By U.S. Sen. Susan Collins(R-Maine)
The American people are angry over the country’s financial crisis, and rightfully so. We are angry because the current crisis was not created from our own bad investments or decisions, but by those on Wall Street who concocted complicated financial instruments that ended up backfiring and who took advantage of regulatory loopholes with little regard to risk. Investment firms like Bear Sterns borrowed to the hilt despite not having the resources to back their high-risk strategies. And it has been the American taxpayers and individual investors who are paying the price. As financial firms speculated in increasingly risky products and practices, not one of the hundreds of federal or state agencies involved in financial regulation was responsible for detecting and assessing the risk to the system as a whole. The financial sector was gambling on the continued rise of the housing market, yet no single regulator could see that everyone was betting on a bubble that was about to burst. Instead, each agency viewed its regulated market through a narrow lens, missing the total risk that permeated our financial markets.
As a former Maine financial regulator, I am convinced that financial regulatory reform is essential to restoring public confidence in our financial markets and to preventing a recurrence of a crisis like this one, which has cost so many Americans their retirement savings and so many workers their jobs. America’s Main Street small businesses, homeowners, employees, savers, and investors deserve the protection of an effective, new regulatory system that modernizes regulatory agencies, sets safety and soundness requirements for financial institutions to prevent excessive risk-taking, and improves oversight, accountability, and transparency. Such a reform would help ensure that high-risk financial products and practices can be detected in the future and effective actions taken to prevent the contagion from spreading to otherwise healthy financial institutions and markets.
To achieve these goals, I have introduced the “Financial System Stabilization and Reform Act of 2009.” This legislation would fundamentally restructure our financial regulatory system. It would strengthen oversight and accountability in our financial markets. It would help rebuild the confidence of our citizens in our economy and help restore stability to our financial markets.
My legislation creates an independent Financial Stability Council, composed of representatives from existing federal agencies which have responsibility for overseeing portions of the financial system. The FSC would serve as a “systemic-risk monitor,” maintaining comprehensive oversight of potential risks to the U.S. financial system. Had there been a systemic-risk monitor in place years ago, many of the causes of our current economic crisis could have been detected and action taken to prevent risk to the stability of the entire financial system. We might have been able to prevent many of the disastrous economic consequences we now face.
An example of a regulatory “black hole” in the current regulatory structure is the creation of credit default swaps, which function as an insurance policy against a security defaulting. Credit default swaps escape regulation as an insurance product or as a security. My bill would close the credit default swaps loophole, a financial instrument that contributed heavily to the current financial crisis and the downfall of AIG. This regulatory gap allowed systemic risk to build in our financial system without the oversight, regulation, and transparency needed to prevent a collapse. The reform legislation I have proposed would not only provide proper oversight over credit default swaps, but also help prevent any new, risky financial instruments that do not fall under the authority of any federal financial regulatory agency from undermining our economy.
The bill also would impose safety and soundness regulation on large financial investment firms. Under the current system, investment banks such as the Bear Stearns and Lehman Brothers were left largely unregulated with no agency given the authority to examine the full scope of their operations. Bear Stearns had a leverage ratio of 35 to 1, which means the firm borrowed $35 dollars for every dollar of its own money. For example, suppose your net worth is a dollar and you combine that dollar with $35 in borrowed money to buy an asset worth $36. If the value of that asset declines by only $2, to $34, you are now bankrupt. This is exactly what happened to Bear Stearns and other investment banks.
As a leader of the Senate Homeland Security and Governmental Affairs Committee, I have previously tackled massive failures by the federal government. In 2004, after the 9/11 Commission released its devastating report, I co-authored legislation that dramatically overhauled our nation’s intelligence community. A year later, following the Hurricane Katrina disaster, Senator Joe Lieberman and I joined forces again to restructure of our nation’s emergency management capabilities. Our Committee now is holding a series of oversight hearings on the failures of federal financial regulation.
I am confident that we can achieve the same type of success in protecting the hard work, the savings, and the dreams of the American people by overhauling our financial regulatory system. Honest savers, borrowers, and investors deserve a regulatory system suited to demands of modern times, where dangerous regulatory gaps are closed, where large institutions are subject to capital requirements, and where risky transactions are identified and controlled before they pose a threat to the economy as a whole. These reforms must be made to restore the confidence necessary to stabilize our financial markets.
