her grandchildren in Kansas City.
Perhaps a farmers co-op in Nebraska will use derivatives to finance fixed-price diesel for truckers who haul cattle. Perhaps a hospital in Los Angeles may use derivatives to hedge against [Page: H6917]
the rising interest rates when financing a big investment like more beds or new lifesaving technology.
Although not one single patient, not one single farmer, not one single grandmother, not one single trucker caused the financial crisis, they were all swept into section 716 of Dodd-Frank.
Section 716 requires financial institutions to push out almost all of their derivatives business into separate entities. This not only increases transaction costs, which are ultimately paid by the consumers, it also makes our financial system less secure by forcing swap trading out of regulated institutions.
In fact, Mr. Speaker, Federal Reserve Chairman Ben Bernanke said section 716 ``would make the U.S. financial system less resilient, weaken our financial stability, and make our economy more susceptible to systemic risk.''
To those who are loath to ever amend Dodd-Frank, no less of an authority than Barney Frank himself, former chairman of the committee, said: ``It addresses the valid criticisms of section 716 without weakening the financial reform laws, important derivative safeguards or prohibitions on bank proprietary trading.''
So again, Mr. Speaker, no law is perfect. We would be derelict in our duty if we didn't put the American people back to work and pass this law.
I reserve the balance of my time.
Mr. PETERSON. I thank the gentlelady.
I rise in strong opposition to H.R. 992, commonly known as the swap push-out bill. This bill would effectively gut important financial reforms and put taxpayers potentially on the hook for big banks' risky behavior.
In 2008, I voted against the TARP because I didn't think the Federal Government should be bailing out the mess both regular banks and so-called investment banks like Goldman Sachs got themselves into with derivatives trading.
Section 716 of the Dodd-Frank law ensures that, hopefully, we won't find ourselves in that situation again. The provision is a modest measure designed to prevent the Federal Government from bailing out or subsidizing bank activity that is not related to the business of banking.
Originally, section 716, a Senate provision, would have forced banks to spin all of their swap activity into a separate affiliate. The House version of Dodd-Frank had no such requirement.
In a compromise, the final version of section 716 allows the banks to hold on to swaps for hedging purposes and swaps related to the business of banking, primarily, interest rate swaps and foreign exchange swaps.
Under Dodd-Frank, banks are required to move commodity swaps, including energy and agriculture swaps, non-cleared, non-investment grade credit default swaps, credit default swaps on asset-backed securities, and equity swaps to a separate affiliate. This represents barely 10 percent of the world of the swap market. So banks can keep 90 percent in the bank.
Apparently this isn't good enough for some of these big banks, which is why we are here today with H.R. 992, trying to gut the Dodd-Frank provisions and keep playing in 99 percent of the swap market, which is pretty much the status quo.
H.R. 992 also makes it easier for banks to hide commodity manipulation from regulators. In recent months, we have seen JPMorgan charged with settling cases of alleged energy market manipulation and the start of an investigation of Goldman Sachs for aluminum manipulation.
The Federal Reserve is even reconsidering its decision letting banks get involved with owning commodities. Until the big banks are held accountable for the activities in the commodity swaps market, I am reluctant to repeal limits Congress already has put in place.
Since the passage of Dodd-Frank, it is clear that Wall Street has not learned its lesson. The loss experienced by JPMorgan through derivatives trading in the ``London Whale'' incident is proof of that. At some point, another bank is going to find itself in similar trouble and run to the government with its hands out for assistance.
Frankly, I think the American people are sick and tired of the banks asking for taxpayer help when they get in trouble from risky trading activities.
In the past, I have joined our Democratic Agriculture Committee members in support of legislation to change Dodd-Frank, and I have supported those efforts because those bills reaffirmed what Congress intended with the original law, like protecting derivatives end-users.
Well, these end-users also share my concerns. The Commodity Markets Oversight Coalition, representing commodity-dependent industries, businesses and end-users that rely on functional, transparent and competitive commodity derivative markets as a hedging and price discovery tool, they also oppose H.R. 992.
H.R. 992 repeals a key, if modest, reform component of Dodd-Frank. My colleagues are certainly free to vote as they wish, but I urge them to be careful because people will remember this vote.
I urge my colleagues, if they are smart, to oppose H.R. 992 so we don't put our taxpayer dollars at risk for bank swap activities that are not related to their banking business.
Mr. HULTGREN. Mr. Speaker, I come to the floor today with tremendous pride, not because the bill we are debating is my own, but because we have the chance to help Main Street businesses and roll back one of the unintended consequences of Dodd-Frank.
From its first addition, the Lincoln amendment, also called the swaps push-out or spin-off provision, has been hotly debated. Section 716 of Dodd-Frank initially prohibited all swaps activities. However, the conference process yielded some measure of compromise by exempting foreign exchange and interest rate swaps back in.
By doing this, the conferees acknowledged that swaps are not inherently disruptive. In fact, swaps are a prudent and necessary activity for many businesses.
