Jeff Merkley

Mr. MERKLEY

Mr. MERKLEY. I ask unanimous consent that the order for the quorum call be rescinded.

Mr. MERKLEY

Mr. MERKLEY. Mr. President, I rise to speak about an issue of critical importance to the future of our democracy. I have in my hand the majority opinion titled ``Citizens United.'' This Supreme Court decision, decided on the narrowest of grounds, is of profound importance to our Nation and how the voices of citizens get heard or get drowned out. This decision, Citizens United, is a dagger poised at the heart of American democracy. Our Nation is unique in world history in that it was founded not on nationality of royal bloodlines but on a simple idea, a simple yet revolutionary idea that the country's people are in charge. As was so often the case, Abraham Lincoln said it better than most. He said, the United States is a ``government of the people, by the people, for the people.'' What that means is that we elected officials work for the people. They elect us. They are in charge. But this formula, government by and for the people, cannot survive if our elections are not open, free, and fair, and Citizens United ends open, free, and fair elections in America. This decision says that unlimited secret and foreign funds can be spent on elections in the United States of America. Let me restate that. This decision, Citizens United, says unlimited secret funds can be spent on elections in the United States of America. This is not just some hypothetical. Reports estimate that over the last few weeks, $24 million has been spent in secret spending, with no ability to trace who put it into campaigns. The results are negative attack ads barraging candidates in State after State after State, under, I am sure, pleasant-sounding names such as Citizens for a Strong America or Citizens for Blue Skies or Citizens for a Better Nation, front groups that are using this secret money, allowed by this decision, to drown out the voice of the American citizen in elections across this land. Government is not by and for the people if corporations and even foreign corporations and giant government contractors are able to hijack our electoral process to run millions of dollars of attack ads against any candidate or legislator who dares put the public interest ahead of the company's bottom line. Our Constitution, through the first amendment, puts the highest protection on political speech, recognizing how important it is that citizens be able to debate the merits of candidates and ideas. But the essence of the first amendment is that competing voices should be heard in the marketplace of ideas. The Citizens United decision gave the largest corporations a stadium sound system to drown out the voices of our citizens. Let me give you some sense of this. Take a single corporation in 2008, Exxon Corporation. Exxon Corporation made a lot of money in 2008. If it had spent just 3 percent of the total net revenue it had that year, that would exceed all the spending by Presidential candidates for the 2008 election. Three percent of a single corporation's net revenues would drown out all the dollars spent by citizens in the Presidential race in the 2008 election. That is the stadium sound system I am talking about. Think about the scale. My Senate race was far and away the most expensive election in Oregon history. Two candidates together spent about $20 million. To translate that back to a single corporation, Exxon, that would be the amount of money in net profits they made every 10 hours. You get some sense, then, of the challenge. If you like negative ads, you will love the impact of Citizens United. Imagine what corporations will do to put favored candidates in office. The sheer volume of money could allow corporations to handpick their candidates, providing unlimited support to their campaigns, and take out anyone who dares to stand for the public interest. The DISCLOSE Act we are debating is not a perfect solution to this attack on American democracy. But it does change one critical feature; that is, secret spending becomes publicly disclosed spending. My colleagues on both sides of the aisle have spoken time and time again about the importance of public disclosure and democracy. One of my colleagues from Texas said: I think the system needs more transparency so people can reach their own conclusions. In other words, people should know who is funding that campaign ad. One of my colleagues from Tennessee: To me, campaign finance reform means individual contributions, free speech, and full disclosure. In other words, any individual can give whatever they want as long as it is disclosed every day on the Internet. Otherwise you restrict free speech and favor super rich candidates, candidates with famous names, the media and special interest groups, all of whom can spend unlimited money. That is a strong statement by my friend and colleague from Tennessee in support of disclosure. The Republican floor leader, speaking in 1997: Public dealerships of campaign contributions and spending and spending should be expedited so voters can judge for themselves what is inappropriate. How can a voter judge the content of the ad if they do not know what money is behind it? So disclosure is something that has been a bipartisan concept. Folks have referred to it as sunshine is the best disinfectant. So this bill brings transparency. The DISCLOSE Act makes the CEO of a company stand by its words. The CEO would have to say, at the end of the ad, that they approved this message, just like political candidates have to do right now. It is common sense. If a company is willing to spend millions working against a candidate, voters, our citizens, have a right to know who is involved instead of allowing them to hide behind shadowy front groups. Similarly, this bill would require 527 groups, which exist solely to influence elections, to be transparent about who is funding them. Voters have a right to know where ads and campaign dollars come from. A second issue this act takes on is the pay-to-play issue; that is, the concept that groups that are competing for government contracts and winning those contracts have a particular conflict of interest when it comes to spending large volumes on campaigns. So this gets rid of that conflict of interest. It says it bars government contractors from running campaign ads or paying for other campaign activities on behalf of a Federal candidate. We understand this conflict of interest. We have the Hatch Act. We understand Federal employees have a conflict of interest. We also understand government contractors have a conflict of interest. This bill also takes on the issue of foreign-owned corporations. It says that if a company is 20 percent foreign owned, it is not eligible to allow these massive expenditures on behalf of particular political candidates or causes. Do we want to leave the door open to foreign corporations spending unlimited sums here in America to change the course of our Nation? I do not think so. I do not think any red-blooded American wants foreign corporations dictating the future of the United States of America. That is what this act is about. Essentially, what the Citizens United decision did, it created a ``supercitizen'' who can operate in secret with unlimited funds to influence American elections. A few years ago, I was with my son on the first floor of the Lincoln Memorial, down under the stairs. I saw a quote that had been posted on the wall. It said something to the effect of: The greatest threat to the success of our Republic is that the citizens have an equal voice. I said that is an interesting quote coming from a President in wartime, in a civil war, dealing with slavery. So I asked the ranger: Say, do you know the background of that quote? Because I was surprised President Lincoln did not say the biggest threat was the war or slavery or reuniting the sides or preserving the Constitution. But he said: the citizens' voice, preserving the citizens' voice. The ranger lit up and said: Yes, actually, I do know the background to that. He said: During the civil war, President Lincoln was very concerned that the military contracts that were being let by the government were resulting in numerous representatives of companies coming to DC and lobbying intensely to get those contracts. He was concerned that voice would drown out the voice of the people. It is no wonder. It fits right with a President who understood the heart of the genius of American democracy, that we are talking about government by and for the people. Well, Lincoln's concern about that conflict of interest is one that should be magnified many times today in the context of Citizens United. Citizens United, that allows unlimited secret donations and foreign donations to influence the course of American elections. President Lincoln reminds us the essence of our Nation, the cause that brought a generation of patriots to challenge the greatest military power of the 18th century, the idea that has inspired people to leave everything to come to our shores is a government of people, by the people, for the people. So let's say no to secret spending. Let's say no to foreign corporations. Let's say no to the conflict of interest of government contractors using their profits from their contracts to weigh in and try to influence and getting favoritism with candidates. Let's say yes to government by and for the people. We need some profiles in courage today to preserve the heart of our democracy, government by and for the people. I yield the floor. The PRESIDING OFFICER (Mr. Pryor.) The Senator from New Jersey.

Mr. MERKLEY

Mr. MERKLEY. Mr. President, I ask unanimous consent that Peter Gaulke, a legislative fellow in my office, be granted floor privileges for the remainder of this Congress.

Mr. MERKLEY

Mr. MERKLEY. I thank Senator Landrieu very much for her leadership as chair of the Small Business Committee. She has put in countless hours working with the national small business community and asking what the key obstacles are and how can we help to address them. The result is a list of endorsements from I would say about every organization in the United States. This list has grown as we have been debating this bill. This list has grown while we were out talking to our small businesses back home. I was astounded when my staff put it into my hands today because it is no longer one page, as it was earlier in our conversations, it is no longer two pages, but page after page of fine print of every organization from the U.S. Chamber of Commerce, the U.S. Women's Chamber of Commerce, the American Bankers Association, the Hotel and Lodging Association, the American Farm Bureau, the National Association of Realtors, the National Federation of Independent Business, the National Restaurant Association, to the Independent Community Bankers of America. If you know of an organization that works with small businesses in America, it is on this list. It is phenomenal. Why have all these groups--more than I have ever seen on any bill-- said they support this small business jobs bill? Well, I will tell you why. Because this bill is targeted at putting small business back in gear as the job factories of America. I was just back home, and I completed my annual set of townhalls in 36 counties, so I have been all over the State of Oregon. I have heard from independent businesses, small businesses on the coast, I have heard from businesses in central Oregon and southern Oregon and the valley, and everywhere people said: We need access to credit. We can't seize a business opportunity that is right in front of us because we can't get the credit necessary to seize that opportunity. And they want to know what is going on. In some cases, perhaps a bank is a little bit nervous, having gone through and weathered this national economic meltdown. But in many cases our Main Street banks are at the limit they are allowed to lend based on their current capitalization, and so they will say: Well, the FDIC is enforcing the rules on leverage and we can't do additional lending. Well, this bill addresses that. This bill, through the Small Business Lending Fund, increases the capitalization of Main Street banks. Those are healthy Main Street banks. It allows them to basically increase lending to small business on a 10-to-1 ratio. So that means that $30 billion in recapitalization for Main Street America can climb to $300 billion of lending to small businesses and they can then seize those opportunities and put America back to work. That is the power of the Small Business Lending Fund that is in this bill. But that is not all that is in this bill. There is in this bill the ability to have 100 percent of capital gains written off so you can basically move your assets to seize another opportunity without having to pay a tax on the sale of the assets you have right now. This has a 5-year carryback on business credit so that if you can't use those credits this year because your business is down, you can use them against earlier profits, and that means a reduced tax bill. This has an extension of bonus depreciation, which is very helpful. This bill has the Jumpstart Act, which says if you are a small business, just getting started, then your original startup cost deduction is doubled. Taken together, this bill is about putting small business to work in America. I can't imagine why we wouldn't have 100 votes on the floor of this Chamber, 100 votes to put small business back on track. Sometimes legislation is regional--we will do a little bit that affects an industry in the Northwest or in the South or maybe it is for the west coast--but there is nothing regional about this bill. Last I checked, small businesses are the heart of every town, city, and rural area of the United States. So this puts people back to work and strengthens the economy in every part of America. That is why the list of endorsements goes on page after page after page. My colleague from Washington State is going to continue to share her observations, so I will yield, but I want to conclude by saying this is the type of problem-solving legislation that is needed in America, where rather than looking to an election down the road and political positioning, we do the hard work of investigating the obstacles and then we proceed to design legislation to remove those obstacles, and that puts a job back in every community in America. That puts a lot of jobs back in every community in America, and every job is the foundation for a family. I can tell you that the unemployment rate in Oregon is absolutely unacceptable. Families are hurting, with the loss of a job on top of a loss to the value of their house and often the loss of their retirement savings. This starts to turn America around. It is time to pass this act, and I encourage all my colleagues to vote early, vote yes, and let's put America back to work.

