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STATEMENT BY SENATOR JOHN MCCAIN ON THE BANKING INTEGRITY ACT OF 2009
December 17, 2009
“Mr. President, I am pleased to be joining my friend and colleague from Washington, Senator Cantwell, to introduce the Banking Integrity Act of 2009. My reasons for joining this effort are simple – I want to ensure that we never stick the American taxpayer with another $700 billion tab to bailout the financial industry. If big Wall Street institutions want to take part in risky transactions – fine. But we should not allow them to do so with federally insured deposits.
“Paul Volcker, a top economist in the Obama Administration and former Federal Reserve Chairman, wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations. Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The Administration should accept this and shield commercial banking from Wall Street’s wild ways. ‘The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties’ and ultimately fails.
“The bill we are introducing today precludes any member bank of the Federal Reserve System from being affiliated with any entity or organization that is engaged principally in the issue, flotation, underwriting, public sale or distribution of stocks, bonds, debentures or other securities. Essentially, commercial banks may no longer intermingle their business activities with investment banks. It’s that simple.
“Since the repeal of the Glass Steagall Act in 1999, this country has seen a new culture emerge in the financial industry: one of dangerous greed and excessive risk-taking. Commercial banks traditionally used people’s deposits for the constructive purpose of main street loans. They did not engage in high risk ventures. Investment banks, however, managed rich people’s money – those who can afford to take bigger risks in order to get a bigger return, and who bore their own losses. When these two worlds collided, the investment bank culture prevailed, cutting off the credit lifeblood of main street firms, demanding greater returns that were achievable only through high leverage and huge risk taking, and leaving taxpayers with the fallout.
“When the glass wall dividing banks and securities firms was shattered, common sense and caution went out the door. The new mantra of ‘bigger is better’ took over – and the path forward focused on short-term gains rather than long-term planning. Banks became overleveraged in their haste to keep up in the race. The more they lent, the more they made. Aggressive mortgages were underwritten for unqualified individuals who became homeowners saddled with loans they couldn’t afford. Banks turned right around and bought portfolios of these shaky loans.
“Sub-prime loans made up only 5 percent of all mortgage lending in 1998, but by the time the financial crisis peaked in late 2008, they were approaching 30 percent. Since January 2008, we have seen 159 state and national banks fail. In my home state of Arizona, five banks have shut their doors, leaving small businesses scrambling to find credit from other banks that may have already been “overleveraged.
“Banks sold sub-prime mortgages to their affiliates and other securities firms for securitization, while other financial institutions made risky bets on these and other assets for which they had no financial interest. As the market grew bigger, its foundation became shakier. It was like a house of cards waiting to fall. And fall it did.
“In October 2008, the financial system was on the brink of collapse when Congress was forced to risk $700 billion of taxpayer dollars to bailout the industry. These financial institutions had become ‘too big to fail.’ In fact, the special inspector general of Troubled Asset Relief Program (TARP) testified before Congress earlier this year that ‘total potential Federal Government support could reach $23.7 trillion’ to stabilize and support the financial system. Ironically, some of these ‘too big to fail’ institutions have now become even bigger. An editorial from yesterday’s New York Times stated:
‘The truth is that the taxpayers are still very much on the hook for a banking system that is shaping up to be much riskier than the one that led to disaster.
‘Big bank profits, for instance, still come mostly courtesy of taxpayers. Their trading earnings are financed by more than a trillion dollars’ worth of cheap loans from the Federal Reserve, for which some of their most noxious assets are collateral. They benefit from immense federal loan guarantees, but they are not lending much. Lending to business, notably, is very tight.
‘What profits the banks make come mostly from trading. Many big banks are happy to depend on the lifeline from the Fed and hang onto their toxic assets hoping for a rebound in prices. And the whole system has grown more concentrated. Bank of America was considered too big to fail before the meltdown. Since then, it has acquired Merrill Lynch. Wells Fargo took over Wachovia. And JPMorgan Chase gobbled up Bear Stearns.
‘If the goal is to reduce the number of huge banks that taxpayers must rescue at any cost, the nation is moving in the wrong direction. The growth of the biggest banks ensures that the next bailout will have to be even bigger. These banks will be more likely to take on excessive risk because they have the implicit assurance of rescue.”
“Excess was a common theme for banks/financial institutions in the mid-2000s – excessive risk, excessive bonuses. Times were good at Merrill Lynch in 2006 when the firm’s risky mortgage business was booming. The firm made record earnings of $7.5 billion that year and paid out bonuses of $5 billion to $6 billion. Flash forward to late 2008 when Merrill’s gambling left it in deep financial despair with losses exceeding $27 billion. Yet we witness the firm pay out another $3.6 billion in bonuses just before it was acquired by Bank of America.
“Merrill Lynch wasn’t alone in excess and greed. Citigroup posted a net loss of nearly $28 billion in 2008, yet paid out $5.3 billion in bonuses. Although Goldman Sachs earned only $2.3 billion, it paid out $4.8 billion in bonuses. Morgan Stanley earned $1.7 billion, and paid out nearly $4.5 billion in bonuses. J.P. Morgan Chase earned $5.6 billion and paid $8.7 billion in bonuses. If a company doesn’t make money, how can it pay these bonuses? In this case, each of these firms was a recipient of billions in taxpayer funded TARP money.
“Mr. President, the federal government has set a dangerous precedent here. We sent the wrong message to the financial industry: you engage in bad, risky business practices, and when you get into trouble, the government will be there to save your hide. Many would call it a moral hazard. I call it a taxpayer-funded subsidy for risky behavior.
“The consolidation of the banking world was also riddled with conflicts of interest, despite the purported firewalls that were put into place. If an investment bank had underwritten shares for a company that was now in financial trouble, the investment bank’s commercial arm would feel pressure to lend the company money, despite the lack of merits to do so. The Banking Integrity Act of 2009 would eliminate some of these conflicts.
“Today, it is time to put a stop to the taxpayer financed excesses of Wall Street. No single financial institution should be so big that its failure would bring ruin to our economy and destroy millions of American jobs. This country would be better served if we limit the activities of these financial institutions. Banks should accept consumer deposits and invest conservatively, while investment banks engage in underwriting and sales of securities.
“I urge my colleagues to support this bill.”