When oil prices spike or corn prices plummet, farmers and manufacturers rely on financial products like swaps to weather the uncertainty. Many of these businesses use banks as counterparties, where they have longstanding relationships with trusted institutions. Limiting banks' ability to serve their customers will cost these customers more as they are forced to find new, less stable partners.
Section 716, as it stands now, would force certain swaps out of Federal, prudential regulators' supervision and push them into affiliated entities that are not subject to the same oversight and regulation. This is why some of the loudest critics of the push-out provision have been Federal regulators, like the Federal Reserve Chairman Bernanke and Paul Volcker.
I know Ranking Member Waters and many members of the House from both sides of the aisle share these concerns. Moving swaps out of banks, while intended to reduce risk, may actually increase it.
This is one of the reasons I introduced H.R. 992. The Swaps Regulatory Improvement Act leaves the most opaque swaps spun-off to affiliates, the kind of swaps that exacerbated the 2008 crisis. Those are still forced out.
However, banks will be allowed to provide other types of swap contracts to their customers, such as equity, credit, and commodity swaps, which are very important to my home State, Illinois.
All of these activities are subject to the new swaps
regime created by title VII, including reporting and registration requirements, clearing, margin, and business conduct standards. These activities would also be subject to a finalized Volcker Rule, meaning they would generally be for legitimate hedging purposes or client facing, not proprietary.
In the committee report from the last Congress, former Chairman Barney Frank, Ranking Member Waters, and other minority members of the committee noted that this bill ``addresses [Page: H6918]
the valid criticisms of section 716 without weakening the financial reform law's important derivative safeguards or prohibitions on bank proprietary trading.''
This is every bit as true of the bill we are considering today as it was in the last Congress. H.R. 992 addresses the valid criticisms of section 716, ``concerns ..... about whether pushing ..... swaps out of banks is the best way to mitigate against future system failure,'' to quote Ranking Member Waters.
This bill strengthens regulatory oversight of these products. H.R. 992 does not weaken title VII's derivatives safeguards or the prohibition of bank proprietary trading.
H.R. 992 will keep costs lower for Main Street businesses that use swaps to hedge risks. H.R. 992 will help prevent derivatives market displacement and help promote U.S. competitiveness.
This bill addresses nonpartisan concerns with a bipartisan solution. I thank my Democratic colleagues for being willing to consider targeted fixes to Dodd-Frank. We can find common ground on financial regulation. We can work together for the American people, and we can fix Dodd-Frank without dismantling its important accomplishments.
So I ask my colleagues to support this bill. Talk to your hospitals, bankers, and farmers. They will tell you that swaps are an important, common business tool. Forcing higher costs on these transactions will only stifle job creation and economic growth.
H.R. 992 is a sound bill and strikes, in the words of Ranking Member Waters, the ``right balance.''
Ms. WATERS. Mr. Speaker, I yield myself such time as I may consume.
The financial crisis of 2008 wreaked untold havoc on the U.S. economy. This disaster, which was intensified by the use of derivatives, set back hardworking Americans for generations. At the same time, it bailed out many of the Nation's largest banks.
The Dodd-Frank Act sought to put our financial markets back together by, for example, creating comprehensive oversight and reforms for derivatives markets, as well as prohibitions on banks betting with taxpayers' resources.
H.R. 992 would undo some of these reforms before our regulators, Wall Street's cops, have a chance to finish them, especially the Volcker Rule. Congress passed the Volcker Rule to stop banks from using customer deposits, backed by the taxpayer, for trades intended to only benefit the bank and not its customers. The rule, when finalized, will define legitimate bank activities like hedging and market making, but prevent other behavior that would leave the taxpayer and the economy hurting.
In the same vein, Congress passed the Lincoln amendment, the provision that H.R. 992 would gut, to insulate the taxpayer by ``pushing out'' certain derivatives from the insured bank, while also making broad exceptions for swaps that bank customers overwhelmingly use.
The Bipartisan Policy Center also recognized a connection between the Volcker Rule and the Lincoln amendment, noting that a ``well-executed Volcker Rule would simultaneously accomplish the intended goal of the Lincoln amendment.''
In case America forget, JPMorgan reminded all of us of the importance of setting limits on bank activity. In 2012, 4 years after the crisis, JPMorgan Chase's ``London Whale'' caused the bank to lose more than $6 billion in a few months. What were purportedly hedges using complicated derivatives transactions were later transformed by the bank's focus on profit into what would likely be banned under Volcker.
The sense of urgency to separating the taxpayer-supported bank from the investment bank is shared across the aisle. Let me just tell you, in March of this year, Representative Jeb Hensarling said that, ``Certainly, we have to do a better job ring-fencing, fire-walling, whatever metaphor you want to use, between an insured depository institution and a noninsured investment bank.''
Yet, 3 years after the passage of Dodd-Frank, and 5 years after the financial crisis, we still do not have a ban on the very behavior that hurt our economy.