Mr. MERKLEY

Mr. MERKLEY. Madam President, today I honor the centennial of the Pendleton Round-Up. Throughout its history, the Pendleton Round-Up has been a spectacular celebration of Oregon's Western heritage. The rodeo has been a world-class event since its inception in 1910. The inaugural Round-Up drew 7,000 spectators to a town of only 4,500. Over time, crowds have ballooned to 50,000, and while cowboys and broncos still take center stage, a host of other activities engage families at the 4-day event. To the people of Oregon, the Pendleton Round-Up reflects our great sense of civic pride, love of the outdoors and appreciation of our State's history. I have experienced firsthand the excitement the event brings to Pendleton, and the attention the town brings not only to the competition, but to honoring Oregon's Native American past. A 100-year anniversary is a considerable achievement, and yet the Pendleton Round-Up shows no signs of aging. It remains one of the largest rodeos in the world and its success is a major boon to Oregon's economy. The Pendleton Round-Up is truly unique, and its storied history has woven itself into the fabric of eastern Oregon. I wish the Round-Up and the entire town of Pendleton a happy centennial and continued success for years to come. Let'er Buck!

Mr. MERKLEY

Mr. MERKLEY. Mr. President, I wish to speak to the proceedings that have just taken place this evening and try to put them in some context. What we have had before this Chamber is a bill that is very important to putting the American economy back on track. Lots of folks have looked at the various chokepoints in our economy, and so many have found that one of the critical issues is the access to lending by small businesses. That is a key provision in the bill before us--the ability to capitalize healthy community banks so they can make funds available to small businesses so small businesses can seize opportunities and put Americans back to work. There are many other terrific provisions in this small business jobs bill. They include, for example, a capital gains tax holiday that will assist small businesses. It includes a whole number of provisions, in fact, that stack up to $12 billion in tax reductions for small businesses. This bill came to this floor in a bipartisan way, with many provisions that were Republican provisions, some that were Democratic provisions, bipartisan support out of committee. It is before us now, and the question throughout this day has been this: Are the Republicans blocking this support for small businesses because they are opposed to helping small businesses and want to drive this economy back into a double-dip recession or do they have a legitimate concern that they should get a chance to offer amendments on the floor of the Senate? To put that issue to rest, our majority leader made the following proposal: Our colleagues across the aisle would get three amendments. The Democrats on this side of the aisle would get three amendments. Both sides get to choose the amendments they want to bring forward. That is a legitimate debate about small business. That gives everybody a chance to weigh in. That certainly addresses any procedural issue. What was the response of the Republican leadership? The Republican leadership responded and said: No, we want four amendments, and we also want to control what the Democratic amendments are. In other words, we want to have the say on eight amendments while the Democrats choose none. Of course, it becomes very clear: The Republican intent is not to have a debate about taking our Nation forward and getting out of recession; it is to block bills that will help our small businesses and put this economy back on track. I say to my colleagues across the aisle, there is too much at stake for this sort of outrageous political competition. Put your November thoughts aside, I say to my friends, and focus on what is right for the economy of this Nation, what is right for the small businesses of this Nation. Let's have the three amendments on each side as each side would choose. Let's get it done, and then let's go home and know we are working together in a problem-solving, bipartisan fashion to make our communities stronger, to create employment opportunities for our working families, and to strengthen our economy as a whole.

Mr. MERKLEY

Mr. MERKLEY. Madam President, I also rise to discuss provisions of this bill and would like to begin by saying, when one gets into the details, you see there is a spectacular array of provisions that have been put together by the Small Business Committee to assist small businesses in helping them get themselves back on track, and, in the course of doing so, get our Nation back on track. Particularly, I thank the chair of the Small Business Committee, the Presiding Officer, Senator Landrieu, for working in such a bipartisan manner to bring together the best ideas that can be brought to bear in that effort to assist our small businesses. I will mention just a few of them. A 100-percent exclusion of small business capital gains will be big factor for helping our small businesses, a carryback provision so small businesses can take and balance out losses against former profits, making the general business credit not subject to the alternative minimum tax, increasing the Small Business Administration loan limits, eliminating the Small Business Administration loan fees, and so on and so forth. These are terrific provisions to assist small businesses. But I wish to particularly speak to two additional parts of this bill. One is the Small Business Jump Start Act. This is intended to help businesses get started in their first year. Under this provision, it allows the deduction not of $5,000 in startup expenses but of $10,000. So it is a doubling of kind of a jump-start or a boost to getting businesses off the ground. It is for those entrepreneurs who say: Here is an opportunity, and I am going to take a big risk, and I am going to take my savings or borrow against my house or utilize my credit card in order to jump in and seize this opportunity. It is giving those folks additional help in that first year, and who knows when those first-year efforts--when so much is at risk--are going to turn into the successes that employ person after person after person on Main Street in communities throughout this Nation. The second piece I wish to address is the Small Business Lending Fund. I think every legislator who has been spending time back home in townhalls has heard from owners of small businesses, has heard the stories of how a long-term banking relationship--a relationship in which they knew they could always turn to their community bank for help--has not been able to yield the credit they need at this moment and not through the fault of the community bank. The community bank wants to lend but because the community bank's capital has diminished, they are at the limit of their ability to make loans. Unless they bring in additional capitalization, they are not able to make additional loans, no matter how good that opportunity might be. We have heard about small businesses that, in fact, are having to rely upon their credit cards. The percent of small businesses in America that are currently turning to their credit cards has increased 14 percent in a single year--14 percent more small businesses having to rely on a credit card because they cannot get access to traditional lending from their community bank. Well, this chokepoint in our system is essential to address because if the small business entrepreneur cannot access credit to seize an opportunity or to expand on a successful formula, then we will not be putting businesses back to work, we will not be putting citizens back to work for those businesses. So that is what the Small Business Lending Fund does. There are a number of questions that have been raised about it. I wish to address each of those. But I wish to note the potential of taking $30 billion in recapitalization, which actually makes a profit for the taxpayer--CBO estimates a profit of $1.1 billion--and in addition will bring in additional revenue through the taxes on the additional folks who are employed and the larger small business profits. So the $1.1 billion, that is just the base. That is not including the additional revenue that will flow from the success of small businesses and the restoration to employment of workers across this Nation. So one of the questions has been: Will these funds recapitalize or bail out failing banks? The answer is absolutely not. This is a program for small business, making capital available to small businesses through healthy community banks. That is a very important distinction, and there are ratings in which the regulators evaluate the health of banks. They range from 1 through 5. They are called CAMELS ratings, and only those banks with ratings of 1, 2, or 3--that is, healthy banks-- will be eligible for this program. A second question has been: Well, if we help recapitalize community banks, is there a possibility they will sit on the funds, prepare for a rainy day or a rainier day? The answer is no. The program is structured so that if funds are lent out, then the dividend rate falls to 1 percent. But if they are not lent out, the dividend rate rises to as high as 7 percent. Well, that 7-to-1 distinction means you are not going to borrow money if you do not have an intention of using it to leverage funds to lend out because you will be losing money, and you want to take advantage of that incentive to only pay a 1-percent dividend. So there is a lot of carrot in this in a structure that makes it illogical for a bank to seek these funds in order to sit on them. A third question is: Why utilize community banks to help get lending to small businesses? Why not just do it in some other direct government fashion? Well, the answer can be discerned by anyone exercising a small portion of common sense. Main Street banks are in the business of evaluating opportunities, entrepreneurial opportunities, and funding those opportunities to make a profit. That is what community banks do. That is their expertise. This approach builds on the expertise of Main Street banks to produce successful Main Street small businesses across our country. Another question that was raised was: Will recapitalization cause banks to have to rush to make speedy loans and not take the time to evaluate that business opportunity thoroughly? The answer is it will not, because this program was designed so there is a 2-year span of time in which a bank has the opportunity to make that transition from capitalization to lending before the dividend rate is locked in. So there is no incentive for a rush to judgment. I ask all my colleagues: Is not this the type of bipartisan problem- solving America wants us to undertake, bringing forth, through the committee process, through an open discussion--with television cameras running--the consideration of this idea and that idea being merged together to bring to the floor a coherent piece of thoughtful legislation to help address one of the major challenges in America, which is getting our small businesses back on track? Is not this what we are being brought here to do? So I applaud the Small Business Committee. I applaud the work of the chair and all the members of the committee who produced this type of concrete aid to put Main Street back on track, to create employment for citizens across this Nation, and, by so doing, put our Nation back on track. Thank you, Madam President.

