Christopher Dodd

Mr. DODD

Mr. DODD. Mr. President, our colleague from North Dakota is going to speak over the next several minutes. At the conclusion of that, I will make some remarks, and then there will be a tabling motion of the Dorgan amendment. To make colleagues aware, that is what will happen.

Mr. DODD. Mr. President, I wish to speak a couple of minutes. This is the first opportunity we have had, with all the other amendments we talked about, to even talk about this very critically important part of the legislation, and that is the section dealing with derivatives, which is a source of major interest. I wish to spend a couple of minutes describing to my colleagues what is in this bill that is before us dealing with derivatives, and then I will express some concerns about the amendment of my good friend and colleague from North Dakota. Then at the conclusion of that, unless others would like to be quickly heard on this matter, I will move to table the Dorgan amendment. That is normally not what we have done. There have been no tabling motions made over these 2\1/2\ weeks. Let me express my regret that Senator Dorgan was unable to get a straight up-or-down vote on his amendment. Even though I have concerns about it, I tried over the last 2 weeks to have everyone have their amendments raised so we could have a good, vibrant, full-throated debate on matters and let Members decide. In some cases, we had a 60-vote margin; in most cases a 50-vote margin. No one has said to anyone yet: Your amendment can't come up. I say to the Senator from North Dakota, I tried to see to it that everybody has the opportunity to be heard. As he knows and others know, we have had a stalemate this afternoon on whether matters can be heard. As I said, derivatives, as most of my colleagues and many in the country understand, are essentially hedges or bets whose worth rises and falls with the price of something in the marketplace. They can be very commonsense financial tools to help businesses manage their costs. The word is taken on a pejorative, but actually derivatives are critically important in our economy. For instance, let's say you make candy for a living; you are a candy manufacturer. The price of sugar is an incredibly important factor in determining your bottom line, and the cost of sugar can fluctuate dramatically. All sorts of factors can raise or lower the price of sugar, which is a critical component in your production of candy, but it is a factor you cannot control. You do not necessarily control what happens to the price of sugar as a candy manufacturer. Derivatives can help you manage volatility, and that is why they are so valuable in our economy. If it sounds like insurance, that is because if used properly, that is exactly what it is. Let's say you are an investor and you will not be able to afford the loss if your company or government whose bonds you bought defaults. Again, you do not have control over that company's or government's ability to pay you back. So a form of insurance has sprung up in the form of derivatives that would protect you against that kind of default. It is called a credit default swap, or CDS. Just like a derivatives contract on the price of sugar, it is not necessarily a bad thing. In fact, it could be very helpful in terms of managing volatility and protecting against losses totally unconnected with your activity. Credit default swaps played a huge role, as we now know, in the lead- up to the financial crisis that has cost our country so much. For instance, take what happened to AIG, the former insurance giant. Before the crisis, institutions around the world bought credit protection against mortgage-backed securities from AIG, just like you or I might have bought some other, more pedestrian insurance policy. When those mortgage-backed securities failed, AIG owed money to all of those protection buyers around the world. But AIG, as a seller of CDSs, had no regulatory requirement that it actually have the capital on hand that it would need to pay those parties if, in fact, it was called. Guess who ended up having to make those counterparties whole. We, the taxpayers, the taxpayers across the country because AIG lacked the capital behind those derivatives. Even worse, because there was no reporting requirement, regulators did not even know where the risks were in the financial system. Because there was no requirement that these transactions run through a clearinghouse, even people in the financial sector could not figure out for sure who was exposed to AIG's potential failure. The result, of course, was a total freeze in our markets and our financial system because financial sector actors no longer trusted that their counterparties would be creditworthy. And who could blame them? It is like if you did not trust your bank to be around the next day, you would get your money out in a hurry, as many did back 80 years ago when there were no protections. When the word went out, people took to the streets. That is why the bill drawn up in our Banking Committee and Agriculture Committee contains some very tough new rules for CDSs and the rest of the derivatives market. Under the terms of our bill, CDSs must centrally be cleared and traded on regulated exchanges in order to reduce counterparty