Mr. FRANK of Massachusetts. Mr. Speaker, I concur with the substantive discussion of this bill from the gentleman from North Carolina. His comments on bipartisanship seem to me rather odd, and I will not dwell further on them. It does seem to me if you were trying to promote bipartisanship, as we all are, beginning by attacking the sincerity of those who will be in charge of it is not a good idea. But the gentleman is free to speculate as he wishes.
The bill itself is, as he described it, a good idea. We originally passed it with an amendment from the Judiciary Committee. Frankly, I was not in favor of that amendment. I think what the Senate has done has improved the bill; and that is not a sentence I always get to say, but I do want to say in this case. I think it is now a good bill and more consumer friendly.
The gentlewoman from Florida was very much interested in this, and quite right to push for it. Our colleague from North Carolina (Mr. Watt) had some concerns about some potential negative effects on consumers. It has all been worked out, so it is now a bill that improves the administration of the system, and I generally support it.
With that, Mr. Speaker, I yield back the balance of my time.
Mr. BAKER. Mr. Speaker, I thank the gentleman for yielding, and wish to express appreciation to my friends on the other side for their work in this arena.
It flows from the problems that erupted during the fall of 1998 when the then largest hedge fund in the world, LTCM, pursuant to a Russian currency crisis, found itself unable to meet its financial obligations. When the New York Fed arrived at the meeting location to determine how to best resolve this uncertainty, they were surprised to find the scope and complexity of the financial relationships that LTCM had with significant and large financial institutions, both U.S. and abroad. There was
not in place at that time a mechanism where counter-party obligations could be unwound without wreaking havoc and some sort of domino effect, potentially bringing significant adverse financial consequences to large numbers of individuals who had no knowledge of their exposure to the LTCM instability.
Further, at the time of LTCM's demise at the end of 1998, they had approximately $1.5 trillion in notional amounts of derivative positions held worldwide. And their leverage ratio exceeded 28 to 1. In other words, this was not a good thing. They were significantly larger in scope than any of the [Page: H8651]
largest commercial banks. And although others enjoyed higher leverage ratios, few had the sophisticated relationships with counter parties that were engaged
The provisions of the bill now suggested by the gentleman from North Carolina is the ability to close out what are called netting relationships to prevent the failure of one entity from causing a domino effect of more serious disruption, known as systemic risk. Absent the adoption of these provisions with the growth in size of hedge funds and in number of hedge funds, there is considerable market uncertainty as to how a bankruptcy proceeding would affect market liquidity. The unwinding of these
obligations, and let me quickly add that it is in scope much larger than impact just in hedge funds; it does go to the broader financial marketplace, all of which have in common that these transactions are put in place through intermediaries such as stock brokers, smaller financial institutions, securities clearing agencies that often hedge their risk on transactions through securities collateral received pursuant to these obligations.
As a result, this will provide a safe and secure mechanism to unwind complex financial relationships, minimizing market instability, providing market liquidity and ensuring that our economic system is not adversely impacted by the demise of a hedge fund. In essence, that is a good thing, and I commend the gentleman for his work product.
Mr. McHENRY. Mr. Speaker, I want to thank the gentleman from Louisiana for his kind words. And with that I would like to close by again thanking the Congresswoman from Florida for her work and assistance on this legislation. As I understand it, she was detained with an important meeting, an event today, from being here on the floor. But I want to thank her for working with me in a bipartisan way, and I am hopeful that this is a new direction for the coming Congress of bipartisanship.
As I said in the beginning, I am not overly optimistic about the opportunities, but I think this may begin that new direction.
Mr. McHENRY. I believe the gentleman is well versed in the knowledge of what sarcasm means, and perhaps I was a bit sarcastic in my quoting the new direction. I look forward to action in the coming Congress on a bipartisan basis.
Mr. FRANK of Massachusetts. I will confess to sometimes starting slow, and I am getting old. It would probably be helpful in the future if the gentleman would find some way to signal when he was being sarcastic. That would help my understanding.
Mr. McHENRY. Thank you. I certainly appreciate the gentleman's guidance on signals. I will make sure, going forward, I smile or wave when I am being sarcastic. Or the gentleman, who will be the chairman of my committee in the next Congress, I will simply just speak when I am being sarcastic on your committee in the next Congress, if that would be all right.
Actually, before I close, I want to give one final story. Before I got on the Financial Services Committee, a senior Member told me that with the ranking Democrat from Massachusetts (Mr. Frank) that if he ever asks you to yield in a committee debate, say ``no.'' And I said, why; isn't that rude? He says, well, you have never been in a debate with BARNEY FRANK, have you?
Well, sure enough, 6 months in, I say something and the ranking member asks me to yield. And as a new Member, I mistakenly said ``yes.''
I will not make that mistake going forward. The gentleman is quite able with his arguments, a Harvard educated attorney. I respect his ability to make an argument and to make the opposition look silly.
And with that, as the opposition, I would sit down and say, Mr. Speaker, I have no further requests for time.
Mr. Speaker, I yield back the balance of my time.