Mr. MERKLEY

Mr. MERKLEY. Mr. President, the Citizens United case has aimed a dagger at the heart of American democracy. So I rise today in support of the DISCLOSE Act, to stop that dagger aimed at our heart. Our Nation is unique in world history in that it was founded not on nationality or royal bloodlines but on an idea--a simple yet revolutionary idea--that the country's people are in charge. As was so often the case, Abraham Lincoln said it better than anyone--that the United States is a ``government of the people, by the people, for the people.'' What that means is we, the elected officials, work for the people. They elect us. They are in charge. But this idea, this vision, this government by and for the people cannot survive if our elections are not open, fair, and free. The government is not by or for the people if corporations and even foreign corporations and giant government contractors are able to hijack the electoral process to run millions of dollars of attack ads against any candidate or any legislator who dares to put the public interest ahead of a company's interest. Our Constitution, through the first amendment, puts the highest protection on political speech, recognizing how important it is that citizens be able to debate the merits of candidates and the merits of ideas. But if the essence of the first amendment is that competing voices should be heard in the marketplace of ideas, the Citizens United decision just gave the largest corporations a stadium sound system with which to drown out the voice of American citizens. Think about the scale of the spending this decision allows. My Senate race was far and away the most expensive election in Oregon history. The two candidates together spent around $20 million. ExxonMobil, a single corporation, made $20 million in profits every 10 hours in 2010, and that was during their worst year in a decade. If you like negative ads, you would love the impact of Citizens United. Imagine what corporations will do to put favorite candidates in office. The sheer volume of money could allow corporations to handpick their candidates, providing unlimited support to their campaigns to take out anyone who would dare to stand up for the public interest. The DISCLOSE Act will help prevent special interests from drowning out the voice of American citizens. First, this bill will bring transparency to campaigns now that unlimited money is allowed to be spent on negative attack ads. If you are looking to buy a used car and someone tells you the engine looks great, you would want to know if the person saying that is your trusted mechanic or the used car salesman. Who is speaking is critical information in evaluating the message. With that principle in mind, the DISCLOSE Act makes the CEO of a company stand by their words. The CEO will have to say at the end of the ad that he or she approves this message, just as political candidates have to do today. It is common sense. If a company is willing to spend millions working against a candidate, the voters have a right to know about that company's involvement instead of allowing it to hide behind shadowy front groups. The second problem the DISCLOSE Act takes on is the system of ``pay- to-play'' where companies campaign on behalf of candidates in order to get access to government contracts. This legislation bars that form of corruption. It bars government contractors from running campaign ads and paying for other campaign activities on behalf of a Federal candidate. Passing the DISCLOSE Act is key to sustaining the healthy democracy that represents the interests of American citizens. A healthy democracy requires transparency, an equal voice for all its citizens, not an amplified voice for those who represent very large corporations. So I urge all my colleagues to support this legislation. As President Lincoln, a great Republican President, reminds us: The essence of the Nation, the cause that brought a generation of patriots to challenge the greatest military power of the 18th century, the idea that inspired people to leave everything behind to come to our shores is a government of the people, by the people, and for the people. We are here because we work for the American people. Let's pass the DISCLOSE Act today so our successors can say the same thing tomorrow. Thank you, Mr. President.

Mr. MERKLEY

Mr. MERKLEY. Mr. President, I came to the floor earlier to talk about a number of concerns that had been raised and how those did not actually fit the bill. One of those concerns was that banks would simply sit on the funds, which is not the case because there is incentive to lend. Another concern is there would be capitalization of failing banks, which is not the case because ratings are being applied so that capitalization only goes to healthy banks. The point is not to save banks. The point is to get lending, to get capital into the hands of small businesses. I went through a number of those concerns. Since I left the floor, there were three more issues that were raised by those who have concerns about the program. I wished to come back and address those issues. One issue that was raised by a colleague is he said this program will have the government saying where to send money, what businesses will get money. In fact, no, not at all because similar to any capitalization of a small bank, the bank decides where to send money. That is the beauty of this public-private partnership; we are channeling, we are connecting to the power and wisdom of the small banks that understand the economy on their Main Street, that understand the reputation and capabilities of the folks who are asking for the loans, that understand the local economic dynamics. That is the duty. It is small banks that do what they do very well, which is decide where it is smart to invest and not invest. A second concern that was raised since I last left the floor was that this would create a rush to lend. I think maybe the speaker had some picture in his mind that the moment a small bank got capitalized, they would immediately be judged on how much they had loaned out and that their rate of dividends would be set on that and, therefore, they would just throw the money out the door. I wanted to make sure folks understood the basic mechanism in this bill. It works like this: For every 2.5 percent incremental increase in loans made by small and medium banks, the dividend would be reduced by 1 percent. This is the key phrase: The enumerated loans would be monitored for a 2-year period, starting on the date of the investment. Based on the lending rate at the end of that 2-year period, the dividend rate would be locked in and the bank would benefit from this attractive rate for the next 3 years. If a bank seeks some funds to be recapitalized, it has a full 2 years to get loans out the door and needs to do so only at a rate of 2.5 to 1; whereas, we know a lot of banks will leverage that at 10 to 1. This is a modest standard and certainly nothing that would impel a rush. The third critique that was raised said this report--I hold up the cover, the ``May Oversight Report, Small Business Credit Crunch and the Impact of TARP,'' said there was a moral hazard in the structure of a small business lending fund. Let's find the language in the report and analyze what was actually being said. We will find it on page 77. Feel free to look it up. In this report, it is going through a series of issues and saying: OK, this is something worth considering. That is why we value these kinds of reports because they point out the challenges we might be facing and allows us to design legislation to work better. This report notes: A capital infusion program that provides financial institutions with cheap capital and a penalty for banks that do not increase lending runs the risk of creating moral hazard by encouraging banks to make loans to borrowers who are not creditworthy. Then it goes on to answer that critique: Although, in the legislation, the carrot . . . is arguably stronger than the stick. . . . It is an incentive system rather than a penalty system. Then it goes on to note further, and it received feedback from Treasury: . . . the SBLF was designed to minimize the chances that banks will use the capital to make risky bets. Why is that? The program does not shift risk away from the banks that receive the capital: any institution that receives funds under the SBLF is obligated to repay that money to Treasury and therefore will lose money if it makes a bad loan. I made this point earlier that unlike a guaranteed loan program where it does not matter if you make a bad judgment, in this case, it is the banks themselves putting at risk their own profits, utilizing their best judgments. I think it is appropriate that folks come to the floor and say: I want to oppose this bill because it has this problem and this problem. That is the value of debate. Others can come to the floor and say: Actually, it is not designed like that; actually, it has been addressed because it has gone through months of people wrestling with the best design to harness the power of small banks, to address the challenges of small businesses in getting loans. We will not get out of this recession if we do not empower our small businesses. There is only one other approach that has been brought to this floor as an alternative, and that alternative is to tell the small business to run up its credit card. I don't know about in my colleagues' States, but in my State, running up your credit card is not a viable option for small businesses to succeed. We have the power, the wisdom of Main Street banks helping Main Street small businesses. Let's put that power to work.

Mr. MERKLEY. Madam President, I wish to start simply by recognizing the tremendous work the chair of the Small Business Committee is doing in championing commonsense strategies to assist our small businesses in being the job factories that they can be if they have access to credit. That is where the genesis of this bill comes from. The question we have heard in each of our States is: How can I, as a small business, gain access to credit when the credit markets are frozen? We have done precious little to assist them. So often, we need to indulge in far less partisanship and a lot more problem solving. If one investigates what is going on in the credit markets for small business, one finds that the businesses have gone to their banks, and the banks have said, we are cutting your credit line in half or we are eliminating it. The small business said, well, we have always made every payment. Yes, but we are in a land of frozen credit and we cannot extend the same amount of credit. When we give you that line of credit, it counts against our leverage, and we have to increase our capital holdings to meet the leverage requirements. So we are taking away or cutting in half or cutting by 90 percent your line of credit. At that point, the small businesses go to other banks and find out the other banks are in the same position. These are community banks where often the principals know each other, they have worked together, the banks want to lend, the small business wants to borrow, they can see it is a profitable arrangement, but the banks are constrained by their leverage limit. If there were not a credit crunch in this Nation, the bank would be able to recapitalize and then make additional loans. That is where we had a period of irrational exuberance, now we are in a period of irrational fear, and people do not want to recapitalize community banks, even when they are healthy. Through much discussion with many thoughtful people from various parts of the country, various parts of the credit system, it became clear that the chokepoint was the capitalization of healthy community banks. This is why what this provision does is it provides for the recapitalization of community banks. Community banks will have to pay that money back. A lot of questions were raised about this point, and I want to clarify some of them. The first question was: What happens if a bank that is going under is seeking a bunch of money to recapitalize? Will this program help them? Answer: No, it will not. Because only banks that have CAMEL ratings--those are ratings of how healthy they are--of one, two or three qualify. The banks have to be healthy, because this is ultimately not about saving banks, this is about getting capital into the hands of small business. The second question that many have raised is: Well, will banks not just sit on the funds, and not make loans? Will they not hoard funds in case they have better opportunities as the economy recovers? And the answer is probably not. Because the program was designed so that when a bank recapitalizes in this fashion, they pay dividends. If they do not lend out the money, then they pay a high dividend of 7 percent. They are not going to make money sitting on funds in their bank and paying 7 percent. But if they make loans, then they pay a 1-percent dividend, so that puts them in a situation where they will make money if they make loans. So they will not even ask for the money if they do not intend to lend it. That was a thoughtful question for some of my colleagues to ask, would banks sit on these funds. It is important that we design this program so that they do not. And we did. A third question came: Well, does this not put taxpayer funds at risk? The answer is, actually it does not, because we are not lending to unhealthy banks, we are capitalizing healthy banks. The Congressional Budget Office estimates that this will make $1 billion, over $1 billion for the U.S. Treasury. That estimate does not include the taxes that individuals will pay on the wages they earn because small businesses are able to hire. That estimate does not include the taxes that small businesses will pay on their profits which will be higher when they are able to expand. So that is a bottom-line positive return that could be far larger when you take into account the impact on employment and the success of small businesses. Other folks have asked another question: Why get lending into the hands of our small businesses through the hands of community banks? Why not create some government organization to do it? Well, very simply, banks are on Main Street. It is their business to know what works and what does not work. They know the principals involved. They know the local market dynamics. You do not want to set up a government agency to distribute loans when you can have the power, the knowledge, the wisdom, of community banks making smart decisions. Then finally an additional question was asked: Well, will banks not make loans that maybe are not a good bet if they have this additional capitalization? Well, actually, no, they will not, because, first, they are not required to be recapitalized in this fashion. And if they do make loans through this system, they are not guaranteed loans. When you have a guaranteed loan, you are saying to someone: You bear no risk. But these loans are not guaranteed. This is a bank doing its standard lending. In that standard lending, they make money if they make good loans, and they lose money if they make bad loans. So they have absolutely no incentive to lend, because if a loan goes under, the bank is hurt. It is all the power of a smart path to getting capital into the hands of our small businesses. I guess my request to all of my colleagues is to ask yourselves if we are going to ever get out of this recession if we do not unleash the power of small business in America to create jobs. Please ask yourself, is it possible to unleash the power of small businesses if the small businesses do not have access to credit, and, therefore, if you believe in small business, if you believe in job creation, if you believe in strengthening communities through successful businesses and employed families, then this plan makes a lot of sense. I will close with this thought: Let's bring commonsense problem solving to the challenge of putting America back on track. Let's set partisanship aside, let's set thoughts about the November elections aside, and let's engage in commonsense bipartisan problem solving, and this program makes all the sense in the world. I yield the floor.