risks and to promote transparency and stability in our financial system. The central clearinghouse will set margin requirements and position limits. Those ideas have been around for decades, by the way, within the commodities markets, going back to the 1870s or 1880s. Margin requirements and collateral requirements have been required; hence, there are very few problems in the commodities markets because of margin requirements and collateral requirements. The bill before us includes tough new rules for protection sellers, such as AIG and dealers such as Goldman Sachs, that will be registered and regulated by the SEC and CFTC. They will have to face tough new rules to curb excessive risk taking, and all CDSs will be reported through a central clearinghouse, data repository, or directly to regulators. For the very first time, financial advisers working with municipalities--the people helping to ensure that our communities invest wisely--will have to register and be subject to rules and regulations. Our colleague from North Dakota, Senator Dorgan, has offered an important amendment to tackle yet another problem, as he sees it, with CDSs. If you owned a house and bought a policy that would pay you money if the house burned down, we would call that insurance. But if you bought that policy on someone else's house, a house you did not even own, you probably would not get invited to spend the weekend there because you were betting the house would catch on fire. At best, we call that a cynical bet. Unfortunately, it happens a lot in our financial system. It is called a naked CDS. It is a CDS in which the entity buying protection does not even own the underlying credit. During the crisis, traders bought protection hoping that borrowers would fail to pay back their loans--borrowers such as the government of Greece or the State of California, for that matter. Betting on failure, of course, is dangerous, as we know. That is why Senator Dorgan has offered an important amendment, in his mind, to define the problem. In addition to requiring all CDSs to be cleared, it outright bans naked CDSs and synthetic asset-backed securities. I have described the serious steps we have taken in our underlying bill to reduce the dangers in the CDS market. Senator Dorgan's amendment goes a step further and, in my view, too far at this particular juncture. Let me explain why. I don't know, nor can anyone say with absolute clarity, what are the implications and the unintended consequences if we have a total ban on the naked synthetic credit default swaps. Here is my concern. You can have, for instance, people hedging against where they have uninsured interests. In fact Greece--a country that may fall, an entity in which there is no particular financial interest but there is a concern that economy may not be there--they lack insurable interests, necessarily, but it is not illegitimate to want to protect yourself against an event such as the collapse of another country that could cause financial disruptions. My concern about the Dorgan amendment, and had we been dealing with it in another means--that is, we had offered the Dorgan amendment--I intended to offer a side-by-side amendment that would have allowed this to go forward but asking the security risk management operation we set up in this bill to make valuation to determine how this could work. I happen to believe in certain instances what Senator Dorgan offers makes sense. My concern is I cannot tell you with certainty what the unintended consequences are. I cannot say with absolute certainty what Senator Dorgan is proposing actually will be doing what it claims or if there are broader implications to it. This is a very important matter. I do not minimize it at all. But as chairman of this committee responsible for advising colleagues and drafting legislation, I need to talk with some certainty about what I think the implications will be of certain proposals. I cannot tell you what the outcome of this will be. There may be serious consequences negatively to our economy if we adopt this amendment as is. For those reasons this evening, I feel compelled to disagree with this amendment. The only alternative I have to disagreeing to it is to vote to table because of the procedural position in which we find ourselves. I would have preferred a side-by-side which would have given some room for the Dorgan amendment to move forward with further consideration as to how it is applied. Lacking that ability, do we accept or reject the amendment? Because of the concerns I have about accepting the amendment without knowing what the consequences may be, I have to recommend the amendment be defeated. Without necessary protections for commercial end users, financial stability, and governments and corporations that depend on credit in which to operate and any alternative, we risk shutting down a $25 trillion credit default swap market--a $25 trillion credit default swap market. We need thorough examination and study before taking this kind of dramatic action. That much is at risk if this amendment were to be adopted. I urge my colleagues, given the circumstances, to support the tabling motion. I see my colleague from North Dakota. I withhold making the tabling motion and give him a chance to respond.