Instead, H.R. 992 eliminates one taxpayer protection, the Lincoln amendment, by now allowing banks to engage in 99 percent of the swaps market without the taxpayer knowing how robust the monitoring and oversight of such activities will be.
Mr. Speaker, H.R. 992 is a step backward in repairing our economy. This view is shared by the Commodity Markets Oversight Coalition, a nonpartisan alliance of American industries, businesses, consumers, and derivatives users.
Similarly, the White House, the AFL-CIO, CalPERS, the Teamsters, Public Citizen, and Americans for Financial Reform all strongly oppose H.R. 992.
Former Republican chairman of the FDIC, Sheila Bair, who strongly defended taxpayers during the crisis, noted immediately after the Financial Services Committee passed H.R. 992, ``Repeal of section 716 moves in the wrong direction. In an area as complex as this, I wish, I just wish Congress would at least wait for the regulators.''
I do too. Vote ``no'' on H.R. 992.
Mr. Speaker, I reserve the balance of my time.
Mr. CRENSHAW. I thank the gentleman for yielding.
Mr. Speaker, let me just simply say, as chairman of the Appropriations Subcommittee on Financial Services and General Government, my subcommittee has oversight over the SEC and is charged with funding the SEC; and their budget has increased about 200 percent over the last 10 years. That is more than most agencies. That is a lot of money, and a lot of that is caused by all of the rules and regulations that they are asked to pass over and over again. Dodd-Frank is part of that problem.
I think this bill seeks to alleviate that problem by saying, look, we can protect investors. We can have orderly and fair capital markets; but we don't need to go overboard on regulation. Certainly derivatives are complicated financial instruments. They need regulation. But that is what this bill provides. And I would say that the great overwhelming majority are not responsible for the financial crisis.
If we pass this legislation, we can help save those people that use these instruments. We can also help the SEC not have to draft so many unnecessary rules and regulations, and that will save taxpayers as well.
Mr. LYNCH. I thank the gentlelady for yielding, and I want to associate myself with her earlier remarks on this bill, as well as the remarks of Mr. Peterson of Minnesota.
Mr. Speaker, I rise today in strong opposition to H.R. 992, the misleadingly named Swaps Regulatory Improvement Act. If you need to know one thing about this bill, it is that a vote for this bill is a vote to provide taxpayer funding and backing for the kind of reckless derivative trading that brought our economy to the brink of catastrophic collapse. It is as simple as that.
The bill before us today would repeal the provision in the Dodd-Frank reform law that requires too-big-to-fail banks to push their risky derivative dealings out of banks that receive taxpayer support and into separately capitalized subsidiaries.
This bill is not a regulatory improvement. It is a giveaway to Wall Street, and it is an abdication of the duty of this body to protect taxpayers from Wall Street speculators.
I want to point out a couple of things that have been, I think, misleading here. Dodd-Frank already allows banks to keep derivatives that they use for bona fide hedging purposes or for traditional banking activities within the insured bank. Interest rate and foreign exchange swaps, which make up 90 percent of swaps volume, are the most likely to be used by end-users to manage their risk; and those are already exempt from the push-out under section 716. So end-users can already benefit from 90
percent of the swaps that are out there. [Page: H6919]
Moving risky derivatives activity outside of the insured banks will ensure that the risks to the banks--those that are traditional and measurable--and the speculative derivative risks, which are totally unmeasured and unexpected, those are not commingled, which make bank risks easy to understand for regulators and actually leads to better regulation.
Finally, I want to call my colleagues' attention to an article about this very bill that appeared yesterday in The New York Times on the front page of the Business section.
Mr. LYNCH. I appreciate that.
Go read yesterday's New York Times. It says on the front page of the Business section, To Wall Street, Washington, D.C., ``might seem like enemy territory. But even as Federal regulators and prosecutors extract multibillion-dollar penalties from the Nation's biggest banks, Wall Street can rely on at least one ally here'' in Washington. And that ally is the House of Representatives.
We ought to change our position, stand with the taxpayers, stand with the investors, stand with the people that we were elected here to represent and tell Wall Street where to go on this. They get enough breaks as it is. We ought to stand up for the American people and protect them for a change.
Mr. GARRETT. I thank the chairman.
I think the compromise language we are considering today strikes the right balance, and I urge my colleagues to support that approach, and I thank the Members for working together to help us to get to this point.
Mr. Speaker, those are not my words. Those are the words of the ranking member last year when similar language and similar legislation was coming down and she supported this legislation. So I want to associate myself with her support of this legislation.
And why did she do so? Well, because she also said, The provision that we are talking about was something in the bill with section 716 that said ``the House Members were able to consider less carefully than other sections of Dodd-Frank, since the provision didn't come through under regular order in our Chamber.''
In other words, she recognized the fact that this provision in the bill was added late in the dead of night and had never come through committee for consideration.