Mr. MERKLEY

Mr. MERKLEY. I am pleased to yield to the majority leader for that purpose.

Mr. MERKLEY. Mr. President, I note that there are a couple of issues raised that really are false issues. One is in regard to the debt. My colleagues across the aisle are proposing a massive increase of the debt by extending the Bush tax cuts, and they are saying that helping those who are unemployed through no fault of their own is an increase to the debt. This is coming from the same folks who brought us the Bush policy, the ones who doubled our national debt during the Bush administration and created the house of cards that crashed down upon the American families over the last 2 years. So it is not about debt. When it comes to our children--and I hate to see the abuse of this argument--sound economic policy is the right thing. If we put families to work, those families are far healthier, those families have a foundation, they have a future, and they recognize there is a horizon that is brighter. They recognize they will be able to move forward to create opportunity for their children. That is the foundation of a successful family. But giveaways to the wealthiest at the expense of helping families is wrong for our children. If you don't put people back to work, you don't create an economic revival, you don't create revenues in the Treasury, and therefore you don't create the ability to pay down that debt. So do we want the Bush policy 2, the nightmare that doubled our debt, or do we want the investment in families and education that we had under the Clinton administration and that we have under the Obama administration, which will put money back into the Treasury? I think the choice is clear: Let's shore up small businesses and our families, let's shore up education, let's put this economy back on track, and let's put people to work, and in so doing we will address and resolve the issue of the deficit.

Mr. MERKLEY. Mr. President, during the debate, I had a chance to sit in the chair for a while and listen to one of my colleagues from across the aisle. In the space of just a short period of time, that colleague turned this into a debate about courage, about integrity, about character, and about easy versus hard choices. In other words, he took all of his time to use attacks on those who do not share his version of economic policy and where our country should go. Rather than making the arguments, he made the personal attacks. He also said something that struck me as right-on, which is that often when people are using personal attacks, they are trying to camouflage and only give half the story and trying to set up a straw man. That is certainly accurate. What is the real debate we are having on the floor? Well, on one side, there is the argument--an argument I would weigh in favor of-- that says we need to put this economy back on track, put families to work, and that it is through jobs for American families, and that we will restore the financial foundations not only of families but of our communities and of our Nation as a whole. There are certain key things we can do now to accomplish that. Those things include helping our school districts create a bridge through this recession so we don't see thousands of teachers being laid off. There is a provision to assist our school districts in the Defense supplemental bill we will have in the Senate in the near future. Second, we can assist families who are unemployed through no fault of their own and help them create a bridge through this recession. Third, we can help our small businesses create jobs because there is a dysfunction right now in which our community banks that best understand Main Street are at their leverage limits and therefore cannot make additional loans. Indeed, the Chairman of the Federal Reserve was speaking to this challenge in the Capitol just an hour ago--the systemic dysfunction in which capital is hung up and unavailable to our small businesses. It is our small businesses that, by utilizing that capital, can seize economic opportunity and put people back to work. It is a good strategy to enable those funds to be available to small businesses and help recapitalize community banks. It makes money for the Treasury. The CBO estimated it will make $1 billion for the Treasury. It does it by enabling $300 billion in liquidity to small businesses. The CBO estimate of the funds that come back to the Treasury doesn't include the revenue created by families who are put back to work and pay income taxes or by small businesses that are more successful and pay more in business taxes. So it is a win-win. We create a path by supporting our States through funds for education, and we create a path through this recession by helping families who are unemployed because the economy is in such a mess. We create a path out of this recession by creating jobs for American families by supporting our small businesses through our community banks. That is one version of how we can go forward. My colleague across the aisle has a different version. The different version is--and this is the leadership of the Republican side that has been talking about this all this week. Their version is, no, instead of helping families, small businesses, and schools, we want to extend the Bush tax cuts to the wealthiest Americans. That is the path out of this recession, say my colleagues across the aisle. There is a fundamental difference of economic strategy involved. What is striking to me is that we have a lot of information about the strategy being proposed by my colleagues across the aisle because this was the Bush Presidency strategy. We tried it. We found out that when you give away the National Treasury to the wealthiest Americans, you drive this Nation into debt. In fact, under the Bush administration, we doubled our national debt. Under the very idea and plan for which my colleagues across the aisle are advocating, we drove this Nation's economy into the ground. To counteract that, the Bush administration said: Let's deregulate the banks and Wall Street and make everything move a little faster, and maybe consumers will spend a little more and banks will take more risk, and we will take away all the lane markers and the traffic signals in our financial system, and, by golly, somehow we will make this economy flourish. Do you know what. They built a house of cards. It was a house of cards built on predatory mortgages and the securitization of those mortgages, with extraordinary leverage of up to 40 to 1 under that deregulation. That house of cards came down, and that house crashed on the American family, and that American family lost their savings for retirement. Families in my State lost their jobs, and the unemployment rate is huge. The families lost the health care that went with their jobs. Well, that is not a very pretty picture. But my colleagues, who brought us that Bush economic nightmare that crashed on the heads of the American families, are coming to this floor and saying: We want more of the same. Earlier, my colleague across the aisle characterized that strategy as the ``tough'' choice, while he characterized the strategy of helping American families and small businesses and schools as an ``easy'' choice. Well, let's try to set these pejoratives or characterizations aside and just say that they are different choices--one, the revival of the Bush strategy, which is something like the summer sequel to a cheap horror story that wrecks the economy of the United States. That strategy is sitting as a potential idea and threat to our Nation.

Mr. MERKLEY. Five minutes.

Mr. MERKLEY

Mr. MERKLEY. Mr. President, thank you, and thank you to the Senator from Louisiana and your clarion call to go into battle, to fight for small businesses in our Nation. We all know small businesses are the job-creating factories in America and that if we do not go to battle for our small businesses, that, indeed, we will be in this recession for a very long time, which will be certainly bad for our small businesses, it will be bad for all the citizens who would be employed by those businesses, and will certainly be bad for all those trapped in the deep, long recession. So I thank the Senator for her leadership. Also, I would like to thank very much Senator Cantwell for her outspoken advocacy on behalf of small businesses and on behalf of this effort to provide liquidity; to my colleague from California, Senator Boxer, who got involved very early as a partner in creating a plan to help address this fundamental challenge. That challenge is the small businesses are having their credit lines cut and they are going to their community banks and their community banks are observing that, unfortunately, they are at the leverage maximum allowed under the rules so they cannot do additional lending. So here we have banks that would like to lend. We have small businesses that would like to borrow and be able to put more people to work, to seize opportunities in our economy. But they cannot do it because we have this malfunction. This malfunction is the capitalization of community banks that enables them to lend more. So this provision addresses that malfunction. It provides a mechanism to recapitalize community banks that are healthy. That then enables them, under the existing leverage requirements, to provide additional lending to small businesses across America. Well, this wins on every level. First, it makes money for the taxpayer. CBO estimates it will bring in $1 billion of revenue, and that is not including the additional revenue from personal income taxes on the folks who get jobs because small businesses put people to work. It does not include the additional revenue from the small businesses themselves and their share of taxation. So thriving individuals with jobs and thriving small businesses will create additional feedback to our Treasury, helping us to attack the deficit, in addition to the billion dollars that CBO estimates. A couple questions have been raised about this strategy. One question that has been raised is: Well, will not community banks possibly take the additional capitalization and then sit on the funds? Indeed, that is a concern that has been addressed in the design of the program. The program says community banks will pay a dividend back to the Treasury of 1 percent if they provide the full leverage of lending to small businesses and 7 percent if they do not and somewhere in between if they are in between. So you have a 7-to-1 provision. That is a huge incentive for the community banks to follow through and seize the lending opportunities, not sit by and wait for a sunnier day, if you will. A second question has been: Well, is it possible that banks in this situation will make loans that they should not make? The answer there is no as well because the bank's profit is on the line. These are not guaranteed loans. If these loans fail, the banks would suffer. So this utilizes our community banks' wisdom and knowledge about what merits additional capital and what does not. This is why this public-private partnership is powerful. It is powerful because it uses the expertise of the community banks, powerful because it puts people to work in small business, powerful because it allocates capital to the places where the small business entrepreneurs and the banks see that there is an opportunity to grow the business and to grow this economy. A third concern has been that these funds might go to community banks that are in trouble. To address that issue, this program requires for the community banks to be healthy, as rated under a rating called the CAMELS rating. Each letter in the term ``CAMELS'' stands for a component of the analysis of the health of the community banks--C for capital, for example; M for management; L for liquidity, and so forth. Healthy banks get the opportunity to increase their leverage and assist small businesses so they can thrive and put people to work. And we as a nation can find a path out of this deep dark recession. I will wrap up my comments there and say this is the sort of commonsense effort to address a key chokepoint in the economy that we are expected to address by the citizens. It is right for the taxpayer. It is right in terms of alleviating the deficit. It is right for putting people to work. It is right for Main Street America. I urge my colleagues to join us in getting this done. I yield the floor.