Mr. DODD. I understand there will be a request for a rollcall vote on the Grassley amendment. After that, we are still anxious--we have additional amendments. I say to my colleagues, many of you have submitted amendments you would like to have considered this evening before we get to a cloture vote tomorrow. I am willing to stay and try to accommodate as many as possible. I know Members would like to have clarity on whether we will have any more votes. There are a number of other amendments we would take up in relatively short order. I have submitted some 49 amendments to my good friend, Richard Shelby, the ranking member of the committee, that we could accept, both Democratic and Republican amendments. Some are bipartisan amendments. I am not expecting to accept every one of them, but there are many that could be part of a managers' amendment that could take care of a lot of concerns others have raised. We will have to wait to determine whether they have been cleared. Tomorrow, there will be a cloture motion. In the meantime, there is still time this evening to consider amendments that otherwise would probably fail in a postcloture environment. I am willing to stay and deal with as many of these amendments as we can before we get to that cloture motion tomorrow, but the pending matter is the Grassley amendment. There has been a request for the yeas and nays on those votes. That is the immediate business. After that, I cannot tell you with absolute certainty there will be additional rollcall votes. If others ask for them, we may ask you to come back and cast a ballot.

Mr. DODD. While all Members are here, this has been a remarkable 3 weeks. I realize not every amendment has been adopted, but for many of us, we were able to get back to the business where we actually have amendments offered, debates occurring, a good-throated discussion of a very important set of issues. My hope would be that tomorrow--it is coming to the point where we can go on indefinitely on the subject matter. We need to get to closure at some point. My plea to colleagues, as you are thinking about this evening, amendments tonight, a few amendments tomorrow, some amendments in postcloture, we need to come to closure on this legislation. It is a good bill. The country is expecting us to answer the issue of whether we are going to protect our people from future bailouts, give them some protection against the kinds of problems that occurred in the past. I urge you, as the chairman of this committee, to be supportive of our motion tomorrow and begin to reach closure on this bill so we can move on to other matters. Mr. President, I ask for the yeas and nays on the Grassley amendment.

Mr. DODD

Mr. DODD. Mr. President, I ask unanimous consent that the amendment offered by Senators Bond, Warner, Corker, and myself be considered.

Mr. DODD. Mr. President, I ask unanimous consent that the reading of the amendment be dispensed with.

Mr. DODD. Mr. President, I ask unanimous consent to withhold the quorum call.

Mr. DODD. Mr. President, I wish to take a minute or so to thank both the Presiding Officer and the author of this amendment, along with his coauthor and my good friend, the distinguished Senator from Texas. This is a good amendment, as my colleague from West Virginia has pointed out. The role of the Federal Trade Commission has been critically important and goes back a long time. I often cite to people that one of my favorite pieces of statuary is outside the Federal Trade Commission. It is an explanation of what the free enterprise system is and how it is supposed to work. It is a rather dated piece of sculpture, goes back I think to the Depression era, and it shows that very powerful horse straining at the bit, trying to charge forward, and a rather muscular farmer holding the horse back. You are not quite sure, looking at the piece of statuary, whether the horse is going to win or the farmer is going to win, which is about as good a visual expression as we have of our free enterprise system. We want a robust free enterprise system that is charging forward, creating new ideas and innovations in order to allow jobs to be created and wealth to be created. At the same time, we realize we have to have that regulator in place to make sure it doesn't run wild, in the sense that everyone else could be adversely affected by it. So I have always thought that particular piece of statuary captured the essence of what our free enterprise system is that sits outside the FTC. I think this amendment strengthens the bill and is a very worthwhile addition to it. So I thank both my colleagues for their indulgence and their patience as we took a little time to get to this. Either we will have a recorded vote or a voice vote, as soon as the leadership decides how they want to handle that in the next hour or so. Why don't we do this. If there is no objection, we will go to it, and I will call the question.

Mr. DODD. I move to reconsider the vote and to lay that motion on the table. The motion to lay on the table was agreed to.

Mr. DODD. Mr. President, I suggest the absence of a quorum.

Mr. DODD. Mr. President, I ask unanimous consent to call up the Cantwell-McCain amendment, No. 3884.

Mr. DODD. Mr. President, I have a tremendously high regard for my colleague from Idaho. We serve on the Banking Committee together. He is more than just a member; he is an excellent member of the committee and brings great knowledge in the area of financial services. It is always with reluctance that one disagrees with someone they admire. I thank him for his work. For the last 38 or 39 months I have been chairman he has been a very valuable asset to our committee and a solid thinker. We have had a couple amendments already--the Ensign amendment and the McCain amendments--on the GSEs. We have had three amendments because I offered a side-by-side amendment on the government-sponsored enterprises, including Fannie Mae and Freddie Mac. Clearly, all of us, without exception, understand we must have reform of the GSEs. We need an alternative to the housing financing system. The present one is not working. We also understand in the absence of it, we would be in deep trouble in terms of housing issues today. The Senate has spoken on the importance of addressing the issue. My colleague from New Hampshire said it well when we were debating whether to include this. As he pointed out, this was so complex an issue, no one really had an alternative idea as to how to come up with a housing financing system, and to include one in this bill would have been difficult. We have debated that. But aside from the substantive issue, the pending amendment deals with a matter within the Budget Committee's jurisdiction. Therefore, I raise a point of order that the pending amendment violates section 306 of the Congressional Budget Act of 1974. For those reasons, the point of order should lie against this, aside from the substantive debate we have already had and the full awareness that we must address this issue in the coming Congress if we are going to be successful in dealing with Fannie Mae and Freddie Mac. For those reasons, I raise the point of order.