She also realized, and I quote again, that ``legitimate concerns have been raised about whether pushing a significant portion of swaps out of banks is the best way to mitigate against future systemic risk.''
So, again, I wish to associate myself with those words of the ranking member who, in the past, has supported the very same legislation that we have here before us today.
And why do she and I both support this legislation? Because it is good for Main Street. It is good for farmers. It is good for small ranchers. It is good for small businesses. She recognized then, as I do now, that what we need to do is to try to spur on our economy, make sure that there are not impediments, that we don't overly complicate things in the banking sector, in the financial sector and what have you--that would do what? That would put our country at a competitive disadvantage with
other countries around the world and, by so doing, make it harder--yes, harder--for our farmers, ranchers, Main Street businesses, and the like to be able to get the credit they need and to pay their bills and what have you.
So I concur with her that we need to pass this legislation today.
Ms. WATERS. I yield myself 30 seconds.
Mr. Speaker and Members, the gentleman talked about being in step with me and what I supposedly said when we first dealt with this issue in the Financial Services Committee. And he is correct.
But when do you learn? After JPMorgan, am I to understand that nobody has learned a lesson? When do they learn that Volcker is still not in place yet? So all I will say is that I have an opinion that must be recognized.
I yield 2 minutes to the gentleman from Minnesota (Mr. Ellison), who happens to be the cochair of the Progressive Caucus of Congress, is the deputy whip, and also serves on the Financial Services Committee.
Mr. ELLISON. Mr. Speaker, we are a day in front of Halloween, and here we are handing out treats to the likes of JPMorgan Chase, Citi, and Bank of America.
You know, it is fitting on this day that we should be doing the people's business. Yet here we are handing out treats and goodies to huge banks so that they can be allowed--large financial institutions that never were held accountable--so that these institutions can be allowed to use cheap, federally supported, guaranteed, bank-backed deposits to invest in derivatives, very similar to what got our economy in this mess in the first place.
Wasn't the Great Recession scary enough? Weren't we in enough trouble? Didn't we learn anything from the ``London Whale'' fiasco?
This bill, the swaps push-out bill, undermines key sections of the Wall Street Reform bill, the so-called Dodd-Frank bill, under section 716.
Now, this bill, which is supposed to protect investors and consumers--in fact, right now, it seems like the ink is barely dry on it, and here they are trying to weaken it already. Congress passed and the President signed this law to ensure that investment banks use their own money, not the people's money, to buy derivatives, invest in hedge funds, or other risky activities.
Why did we make that requirement? Well, it wasn't to punish anyone. It was to safeguard the public trust. We made this change because we wanted to protect Americans from what I would call a zombie market, given the Halloween theme here, from destructive economic rampages like the global financial crisis which lost us 12 million jobs and over $16 trillion in wealth. We are still experiencing anemic economic growth following the Great Recession, and we do not need more trouble like this swaps bill.
Mr. HENSARLING. Mr. Speaker, I yield myself 15 seconds to help my colleagues, who apparently haven't found time to read the underlying section 716, subsection (i), which reads in part:
No taxpayer funds shall be used to prevent the receivership of any swap entity resulting from swap or security-based swap activity of the swaps entity.
I would encourage my colleagues to actually read the bill.
Now I am pleased to yield 1 minute to the gentleman from the volunteer State of Tennessee (Mr. Fincher).
Mr. FINCHER. I thank the chairman.
Mr. Speaker, I rise today in support of H.R. 992, the Swaps Regulatory Improvement Act. Simply put, we do not want to make the consumer pay more. That is what will happen if we force banks to push out certain swaps into separate nonbank affiliates.
Chairman Bernanke was right about section 716: it increases costs. Section 716 will also drive businesses overseas where foreign regulators have not passed similar rules for derivatives, taking with them American jobs and revenue.
We must weigh the costs and benefits of every rule or regulation and ensure we do not destabilize markets or place American consumers, end-users, and financial institutions at a competitive disadvantage.
With that, I encourage my colleagues to support H.R. 992.
Mr. MULVANEY. Mr. Speaker, I am going to do something I don't ordinarily do. I am going to read something:
I just want to reassure people, passing this bill--particularly as amended--will not in any way, shape, or form reduce sensible regulation of derivatives. It will not increase any exposure to the financial system from derivatives. It was an unnecessary and, I think, somewhat unwise amendment. The bill before us, particularly as amended, will restore this to what I think is the appropriate balance.
Not my words. Not the words of the gentleman from Texas. Not even the [Page: H6920]
words of Mr. Bernanke, Mr. Volcker, or one of my colleagues' favorite economists, Mark Zandi. Those are the words of the gentleman from Massachusetts (Mr. Frank), the guy whose name is on the bill, who supported this exact same initiative in the last Congress.
There is plenty for us to disagree about, Mr. Speaker. Why we continue to fight about things that pass out of committee 53-6, that will pass here today on the floor by an overwhelming margin, I have no idea. But there should be some things that we could come together and agree on. And this, H.R. 992, is certainly one of them, and I encourage full support of the bill.