Mr. MERKLEY

Mr. MERKLEY. Madam President, I ask unanimous consent to speak as in morning business.

Mr. MERKLEY. Madam President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. MERKLEY. Thank you, Madam President. Oil Independence Madam President, today I come to this Chamber to speak about oil independence for a stronger America. Many folks across America are continuously talking about the downside of our addiction to overseas oil. Today I am going to be presenting a plan embodying a bill with that name: Oil Independence for a Stronger America. One of the big issues of our dependence on foreign oil is national security. We send $1 billion a day overseas to governments that often don't share our core American values; governments in the Middle East, in Nigeria, in Venezuela. Sometimes those dollars end up directly in the hands of terrorists. As some national security analysts have noted, in our current wars we are sometimes funding both sides of the battle, and that is not a good place to be. In addition, to maintain our access to that overseas oil, we have to maintain a significant national security military force. Some analysts have estimated the cost of that additional security, that additional access to guarantee oil for America, has a value or a cost of up to $5 per gallon. So those aren't dollars we pay at the pump, but we certainly pay them in terms of our national security overhead. In addition to national security, our addiction to overseas oil is terrible for our economy. We are sending $1 billion a day overseas. Two years ago, when the cost of a barrel of oil surged upwards, we were sending $2 billion a day overseas. It will be that again. It will go higher, because the world's demand for oil is only increasing. As the economies of Asia, and particularly the economy of China, are growing, the demand for oil is growing as well, and with it we will be paying more. Take that $1 billion a day. That is $3 for every man, woman, and child in America. I have a family of four: $12 a day for my family. A significant sum, hundreds of dollars a month for my family, goes overseas. When those dollars go overseas, they create jobs overseas instead of creating jobs here in America. Try to picture the difference between spending $1 billion a day overseas and spending $1 billion a day on red, white, and blue American-made energy. That is the difference between families who have jobs, a stronger economy, or a weaker economy. Oil addiction makes us weaker as a nation. Oil independence makes us stronger as a nation. Isn't it time to choose strength over weakness? I wish to take a look at the numbers demonstrating the challenge before us. The estimate for the amount of oil we will be importing as a nation 20 years from now is between 6 million to 7 million barrels per day, as indicated by this column. If we were to put together a plan that would reduce our consumption of oil by more than 6 million to 7 million barrels per day, then we would have a plan that equates to independence from oil so that we would be able to eliminate the requirement, the need to import oil from overseas. The good news is that the tools are at hand to have such a strategy. What we have lacked is the will, the political will to move forward; the will to say, yes, we are going to have a plan and we are going to stay on that plan over the course of time, the two decades necessary to implement it. So what are the major strategies through which we can end our addiction to overseas oil? The first strategy I wish to talk about is changing the consumption of gasoline in passenger vehicles. Right now we have a number of hybrid cars that consume a lot less oil. We have coming on the market next year the Nissan LEAF, the Chevrolet Volt. We have the Tesla sedan. We are going to have numerous options for customers in America to be able to satisfy their domestic transportation needs in ways that consume vastly less gasoline, and that means less overseas oil. So the question is whether we promote adoption of these strategies. There is a tremendous amount to gain by promoting adoption of these strategies. I wish to thank Senator Byron Dorgan and Senator Lamar Alexander who partnered with me, the three of us together, on the Electric Vehicle Deployment Act. This is an act that will take a half dozen or so communities across this country and create deployment communities to test drive, if you will; building the infrastructure necessary for electric vehicles in partnership with the deployment of electric vehicles, because the two have to work together. From what we learn from those deployment communities, we can develop an accelerated strategy to shift to electricity from gasoline across this Nation. The potential savings are 3.2 million barrels per day. The second strategy is to have more efficient freight transportation. There is a lot to be gained in this area as well--up to 2 million barrels of oil per day. We have a group out in Oregon, a nonprofit called Cascade Sierra. Cascade Sierra works in partnership with the trucking community to make sure there is a one-stop shop to acquire different technologies designed to increase the efficiency of trucks. They deploy airfoils to make the trucks go down the highway more efficiently. They provide the technology for automatic tire inflation which makes a huge difference in mileage over time. Cascade Sierra makes available different types of generators so that a truck, instead of running its large diesel engine to provide electricity when it is stopped, can instead run a small generator. Now they are working to help develop charging stations where the trucks can actually plug in to power up their electric infrastructure on the truck rather than running their diesel engine. There are many ways to increase efficiency on trucks as well as increasing efficiency by shifting a percentage of our freight transportation from trucks to barges and rail. Rail and barges are incredibly efficient. I am constantly amazed at the statistic of how far you can take a ton of freight with one gallon of diesel. For all of my colleagues who may be wondering: Well, how far can you go? Can you go 50 miles? Can you take a ton of freight 50 miles with one gallon? Well, no, it is higher than that. Is it 100 miles? No, it is over 400 miles, a ton of freight, with one gallon on rail or by barge. Significant savings are available in that area. The third section is smart metropolitan transportation options. Portland, OR, is a city that is working very hard to provide options to its citizens on how they commute back and forth to work. We have light rail not too dissimilar from what we have here in Washington, DC. Back home in Oregon, we also are building streetcars, and streetcars create a whole infrastructure around efficient electric transportation for neighborhoods. Then we are working on other strategies, including bike lanes, and so forth, that create a network of options for effective noncar transportation. Those types of strategies can do an enormous amount in reducing the amount of fuel we consume, not to mention reducing the congestion and, therefore, improving the quality of life for Americans throughout metropolitan areas. Potential savings: 1.7 million barrels of oil per day. The fourth area is in alternative fuels. There have been natural gas forklifts since I was a little kid. Compressed natural gas is an effective fuel. Through recent developments in drilling technology, we have discovered we can produce a lot more natural gas in our Nation, which means a lot more potential to power up trucks with natural gas rather than diesel. So that is a technology that will have a big impact. A second area is advanced biofuels. Certainly I wish to see the forests of Oregon generating some advanced cellulosic ethanol for our truck fleet and to do so in a fashion which is environmentally sustainable so the power of plants, if you will, can be a significant factor in strengthening our domestic energy economy and creating more jobs here in America and reducing our oil imports from overseas. The fifth area is energy-efficient homes and buildings. In this case, the savings are more modest: 200,000 barrels of oil per day. They are more modest because most buildings are not heated by heating oil. But we should pay attention to those buildings that are heated by heating oil, because the savings, when you increase the energy characteristics of a building, are substantial. So that merits attention. If one combines these strategies, we are looking at savings of well over 8 million barrels per day, as compared to the estimate for imports 20 years from now of 6 million to 7 million barrels per day. So it is unquestionable that we can end our oil addiction if we have the political will, if we have the determination to sustain a plan through every 4-year cycle over 20 years. Here in America, we tend to oscillate back and forth as Presidencies change, and that is why this bill, the Oil Independence for Stronger America Act, calls for a National Energy Security Council that will sustain the attention to the national plan as Presidents come and go, as Members of Congress come and go. There should be little question in any of our minds that America will be stronger as an oil-independent nation rather than an oil-addicted nation. There should be little question that creating jobs here, buying American-made energy at $1 billion a day is far preferable to sending billions of dollars a day overseas, where they are no longer in our retail stores and are no longer creating jobs. Certainly, many of these strategies will have a very positive influence on creating cleaner air and having American leadership and stewardship of our planet. So numerous positive factors go together. I want to be sure to thank my original cosponsors of the bill. Senator Tom Carper has done terrific work on CAFE and CLEAN TEA, which involves metropolitan transportation options. Tom Udall brought insights on freight, rail, natural gas, and biofuels. Senator Michael Bennet has a comprehensive understanding of energy issues that is of real value in the Senate Chamber. I will conclude with this: Let's choose a stronger oil-independent America over a weaker oil-addicted America. I suggest the absence of a quorum.