Mr. DODD. Mr. President, as I understand it, the next vote will occur on the Cornyn amendment.

Mr. DODD. Mr. President, let me say, if I may--I am looking to the leader here, if I can find him--I believe this will be the last recorded vote this evening. There will be potentially a couple of voice votes after this on matters involving, one, Senator Bond's amendment that I am cosponsoring with him, along with Senator Warner and Senator Corker--this will be the last recorded vote, but there will be a voice vote on the angel investor amendment Senator Bond is interested in, and there will be a vote on the amendment offered by Senator Udall of Colorado dealing with credit scores that I believe we all can support as well. Then we will be laying down a Lugar-Cardin or Cardin-Lugar amendment for discussion this evening, with a possible vote in the morning. Then we will be working this evening, Senator Shelby and I, to try to lay out some amendments tomorrow to give people a clear picture as to what the roadmap will be for tomorrow as well. So with that, I turn to Senator Cornyn.

Mr. DODD. Mr. President, I intend to support the Cornyn amendment, and I ask my colleagues to do so as well. Our colleague from Massachusetts, the chairman of the Foreign Relations Committee, Senator Kerry, has raised some very legitimate issues about the amendment that may need to be worked on as we move forward in our conference. But I believe the thrust of the amendment is a correct one. We are concerned about some very poor countries that may be in a different position, including some additional thought that may need to be put into that, and I respect the concerns raised by the Senator from Massachusetts. I believe this is a good amendment deserving of our support; therefore, I ask for the yeas and nays and ask my colleagues to support the Cornyn amendment.

Mr. DODD. Mr. President, I move to reconsider the vote and I move to lay that motion on the table. The motion to lay on the table was agreed to.

Mr. DODD. Mr. President, there are two amendments I am aware of. The next order of business is the amendment by the Senator from Colorado, Mr. Udall.

Mr. DODD. Mr. President, I thank Senator Udall. He has done a great job on this with Senator Lugar. They made an alternative suggestion that would allow the release of these credit scores on a transactional basis for the purchase of a automobile or a home, so you will get to know what the credit score is, and that will be a great value. I urge adoption of the amendment.

Mr. DODD. Mr. President, I move to reconsider the vote, and I move to lay that motion on the table. The motion to lay on the table was agreed to.

Mr. DODD. Mr. President, I believe the Bond-Warner-Corker amendment is next. Cloture Motions

Mr. DODD. Mr. President, what I would like to do, if I may, I would like to make a statement on the Bond, et al, amendment. If my colleague from Oregon would like to make some comments about this consent request he made, if it is not too long, then I will reserve my time.

Mr. DODD. Mr. President, I ask unanimous consent to add Senator Tester of Montana as a cosponsor of amendment No. 4056, the Bond-Dodd, et al, amendment.

Mr. DODD. Mr. President, I should point out that Senator Brown of Massachusetts, Senator Cantwell, Senator Begich, and Senator Murray are cosponsors of that amendment.

Mr. DODD. Mr. President, I ask unanimous consent that the following be the next amendments in order: Senator Cardin and Senator Lugar, amendment No. 4050, and an amendment of Senator Corker of Tennessee regarding preemption, with a Senator Carper amendment side by side to the Corker amendment.