Ms. WATERS. Mr. Speaker, I would like to read a statement from Ms. Sheila Bair who formerly chaired the FDIC. She said:
Derivatives have many legitimate functions, but they can be high risk and poorly understood because of their complexity by bank managers and even regulators, as we saw with the ``London Whale'' debacle. So keeping them outside of insured banks and making the market fund them is the way to go. This will increase market discipline and protect the FDIC.
I'm concerned that Members of Congress act on these issues without full understanding of the ramifications. If we are going to revisit derivatives regulation, I'd go in the direction of more market discipline and disclosure, rather than letting big derivatives dealers use insured deposits to support their high-risk operations.
The Executive Office of the President sent over a statement that includes these words:
Wall Street Reform represents the most comprehensive set of reforms to the financial system since the Great Depression, and its derivatives provisions constitute an important part of the reforms being put in place to strengthen the Nation's financial system by improving transparency and reducing risks for market participants.
Again, let me refer you to Representative Hensarling who said:
Certainly, we have to do a better job ring-fencing, fire-walling--whatever metaphor you want to use--between an insured depository institution and a noninsured investment bank.
I ask for a ``no'' vote on this bill.
Mr. HENSARLING. Mr. Speaker, again, I continue to be amazed at those who wish to decry the possibility of a Federal bailout in debating this bill. I wonder where their voices were yesterday when all of them, seemingly--the voices we hear today--defended the Federal Housing Administration from actually receiving a taxpayer bailout, the first in history.
So when taxpayers actually have to pay, we hear choruses of ``Que Sera, Sera.'' But when a private institution loses their money that the taxpayers didn't have to pay for, all of a sudden the sky is falling.
I understand that the ranking member, obviously, has the opportunity to change her mind; but clearly she was for it before she was against it.
When I hear many of my colleagues decry the lack of bipartisan legislation, I don't understand why Members would try to oppose it now. It passed overwhelmingly, 53-6.
For those who say this is somehow gutting Dodd-Frank, apparently they didn't consult with the former chairman of this committee, Barney Frank, who is on record saying that this addresses the valid criticisms of section 716 without weakening the financial reform law's important derivatives safeguards.
It is time, Mr. Speaker, to get America back to work. It is time to make commonsense, bipartisan reforms. I respect every right of every Member to change their mind, but I hope something that passed 53-6 to put America back to work, that soon this full House will pass this legislation; and I urge its adoption.
I yield back the balance of my time.
Mr. DAVID SCOTT of Georgia. Mr. Speaker, I yield 3 minutes to the gentlewoman from New York (Mrs. Carolyn B. Maloney), the ranking Democratic member of the Subcommittee on Capital Markets and also the former chairman of the Financial Institutions Subcommittee on the Financial Services Committee.
Mrs. CAROLYN B. MALONEY of New York. I thank the gentleman for yielding and for his leadership.
Mr. Speaker, I rise in support of H.R. 992. This bill passed overwhelmingly out of the Financial Services Committee earlier this year with broad bipartisan support with a vote of 53-6.
The whole point of the Dodd-Frank reforms was to improve the safety and soundness of our financial system; and H.R. 992, the bill before us, will help us do just that.
This bill does not expose the taxpayer to any additional risk. In fact, it includes a ban on taxpayer bailout of any swaps or any use of taxpayer money. Under H.R. 992, truly risky swaps will still be pushed out of commercial banks while at the same time bank regulators can see all of the bank's swaps activities.
As well intended as section 716 is, it turns out it would actually hinder the oversight of regulators of the derivatives market. That is why Barney [Page: H6921]
Frank, the former chairman of the Financial Services Committee and, of course, the Frank in Dodd-Frank, said during the debate in the last Congress of this same bill that is before us now, H.R. 922:
It will not in any way, shape, or form reduce sensible regulation of derivatives; it will not increase any exposure to the financial system from derivatives.
The economist of Moody's, Mark Zandi, also supports this bill and has said that section 716, as written, actually increases systemic risk and creates major inefficiency in the markets.
Even Federal Reserve Chairman Ben Bernanke opposed section 716, as written, stating that the way it forces these activities out of insured depository institutions ``would weaken both the financial stability and strong regulation of derivative activities.''
So Ben Bernanke has said that our bill before us will protect safety and soundness. Barney Frank agrees. Mark Zandi of Moody's agrees. I agree. And I urge my colleagues to agree with us and support safety and soundness of our financial institutions by supporting H.R. 992.