Mr. MERKLEY

Mr. MERKLEY. Mr. President, I am delighted to partner with my colleague from Louisiana. Senator Landrieu has been a passionate and effective advocate for small business across this country. She has worked incredibly hard to drive through this small business jobs legislation, recognizing that the success of our economy is going to rise or fall on the success of our small businesses. That is what brings us together tonight. We have come to talk about the small business lending fund, which is an essential component of assisting our small businesses. Small businesses employ one-half of our Nation's workforce. However, less than one-third of small businesses today are reporting their credit needs are being met. Indeed, 59 percent now rely on credit cards to finance their daily operations. That is an increase of about 15 percent from where we were at the end of 2009. I can tell my colleagues that at every townhall meeting I hold, folks stand to talk about how their credit lines have been cut or they have a business opportunity for which they normally could easily get a loan from a longstanding banking partner, but they are not able to get that loan. Often, the reason the banks cannot make the loan is because they are at their leverage limit. There are legal limits for every dollar they hold, how many can they lend out. If they are at that limit, they cannot make a new loan no matter how good the opportunity. This is a losing situation because our community banks are right on Main Street. They see and know the opportunities. They understand the capabilities of individual entrepreneurs and managers, so putting that expertise to work is going to fuel job growth in this Nation. But we can't put it to work if the banks are unable to lend or are at their leverage limit. The Small Business Lending Fund will proceed to inject liquidity into our economy, and that is like oil into an engine--a job-creating engine--to the tune of as much as $300 billion in additional lending to small businesses on Main Street, and this will occur under the Small Business Lending Fund without any dollar of subsidy from the U.S. taxpayer. Indeed, the Congressional Budget Office has studied this proposal and has recognized and reported that it will save $1 billion to taxpayers over the next 10 years, and that is just from the earnings of the payments that the banks will make back to the funds that are injected as additional capital into our community banks. But think about this: Every small business that is able to see an opportunity because it can gain access to credit is also going to make money on that proposition. When they make money, they pay additional taxes. CBO doesn't score the additional taxes, but recognize that in addition to the $1 billion of savings on interest payments, there will be all the benefits that will flow from additional jobs--additional taxes paid on the income from those jobs, additional profits to small business, additional revenue from those profits. So the real return is even greater to the taxpayer. But most importantly we are creating jobs, and that is a return that is hard to measure. When a family has a job, they can diminish their reliance on every other program. The most important foundation of a family is a good job, and that is what the Small Business Lending Fund is all about. It does indeed have prominent endorsements, as my colleague mentioned: the Independent Community Bankers of America, representing 5,000 community banks on Main Street which are having to bypass the opportunities they are seeing because they are at their leverage limit. Recognize that they can make loans, which is good for them, good for small businesses, good for their communities and certainly great for the families who get the additional jobs. Also, the National Bankers Association, the National Small Business Association, the National Association for the Self-Employed, the Small Business Majority, and so on and so forth. Let me give one example from Oregon. John and his business partner have owned a small retail store in Portland, OR, for over 25 years. It is a store I have visited often. Because of lackluster consumer spending, John has made a lot of sacrifices to keep that business afloat during this recession. He has had to reduce his staff, cut the hours the shop is open, and he and others have had to take pay cuts. But to add insult to injury, his bank threatened to drop his line of credit. John has never missed a payment, never had a late payment, but in this process of reducing exposure or reducing the required leverage limits, banks are cutting lines of credit, and John's line was being cut. Finally, after negotiation, they agreed to renew his line of credit every 90 days but every 90 days charge a fee, and on many occasions to raise the interest rate. He has been looking for a new lender who will work with him and not against him, but that is hard to find in this economy, where lender after lender is affected by the same constraints. This story is repeated, different versions, hundreds of times throughout Oregon, and thousands of times throughout this Nation. How would a Small Business Lending Fund work? Essentially, it capitalizes the community banks, so with that additional capital they can make more loans. If they get more loans out the door, then the repayment rate--the dividends they would pay back to the taxpayers--is reduced to as low as 1 percent. If they do not get loans out the door, the payments go up to as high as 7 percent. So there is a significant incentive to take these funds, after a bank is recapitalized, and get them out the door. That addresses several of the challenges folks have raised. There has been concern about banks that might hoard cash and say: Well, we will prepare in case some assets are devalued in the future or that banks might say: We will wait until a better time, when everything is surging forward. Well, things won't surge forward unless we get lending out to small businesses. That is why this structure of incentives is critical. The banks that will qualify are banks that have CAMELS ratings, which means capital adequacy, asset quality, management, earnings, liquidity, and sensitivity--or exposure to market risk. So a bank that is in deep trouble isn't going to be in a position to take advantage of this. But banks that are sound and healthy will, and therefore this makes it a good investment, an investment that has significant return to the taxpayer but, more importantly, a big return to our communities. I would also note that this will go hand in hand with the program to make additional grants to State-based small business programs. My colleagues, Senators Levin and Warner, have been very involved in helping to forge that program. These things go together. Community banks on Main Street will see opportunities and State-based small business programs will see opportunities. They probably will see the same opportunities. These will work together to take us out of this recession. I wish to read a note that I received: Dear Senator Merkley: Overall, I believe the majority of financial support under TARP went to the large investment banks, insurers, FNMA, FHLMC and other giant institutions on Wall Street. It is now very important to revive the economy that the government assist Main Street, which includes community banks, if we are to have job creation. Jobs are created by small business that bank at community banks. And the writer goes on: As a community banker in Oregon, I urge you to retain the $30 billion small business lending fund. . . . Community banks are well-positioned to leverage the SBLF and have established relationships with small businesses in their communities to get credit flowing quickly. Leveraging the $30 billion funds with community banks would potentially support many times that amount in loan volume to small businesses--as much as $300 billion in additional lending. The writer concludes: Banks that increase their small business lending by certain threshold percentages will pay reduced dividend costs, ensuring that their incentive to lend matches their great capacity to do so. Thank you very much, Sincerely Tom. That was a letter from Tom of M Street Bank. I thank the many colleagues who have put themselves behind this idea and supported it. An earlier rendition of this idea was called ``Banking on our Communities'' and had support from Senators Carper, Hagan, Kerry, Levin, Pryor, Stabenow, and Mark Udall, and I wanted to mention that they have been sponsors of that legislation. I urge my colleagues to stand for small businesses, stand to provide a solution to the problem of liquidity and access to loans that is plaguing our small businesses, stand to help not just your community banks but your community businesses and your families who will benefit from the jobs that it will create. I thank my colleague for her passionate and effective leadership on this particular issue and for her leadership on our Small Business Committee.

Mr. MERKLEY. Mr. President, I again thank my colleague for her leadership. We together as a Senate need to stand with our small businesses so we can revive our communities, restore our economy and create jobs for our families. I thank the Senator again for the terrific job she is doing.

Mr. MERKLEY

Mr. MERKLEY. Mr. President, I ask unanimous consent the Senate proceed to a period of morning business, with Senators permitted to speak for up to 10 minutes each.

Mr. MERKLEY

Mr. MERKLEY. Mr. President, I ask unanimous consent that when the Senate completes its business today, it adjourn until 10 a.m. on Tuesday, July 20; that following the prayer and pledge, the Journal of proceedings be approved to date, the morning hour be deemed expired, the time for the two leaders be reserved for their use later in the day; that following any leader remarks the Senate proceed to a period of morning business, with Senators permitted to speak therein for up to 10 minutes each, with the time until 12:30 p.m. equally divided and controlled between the two leaders or their designees, with the majority controlling the first 30 minutes and the Republicans controlling the next 30 minutes; that the Senate recess from 12:30 until 2:15 p.m. to allow for the weekly caucus meetings; further, that when the Senate reconvenes it be in order to swear in Carte Goodwin to be Senator; that following the swearing in, the Senate resume consideration of the House message on H.R. 4213, the unemployment insurance extension, with the time equally divided and controlled between the two leaders or their designees, and at 2:30 p.m. the Senate proceed to vote on the motion to invoke cloture with respect to H.R. 4213, as provided under the previous order.

Mr. MERKLEY

Mr. MERKLEY. Mr. President, at 2:30 p.m. tomorrow the Senate will proceed to a rollcall vote on the motion to invoke cloture on the motion to concur, with an amendment in the House amendment to the Senate amendment to H.R. 4213, a bill to extend unemployment benefits through November, 2010.

Mr. MERKLEY

Mr. MERKLEY. If there is no further business to come before the Senate, I ask unanimous consent the Senate adjourn under the previous order.