Mr. DODD. Mr. President, I am pleased to join my colleagues Senators Bond, Warner, Brown, Cantwell, Begich, Murray and Tester in offering this amendment to sections 412 and 926 to protect investors and promote capital formation. During the Banking Committee's hearings on the financial crisis, the North American Securities Administrators Association, NASAA, testified about a serious investor problem. A growing number of private placement are being used to defraud ``accredited investors.'' An investor is deemed ``accredited,'' or financially sophisticated and able to withstand investment losses, if he or she has $1 million in net worth, including the value of his or her home, or $200,000 in annual salary, amounts that have not been changed since 1982. ``Accredited investors'' are presumed to be able to fend for themselves, receive fewer protections, and are eligible to invest in private placements. Secretary William F. Galvin, the chief securities regulator of the Commonwealth of Massachusetts, stated that ``my office has seen a dramatic increase in the number of 506 [private placement] transactions sold to inexperienced investors who, on paper, may have met the accreditation standards but in reality didn't understand the investments, could not incur the risk of loss these transactions often entail and did not have the financial sophistication to monitor or evaluate their investments.'' The committee was concerned to protect such investors, particularly those who fall victim to sellers who repeatedly engage in securities fraud. NASAA testified that: These offerings enjoy an exemption from registration under federal securities law, so they receive virtually no regulatory scrutiny even where the promoters or broker- dealers have a criminal or disciplinary history. As a result, Rule 506 offerings have become the favorite vehicle under Regulation D, and many of them are fraudulent. Regarding the ``accredited investor'' standard, NASAA testified that ``[I]nflation has seriously eroded the efficacy of the existing thresholds in the definition of `accredited investor' since their adoption in 1982'' and supports periodic adjustments of these standards. For the past several weeks, I have worked with and consulted the North American Securities Administrators Association, Angel Capital Association, Private Equity Council and others, and I thank them. We have crafted language suited to protect investors from those unscrupulous persons while encouraging capital formation. New section 926 would disqualify felons and other ``bad actors'' who have violated Federal and State securities laws from continuing to take advantage of the rule 506 private placement process. This will reduce the danger of fraud in private placements. New section 412 would amend the ``accredited investor'' wealth threshold by excluding the value of an investor's primary residence. For example, a widow whose financial wealth was $1 million but had the majority of that in the value of her home and had a salary of less than $200,000, would not be deemed to be an ``accredited investor.'' Instead, she would benefit from the broader range of protections available generally to investors. There are several reasons for this change: The net worth test signals a person's ability to bear a loss. If the cushion for a loss is a person's home, a person making a bad investment could end up losing his or her home. Net worth is intended to be a proxy for financial experience and sophistication. Some people who own valuable homes may not be sophisticated investors. Furthermore, real estate prices have greatly appreciated since the net worth standard for accredited investors was adopted in 1982. Accordingly, many more investors are now able to meet the current thresholds based on the value of their homes than was the case in 1982, which is inconsistent with original regulatory intent. Also, the SEC would be directed to review the financial standards at least 4 years to make sure the standards stay relevant. I am pleased at the support the legislative proposals have received. The North American Securities Administrators Association on April 27, 2010 issued a letter stating, We strongly support the adoption of a disqualification provision to prevent recidivists from conducting securities offerings under Regulation D, Rule 506 (a regulatory exemption for private placements). This change would provide much needed investor protection from securities law violators and would not prevent legitimate issuers, including small businesses, who use this exemption, to raise capital. Participants in the Regulation D offerings are ``accredited investors'' as established under SEC rules. The monetary standards for determining who qualifies for ``accredited investor'' status haven't changed since it was established in 1982 and inflation has rendered them almost meaningless. Therefore, we support, at a minimum, excluding the investor's primary residence from the net worth standard. The Angel Capital Association on April 21, 2010 issued a statement saying that ``[t]hese amendments will ensure that high growth entrepreneurs have access to a strong pool of angel capital and that investors are better protected from fraud.'' The purposes of sections 412 and 926 of the bill have been to better protect investors while facilitating capital formation. This amendment more completely accomplishes these goals. It is an important contribution Senator Bond has made, along with others, to this bill. It was never our intention at all. Startup companies need what are called angel investors who are critically important for startup ideas that do not necessarily attract the traditional capital to get behind them. People who step up and take a chance on new ideas deserve some special recognition. The fact is, they have played a very critical role in capital formation over the years. Therefore, I was pleased to be able to accept the amendment and make it a part of this bill. This will allow for efficient capital access for entrepreneurs and also provide fraud protection for investors. Mr. President, I ask unanimous consent to have printed in the Record a letter from the Angel Capital Association.