The Wall Street Reform and Consumer Protection Act requires, for the first time, the regulation of over-the-counter derivatives, previously opaque transactions that helped bring our financial system to the brink of disaster. The vast majority of derivatives must now be centrally cleared and publicly reported, and be backed by margin and capital to ensure that swap dealers and major swap users can honor their commitments. In addition, the reform law also prohibits banks from placing bets with
federally insured deposits through the ``Volcker Rule''. Both measures serve as important safeguards as we rebuild trust in our financial system. As amended, H.R. 1838 would repeal portions of Section 716 of the financial reform law, also known as the ``push-out provision.'' Section 716 prohibits banks from engaging in several types of derivatives. Questions have been raised about this provision by economists and regulators including FDIC's Sheila Bair, who are concerned that it might interfere with a
bank's ability to use derivatives to diminish risk. Section 716 was not part of the original House-passed version of the financial reform law. During the Full Committee markup, Democrats worked with the Majority to amend H.R. 1838 to continue the prohibition
of complex swaps employed by AIG with devastating effect. H.R. 1838, as amended, addresses the valid criticisms of Section 716 without weakening the financial reform law's important derivative safeguards or prohibitions on bank proprietary trading.
Barney Frank, Wm. Lacy Clay, Gwen Moore, James A. Himes, Rubén Hinojosa, André Carson, Gary L. Ackerman, Al Green, Stephen F. Lynch, David Scott, Maxine Waters, Carolyn B. Maloney, Melvin L. Watt, Luis V. Gutierrez, Gary C. Peters, Ed Perlmutter, Michael E. Capuano, and Gregory W. Meeks.
November 14, 2011.
Hon. SPENCER BACHUS,
Chairman, House Financial Services Committee, Rayburn House Office Building, Washington, DC.
DEAR CHAIRMAN BACHUS, As the Committee considers legislation proposing changes to the financial reform law, I wanted to bring your attention to a specific concern in Title VII and share my views on the related legislation. As I noted at the time of its passage, and have stated since, I believe the Dodd-Frank reforms were important measures taken to strengthen elements of our financial system and bring more confidence into the markets and institutions. While some of the reforms are currently
in place, many still need to be finalized in the rule-making process. With any measure as far-reaching and robust as this law is, refinements to it can prove necessary over time, especially given the broad array of complex issues addressed.
The Title VII provisions in Dodd-Frank are among the most meaningful reforms but with far-reaching implications to the economy. Greater transparency in derivatives transactions and clearing requirements are notable improvements that will be realized as they become operational. How financial institutions interact with their counterparties to provide access to capital and manage risk is a critical feature of our system for all market participants.
As the legislation was being considered, one provision that was among the more notable was--Section 716, or the Lincoln swaps push-out proposal. This part of the law effectively requires that financial firms conduct certain derivatives transactions outside of the bank institution and in some other entity within the company. I have significant concerns with this part of the law because of its potential to increase systemic risk, create major inefficiencies in markets, and likely have a major impact
on U.S. competitiveness.
One of the primary objectives of the financial reforms enacted after the 2008 failures was to provide for a way to resolve large financial firms should a similar crisis develop in the future. The resolution authority section of the law was crafted to do so, but Section 716 works against that goal. It does so because it causes firms to segment the derivatives with individual counterparties and requires that another entity be created to engage in the pushed-out transactions. Creating new operations,
and expending additional capital to make them robust enough, is in contrast to the resolution planning objectives of eliminating entities and simplifying structure. During the winding down of either the financial institution or of the counterparty, the breaking up of the derivatives activities creates additional risks
because separate entities will not be able to net their exposures as they can if they are facing one entity only. As noted by some of the prudential regulators in letters objecting to this provision, Section 716 would create significant complications and counter the efforts to resolve such firms in an orderly manner.
For those who argue the Lincoln provision is needed to guard against any future taxpayer bailout based on derivatives, it is important to note that this goal is accomplished by the resolution authority section of the law, thus making Section 716 unnecessary. Indeed, many provisions in the law limit derivatives risk without the need for the push-out provision. The entirety of Title VII is intended to create central counterparties to remove bilateral risk, to create extensive margin requirements
on uncleared swaps where bilateral risk may still exist, and to fully enhance risk management of derivatives. Additionally, there are prohibitions on the Federal Reserve creating any assistance program that does not have broad-based applicability--so the regulators cannot subjectively choose one entity anymore for any sort of capital infusion.
With respect to competiveness, no other foreign jurisdiction has indicated it will likely consider a measure like Section 716. As such, U.S. financial firms will most certainly be at a competitive disadvantage relative to their foreign competitors because Section 716 does not apply to those foreign firms. U.S. firms transacting with counterparties in this country and abroad provide critical risk management tools through derivatives transactions that are much needed and will not disappear. It
is wise for firms with greater regulatory supervision to play a role in this system. However, the ability to net such transactions off each other will be lost because the counterparties will have to interact with a different entity once these derivatives
are pushed out. Counterparties will face higher costs and greater operational inefficiencies that will tie up capital. The likely result will be a substantial loss of market share for U.S. firms as these transactions would be shifted to foreign banks.
As the Committee examines legislation related to the derivatives reforms, I strongly urge consideration and support legislation that would repeal Section 716 as a way to address these concerns. I appreciate your attention to this matter and would welcome any further discussion on the topic if you would find that helpful.
Mr. DAVID SCOTT of Georgia. Mr. Speaker, I yield 2 minutes to the distinguished gentleman from Texas, (Mr. Al Green), who is also the ranking member of the Subcommittee on Oversight and Investigation on the Financial Services Committee.
Mr. AL GREEN of Texas. Mr. Speaker, not everyone supports this legislation. Ranking Member Waters was mentioned. But she spoke eloquently today as to why she opposes H.R. 992. Mr. Frank is not here to speak for himself. So we cannot say that he, today, would support H.R. 992.
It may be that we have the AFL-CIO opposing H.R. 992, as well Public Citizen, and the Commodity Markets Oversight Coalition. It may be that we have them opposing it because we understand, as do many others, that this [Page: H6923]
weekend marks the 84th anniversary of the stock market crash of 1929. It was that stock market crash that gave us Glass-Steagall in 1933.
Glass-Steagall provided the firewall between commercial banking and investment banking. It didn't let you use tax dollars in the sense that they are insured by FDIC to engage in investment banking.
Well, it seems ironic that it took us 66 years to repeal Glass-Steagall, 66 years to repeal that firewall that separated commercial banking from investment banking, and has taken us now little more than 3 years to repeal, by way of evisceration, section 716 of Dodd-Frank.
Section 716 provides a firewall. It is the firewall to protect investors--taxpayers, if you will--from those investors who engage in derivatives. This derivatives market that we are talking about is $600 trillion to approximately $1.2 quadrillion. No one really knows. Only God knows how big it is.
But what we are doing is exposing tax dollars to this derivatives market, and it is my hope that we will not pass this legislation because it will set us back.
Let's give section 716 an opportunity to function. Glass-Steagall functioned for 66 years. Let's not repeal section 716 in a little more than 3 years.
Mr. HIMES. I want to thank Mr. Scott for yielding the time.
Mr. Speaker, derivatives are complicated things. They are probably one of the more complicated things that we deal with in this Chamber, so it is worth describing in simple terms what H.R. 992 does.
It abides by principles that I think we can all agree make some sense, which are those things which contributed to the meltdown of 2008--the terrible mortgages, the derivatives that were based on those mortgages, the proprietary trading. Those things that contributed to the meltdown of 2008 should be either made unlawful or should be much more closely regulated than they were in the past; but those things that were not related in any way, shape, or form and that did not contribute to the meltdown
of 2008 we should take a little lighter hand on.
H.R. 992 says that those derivatives--the currency derivatives, the commodity derivatives, the equity swaps, all of these complicated things that weren't anywhere close to the meltdown of Bear Stearns and Lehman Brothers and the challenges at Citibank and at JPMorgan Chase--will not be subject to a very aggressive measure saying that banks cannot trade in those derivatives.
Now, banks trade in derivatives because they support their clients and trade. I emphasize ``trade'' because one of their clients will borrow $100 million to build in Japan. That exposes him to yen risk. Maybe I don't want to take yen risk, and maybe the same guy who lent me the money can help me offload that risk. That is the idea.
H.R. 992 in no way allows for the risky derivatives--the collateralized bond obligations, all of those real estate derivatives--to come back into the banking environment, and it in no way permits, as the chairman has said a number of times, a bailout of banks because of derivatives.
Even though we have spent a lot of time on this today, it makes sense to spend a second on the history of this bill:
Section 716 requires the full push-out of derivatives. Regulators recognize that this is dangerous, and they are very vocal about it. Then-Ranking Member Barney Frank takes a suggestion from then-Representative Nan Hayworth to repeal section 716. The then-ranking member says, Let's not repeal it. Let's allow for the plain vanilla, common derivatives to remain in the banks and push out the dangerous ones. The Democratic staff helps draft this amendment, and I am personally asked to offer this
amendment to Nan Hayworth's bill. She accepts it. A voice vote is passed, and the bill is passed in the last Congress. The minority views supported it. We all supported it. This year, exactly the same bill comes before us, and we have ginned up the press, and we have ginned up the bloggers. This has become a gift to Wall Street.
What is different? What is different from what passed happily and in a bipartisan fashion in the last Congress relative to this Congress--the London Whale? JPMorgan claims that they were hedging. Hedging is permitted whether we pass this or not. The London Whale has nothing to do with this.
Mr. RODNEY DAVIS of Illinois. Thank you to my colleagues for standing here on this floor today to talk [Page: H6924]
about this very important piece of legislation.
Mr. Speaker, I rise in support of H.R. 992. It has been introduced by my friends Richard Hudson from North Carolina and Randy Hultgren from the great State of Illinois.
I cannot respond to my colleagues who ask about what happened here in the last term, because I wasn't here; but I can tell you from my seat here in the U.S. House that this bill is a good bill and needs to be passed. It seeks to fix yet another unintended consequence of Dodd-Frank while still protecting against risky derivatives activities. This bill amends section 716, also known as the Dodd-Frank push-out provision.
If implemented, section 716 would actually force banks to push out certain derivatives like ag-based swaps and equity swaps, which are very important to my agricultural-based district, and it would effectively drive up transaction costs. According to Ben Bernanke, this would actually make the U.S. financial system riskier.
This bipartisan legislation passed the Ag Committee
31-14 and the Financial Services Committee 53-6. Let me repeat that. This bipartisan legislation passed 31-14 out of the House Ag Committee, and it passed 53-6 out of Financial Services. This is commonsense legislation that will help all Americans.
Mr. SCHNEIDER. Thank you for yielding.
Mr. Speaker, H.R. 992 resolves a widely recognized, unintended consequence in section 716 of Dodd-Frank. I join in asking my colleagues to support this bill in an effort to strengthen Dodd-Frank and to actually improve transparency and oversight in our financial system.
The overall goal of Dodd-Frank is to provide a sound, robust financial system following the upheaval of our financial markets in 2008. I support Dodd-Frank, and I am fully committed to realizing its goals, but no piece of legislation is perfect. This body has recognized that and has passed measures to correct adverse, unintended consequences that were identified after Dodd-Frank was signed into law, and that is what we are doing again here today.
This bill does not undermine the intent or overall implementation of Dodd-Frank. However, section 716, as it is currently written, could impede those very efforts. By indiscriminantly pushing out routine swap trades from heavily regulated banks to separate, less regulated firms, section 716 actually inserts more risk into our system. It could also make the use of certain risk-mitigating derivatives so expensive that businesses will stop using them to hedge uncertainty, resulting in higher costs
for consumers and more financial instability.
Former FDIC Chairwoman Sheila Bair, former Federal Reserve Chairman Paul Volcker, and, most recently, Federal Reserve Chairman Ben Bernanke have all stated that this provision, as written, is problematic. If our foremost experts have concerns with it, why must we maintain this unduly risky provision?
This bill provides the soundness Dodd-Frank intended for our banking system while still prudently limiting the risks and costs. It also ensures manufacturers and our farmers still have the ability to hedge against price fluctuations--a practice that is integral to their operations and also benefits consumers.
I thank the gentlemen for their work on this issue, and I urge my colleagues to support the passage of this legislation.
Mr. DAVID SCOTT of Georgia. Mr. Speaker, in closing, we have before us perhaps the most single important bill facing the viability, the financial security, and the stability of the financial system within the United States and throughout the world. We are dealing here with a $712 trillion piece of the world economy.
Now, my friends who are in opposition to this certainly have some legitimate points. There is no question about that. We had a meltdown. Banks and members on Wall Street did wrongdoing, but this isn't the bill with which to punish them for doing that wrongdoing. We punish them for wrongdoing by working with the regulators and by putting, in fact, in motion not just civil penalties and not just financial penalties but criminal action, but we do that in another place, at another time. We have already
approached that with the CFTC--to use criminal actions if any of these kinds of shenanigans happen again.
We are here to make sure that our banking system and that our economy, which have to work on the world stage, have not a disadvantage. If you push out these commodity swaps or the security swaps, we are doing a great disservice not just to the banks but to our end users.
Take commodities. When you look at them, Mr. Speaker, commodities are things like aluminum. They are agribusiness products. In 40 out of our 50 States, the largest part of their economies is agribusiness. Let us take something like Coca-Cola. The Coca-Cola Company has to deal with aluminum for cans--or Pepsi Cola or any of those in our beverage industry. They have to mitigate their risks. If you push them out of where they have to do their business in the same banks with interest rate swaps--by
the way, the interest rate swaps are the critical pivot swap to mitigate that risk.
You are going to push commodities out. You are going to push the farmers out. You are going to push all the manufacturers, the automobile industry. All of these people that use commodities will not be able to do business in that same bank where the interest rates are, where the currency fluctuation rates are.
When you have that, you are putting us at a great disadvantage. This is why Chairman Bernanke said that this is a problem. This adds to the systemic risk when you push out these individual commodities into another area. It creates uncertainty.
The other thing that it does: it puts our banking system at a huge disadvantage competitively because these [Page: H6925]
foreign banks, they are not pushing their swaps out, and that means that the United States banking system could see a migration of swap activities out in the world. We are the leader of the world. We have got to act like that.
That is what H.R. 992 will do. It will be that force that will help our banking system be the true leader in this world and not at a disadvantage.
With great respect to those in opposition to this, it is written into law in section 716 that no taxpayer money can be used for bailouts.
You talk about the FDIC. You cannot use that because that is the bank's money that they put up to ensure deposits. None of that goes into swaps. Certainly we can't use proprietary trading. The Volcker Rule settles that where they cannot make any kind of money or make profit on the deposits of ordinary citizens. Nowhere is there any taxpayer liability.
This is a good bill. I urge everybody in this House of Representatives to realize our economic security is at stake and let's pass H.R. 992.
I yield back the balance of my time.