Mr. MERKLEY

Mr. MERKLEY. I thank Senator Levin and will be setting forth here our joint explanation of the Merkley-Levin provisions of the Dodd-Frank Act. Sections 619, 620 and 621 do three things: prohibit high-risk proprietary trading at banks, limit the systemic risk of such activities at systemically significant nonbank financial companies, and prohibit material conflicts of interest in asset-backed securitizations. Sections 619 and 620 amend the Bank Holding Company Act of 1956 to broadly prohibit proprietary trading, while nevertheless permitting certain activities that may technically fall within the definition of proprietary trading but which are, in fact, safer, client-oriented financial services. To account for the additional risk of proprietary trading among systemically critical financial firms that are not banks, bank holding companies, or the like, the sections require nonbank financial companies supervised by the Federal Reserve Board, the ``Board'', to keep additional capital for their proprietary trading activities and subject them to quantitative limits on those activities. In addition, given the unique control that firms who package and sell asset-backed securities (including synthetic asset-backed securities) have over transactions involving those securities, section 621 protects purchasers by prohibiting those firms from engaging in transactions that involve or result in material conflicts of interest. First, it is important to remind our colleagues how the financial crisis of the past several years came to pass. Beginning in the 1980's, new financial products and significant amounts of deregulation undermined the Glass-Steagall Act's separation of commercial banking from securities brokerage or ``investment banking'' that had kept our banking system relatively safe since 1933. Over time, commercial and investment banks increasingly relied on precarious short term funding sources, while at the same time significantly increasing their leverage. It was as if our banks and securities firms, in competing against one another, were race car drivers taking the curves ever more tightly and at ever faster speeds. Meanwhile, to match their short-term funding sources, commercial and investment banks drove into increasingly risky, short-term, and sometimes theoretically hedged, proprietary trading. When markets took unexpected turns, such as when Russia defaulted on its debt and when the U.S. mortgage-backed securities market collapsed, liquidity evaporated, and financial firms became insolvent very rapidly. No amount of capital could provide a sufficient buffer in such situations. In the face of the worst financial crisis in 60 years, the January 2009 report by the Group of 30, an international group of financial experts, placed blame squarely on proprietary trading. This report, largely authored by former Federal Reserve System Chairman Paul Volcker, recommended prohibiting systemically critical banking institutions from trading in securities and other products for their own accounts. In January 2010, President Barack Obama gave his full support to common-sense restrictions on proprietary trading and fund investing, which he coined the ``Volcker Rule.'' The ``Volcker Rule,'' which Senator Levin and I drafted and have championed in the Senate, and which is embodied in section 619, embraces the spirit of the Glass-Steagall Act's separation of ``commercial'' from ``investment'' banking by restoring a protective barrier around our critical financial infrastructure. It covers not simply securities, but also derivatives and other financial products. It applies not only to banks, but also to nonbank financial firms whose size and function render them systemically significant. While the intent of section 619 is to restore the purpose of the Glass-Steagall barrier between commercial and investment banks, we also update that barrier to reflect the modern financial world and permit a broad array of low-risk, client-oriented financial services. As a result, the barrier constructed in section 619 will not restrict most financial firms. Section 619 is intended to limit proprietary trading by banking entities and systemically significant nonbank financial companies. Properly implemented, section 619's limits will tamp down on the risk to the system arising from firms competing to obtain greater and greater returns by increasing the size, leverage, and riskiness of their trades. This is a critical part of ending too big to fail financial firms. In addition, section 619 seeks to reorient the U.S. banking system away from leveraged, short-term speculation and instead towards the safe and sound provision of long-term credit to families and business enterprises. We recognize that regulators are essential partners in the legislative process. Because regulatory interpretation is so critical to the success of the rule, we will now set forth, as the principal authors of Sections 619 to 621, our explanations of how these provisions work. Section 619's prohibitions and restrictions on proprietary trading are set forth in a new section 13 to the Bank Holding Company Act of 1956, and subsection (a), paragraph (1) establishes the basic principle clearly: a banking entity shall not ``engage in proprietary trading'' or ``acquire or retain . . . ownership interest[s] in or sponsor a hedge fund or private equity fund'', unless otherwise provided in the section. Paragraph (2) establishes the principle for nonbank financial companies supervised by the Board by subjecting their proprietary trading activities to quantitative restrictions and additional capital charges. Such quantitative limits and capital charges are to be set by the regulators to address risks similar to those which lead to the flat prohibition for banking entities. Subsection (h), paragraph (1) defines ``banking entity'' to be any insured depository institution (as otherwise defined under the Bank Holding Company Act), any entity that controls an insured depository institution, any entity that is treated as a bank holding company under section 8 of the International Banking Act of 1978, and any affiliates or subsidiaries of such entities. We and the Congress specifically rejected proposals to exclude the affiliates and subsidiaries of bank holding companies and insured depository institutions, because it was obvious that restricting a bank, but not its affiliates and subsidiaries, would ultimately be ineffective in restraining the type of high-risk proprietary trading that can undermine an insured depository institution. The provision recognizes the modern reality that it is difficult to separate the fate of a bank and its bank holding company, and that for the bank holding company to be a source of strength to the bank, its activities, and those of its other subsidiaries and affiliates, cannot be at such great risk as to imperil the bank. We also note that not all banks pose the same risks. Accordingly, the paragraph provides a narrow exception for insured depository institutions that function principally for trust purposes and do not hold public depositor money, make loans, or access Federal Reserve lending or payment services. These specialized entities that offer very limited trust services are elsewhere carved out of the definition of ``bank,'' so we do not treat them as banks for the purposes of the restriction on proprietary trading. However, such institutions are covered by the restriction if they qualify under the provisions covering systemically important nonbank financial companies. Subsection (h), paragraph (3) defines nonbank financial companies supervised by the Board to be those financial companies whose size, interconnectedness, or core functions are of sufficiently systemic significance as to warrant additional supervision, as directed by the Financial Stability Oversight Council pursuant to Title I of the Dodd- Frank Act. Given the varied nature of such nonbank financial companies, for some of which proprietary trading is effectively their business, an outright statutory prohibition on such trading was not warranted. Instead, the risks posed by their proprietary trading is addressed through robust capital charges and quantitative limits that increase with the size, interconnectedness, and systemic importance of the business functions of the nonbank financial firm. These restrictions should become stricter as size, leverage, and other factors increase. As with banking entities, these restrictions should also help reduce the size and risk of these financial firms. Naturally, the definition of ``proprietary trading'' is critical to the provision. For the purposes of section 13, proprietary trading means ``engaging as a principal for the trading account'' in transactions to ``purchase or sell, or otherwise acquire or dispose of'' a wide range of traded financial products, including securities, derivatives, futures, and options. There are essentially three key elements to the definition: (1) the firm must be acting ``as a principal,'' (2) the trading must be in its ``trading account'' or another similar account, and (3) the restrictions apply to the full range of its financial instruments. Purchasing or selling ``as a principal'' refers to when the firm purchases or sells the relevant financial instrument for its own account. The prohibition on proprietary trading does not cover trading engaged with exclusively client funds. The term ``trading account'' is intended to cover an account used by a firm to make profits from relatively short-term trading positions, as opposed to long-term, multi-year investments. The administration's proposed Volcker Rule focused on short-term trading, using the phrase ``trading book'' to capture that concept. That phrase, which is currently used by some bank regulators was rejected, however, and the ultimate conference report language uses the term ``trading account'' rather than ``trading book'' to ensure that all types of accounts used for proprietary trading are covered by the section. To ensure broad coverage of the prohibition on proprietary trading, paragraph (3) of subsection (h) defines ``trading account'' as any account used ``principally for the purpose of selling in the near term (or otherwise with the intent to resell in order to profit from short- term price movements)'' and such other accounts as the regulators determine are properly covered by the provision to fulfill the purposes of the section. In designing this definition, we were aware of bank regulatory capital rules that distinguish between short-term trading and long-term investments, and our overall focus was to restrict high- risk proprietary trading. For banking entity subsidiaries that do not maintain a distinction between a trading account and an investment account, all accounts should be presumed to be trading accounts and covered by the restriction. Linking the prohibition on proprietary trading to trading accounts permits banking entities to hold debt securities and other financial instruments in long-term investment portfolios. Such investments should be maintained with the appropriate capital charges and held for longer periods. The definition of proprietary trading in paragraph (4) covers a wide range of financial instruments, including securities, commodities, futures, options, derivatives, and any similar financial instruments. Pursuant to the rule of construction in subsection (g), paragraph (2), the definition should not generally include loans sold in the process of securitizing; however, it could include such loans if such loans become financial instruments traded to capture the change in their market value. Limiting the definition of proprietary trading to near-term holdings has the advantage of permitting banking entities to continue to deploy credit via long-term capital market debt instruments. However, it has the disadvantage of failing to prevent the problems created by longer- term holdings in riskier financial instruments, for example, highly complex collateralized debt obligations and other opaque instruments that are not readily marketable. To address the risks to the banking system arising from those longer-term instruments and related trading, section 620 directs Federal banking regulators to sift through the assets, trading strategies, and other investments of banking entities to identify assets or activities that pose unacceptable risks to banks, even when held in longer-term accounts. Regulators are expected to apply the lessons of that analysis to tighten the range of investments and activities permissible for banking entities, whether they are at the insured depository institution or at an affiliate or subsidiary, and whether they are short or long term in nature. The new Bank Holding Company Act section 13 also restricts investing in or sponsoring hedge funds and private equity funds. Clearly, if a financial firm were able to structure its proprietary positions simply as an investment in a hedge fund or private equity fund, the prohibition on proprietary trading would be easily avoided, and the risks to the firm and its subsidiaries and affiliates would continue. A financial institution that sponsors or manages a hedge fund or private equity fund also incurs significant risk even when it does not invest in the fund it manages or sponsors. Although piercing the corporate veil between a fund and its sponsoring entity may be difficult, recent history demonstrates that a financial firm will often feel compelled by reputational demands and relationship preservation concerns to bail out clients in a failed fund that it managed or sponsored, rather than risk litigation or lost business. Knowledge of such concerns creates a moral hazard among clients, attracting investment into managed or sponsored funds on the assumption that the sponsoring bank or systemically significant firm will rescue them if markets turn south, as was done by a number of firms during the 2008 crisis. That is why setting limits on involvement in hedge funds and private equity funds is critical to protecting against risks arising from asset management services. Subsection (h), paragraph (2) sets forth a broad definition of hedge fund and private equity fund, not distinguishing between the two. The definition includes any company that would be an investment company under the Investment Company Act of 1940, but is excluded from such coverage by the provisions of sections 3(c)(1) or 3(c)(7). Although market practice in many cases distinguishes between hedge funds, which tend to be trading vehicles, and private equity funds, which tend to own entire companies, both types of funds can engage in high risk activities and it is exceedingly difficult to limit those risks by focusing on only one type of entity. Despite the broad prohibition on proprietary trading set forth in subsection (a), the legislation recognizes that there are a number of low-risk proprietary activities that do not pose unreasonable risks and explicitly permits those activities to occur. Those low-risk proprietary trading activities are identified in subsection (d), paragraph (1), subject to certain limitations set forth in paragraph (2), and additional capital charges required in paragraph (3). While paragraph (1) authorizes several permitted activities, it simultaneously grants regulators broad authority to set further restrictions on any of those activities and to supplement the additional capital charges provided for by paragraph (3). Subparagraph (d)(1)(A) authorizes the purchase or sale of government obligations, including government-sponsored enterprise, GSE, obligations, on the grounds that such products are used as low-risk, short-term liquidity positions and as low-risk collateral in a wide range of transactions, and so are appropriately retained in a trading account. Allowing trading in a broad range of GSE obligations is also meant to recognize a market reality that removing the use of these securities as liquidity and collateral positions would have significant market implications, including negative implications for the housing and farm credit markets. By authorizing trading in GSE obligations, the language is not meant to imply a view as to GSE operations or structure over the long-term, and permits regulators to add restrictions on this permitted activity as necessary to prevent high-risk proprietary trading activities under paragraph (2). When GSE reform occurs, we expect these provisions to be adjusted accordingly. Moreover, as is the case with all permitted activities under paragraph (1), regulators are expected to apply additional capital restrictions under paragraph (3) as necessary to account for the risks of the trading activities. Subparagraph (d)(1)(B) permits underwriting and market-making-related transactions that are technically trading for the account of the firm but, in fact, facilitate the provision of near-term client-oriented financial services. Market-making is a customer service whereby a firm assists its customers by providing two-sided markets for speedy acquisition or disposition of certain financial instruments. Done properly, it is not a speculative enterprise, and revenues for the firm should largely arise from the provision of credit provided, and not from the capital gain earned on the change in the price of instruments held in the firm's accounts. Academic literature sets out the distinctions between making markets for customers and holding speculative positions in assets, but in general, the two types of trading are distinguishable by the volume of trading, the size of the positions, the length of time that positions remains open, and the volatility of profits and losses, among other factors. Regulations implementing this permitted activity should focus on these types of factors to assist regulators in distinguishing between financial firms assisting their clients versus those engaged in proprietary trading. Vigorous and robust regulatory oversight of this issue will be essential to the prevent ``market-making'' from being used as a loophole in the ban on proprietary trading. The administration's draft language, the original section 619 contemplated by the Senate Banking Committee, and amendment 4101 each included the term ``in facilitation of customer relations'' as a permitted activity. The term was removed in the final version of the Dodd-Frank Act out of concern that this phrase was too subjective, ambiguous, and susceptible to abuse. At the same time, we recognize that the term was previously included to permit certain legitimate client-oriented services, such pre-market-making accumulation of small positions that might not rise to the level of fully ``market-making'' in a security or financial instrument, but are intended to nonetheless meet expected near-term client liquidity needs. Accordingly, while previous versions of the legislation referenced ``market-making'', the final version references ``market-making-related'' to provide the regulators with limited additional flexibility to incorporate those types of transactions to meet client needs, without unduly warping the common understanding of market-making. We note, however, that ``market-making-related'' is not a term whose definition is without limits. It does not implicitly cover every time a firm buys an existing financial instrument with the intent to later sell it, nor does it cover situations in which a firm creates or underwrites a new security with the intent to market it to a client. Testimony by Goldman Sachs Chairman Lloyd Blankfein and other Goldman executives during a hearing before the Permanent Subcommittee on Investigations seemed to suggest that any time the firm created a new mortgage related security and began soliciting clients to buy it, the firm was ``making a market'' for the security. But one-sided marketing or selling securities is not equivalent to providing a two-sided market for clients buying and selling existing securities. The reality was that Goldman Sachs was creating new securities for sale to clients and building large speculative positions in high-risk instruments, including credit default swaps. Such speculative activities are the essence of proprietary trading and cannot be properly considered within the coverage of the terms ``market-making'' or ``market-making- related.'' The subparagraph also specifically limits such underwriting and market-making-related activities to ``reasonably expected near term demands of clients, customers, and counterparties.'' Essentially, the subparagraph creates two restrictions, one on the expected holding period and one on the intent of the holding. These two restrictions greatly limit the types of risks and returns for market-makers. Generally, the revenues for market-making by the covered firms should be made from the fees charged for providing a ready, two-sided market for financial instruments, and not from the changes in prices acquired and sold by the financial institution. The ``near term'' requirement connects to the provision in the definition of trading account whereby the account is defined as trading assets that are acquired ``principally for the purpose of selling in the near term.'' The intent is to focus firms on genuinely making markets for clients, and not taking speculative positions with the firm's capital. Put simply, a firm will not satisfy this requirement by acquiring a position on the hope that the position will be able to be sold at some unknown future date for a trading profit. Subparagraph (d)(1)(C) permits a banking entity to engage in ``risk- mitigating hedging activities in connection with and related to individual or aggregated positions, contracts, or other holdings of the banking entity that are designed to reduce the specific risks to the banking entity in connection with and related to such positions, contracts, or other holdings.'' This activity is permitted because its sole purpose is to lower risk. While this subparagraph is intended to permit banking entities to utilize their trading accounts to hedge, the phrase ``in connection with and related to individual or aggregated positions . . .'' was added between amendment 4101 and the final version in the conference report in order to ensure that the hedge applied to specific, identifiable assets, whether it be on an individual or aggregate basis. Moreover, hedges must be to reduce ``specific risks'' to the banking entity arising from these positions. This formulation is meant to focus banking entities on traditional hedges and prevent proprietary speculation under the guise of general ``hedging.'' For example, for a bank with a significant set of loans to a foreign country, a foreign exchange swap may be an appropriate hedging strategy. On the other hand, purchasing commodity futures to ``hedge'' inflation risks that may generally impact the banking entity may be nothing more than proprietary trading under another name. Distinguishing between true hedges and covert proprietary trades may be one of the more challenging areas for regulators, and will require clear identification by financial firms of the specific assets and risks being hedged, research and analysis of market best practices, and reasonable regulatory judgment calls. Vigorous and robust regulatory oversight of this issue will be essential to the prevent ``hedging'' from being used as a loophole in the ban on proprietary trading. Subparagraph (d)(1)(D) permits the acquisition of the securities and other affected financial instruments ``on behalf of customers.'' This permitted activity is intended to allow financial firms to use firm funds to purchase assets on behalf of their clients, rather than on behalf of themselves. This subparagraph is intended, in particular, to provide reassurance that trading in ``street name'' for customers or in trust for customers is permitted. In general, subparagraph (d)(1)(E) provides exceptions to the prohibition on investing in hedge funds or private equity funds, if such investments advance a ``public welfare'' purpose. It permits investments in small business investment companies, which are a form of regulated venture capital fund in which banks have a long history of successful participation. The subparagraph also permits investments ``of the type'' permitted under the paragraph of the National Bank Act enabling banks to invest in a range of low-income community development and other projects. The subparagraph also specifically mentions tax credits for historical building rehabilitation administered by the National Park Service, but is flexible enough to permit the regulators to include other similar low-risk investments with a public welfare purpose. Subparagraph (d)(1)(F) is meant to accommodate the normal business of insurance at regulated insurance companies that are affiliated with banks. The Volcker Rule was never meant to affect the ordinary business of insurance: the collection and investment of premiums, which are then used to satisfy claims of the insured. These activities, while definitionally proprietary trading, are heavily regulated by State insurance regulators, and in most cases do not pose the same level of risk as other proprietary trading. However, to prevent abuse, firms seeking to rely on this insurance- related exception must meet two essential qualifications. First, only trading for the general account of the insurance firm would qualify. Second, the trading must be subject to adequate State-level insurance regulation. Trading by insurance companies or their affiliates that is not subject to insurance company investment regulations will not qualify for protection here. Further, where State laws and regulations do not exist or otherwise fail to appropriately connect the insurance company investments to the actual business of insurance or are found to inadequately protect the firm, the subparagraph's conditions will not be met. Subparagraph (d)(1)(G) permits firms to organize and offer hedge funds or private equity funds as an asset management service to clients. It is important to remember that nothing in section 619 otherwise prohibits a bank from serving as an investment adviser to an independent hedge fund or private equity fund. Yet, to serve in that capacity, a number of criteria must be met. First, the firm must be doing so pursuant to its provision of bona fide trust, fiduciary, or investment advisory services to customers. Given the fiduciary obligations that come with such services, these requirements ensure that banking entities are properly engaged in responsible forms of asset management, which should tamp down on the risks taken by the relevant fund. Second, subparagraph (d)(1)(G) provides strong protections against a firm bailing out its funds. Clause (iv) prohibits banking entities, as provided under paragraph (1) and (2) of subsection (f), from entering into lending or similar transactions with related funds, and clause (v) prohibits banking entities from ``directly or indirectly, guarantee[ing], assum[ing], or otherwise insur[ing] the obligations or performance of the hedge fund or private equity fund.'' To prevent banking entities from engaging in backdoor bailouts of their invested funds, clause (v) extends to the hedge funds and private equity funds in which such subparagraph (G) hedge funds and private equity funds invest. Third, to prevent a banking entity from having an incentive to bailout its funds and also to limit conflicts of interest, clause (vii) of subparagraph (G) restricts directors and employees of a banking entity from being invested in hedge funds and private equity funds organized and offered by the banking entity, except for directors or employees ``directly engaged'' in offering investment advisory or other services to the hedge fund or private equity fund. Fund managers can have ``skin in the game'' for the hedge fund or private equity fund they run, but to prevent the bank from running its general employee compensation through the hedge fund or private equity fund, other management and employees may not. Fourth, by stating that a firm may not organize and offer a hedge fund or private equity fund with the firm's name on it, clause (vi) of subparagraph (G) further restores market discipline and supports the restriction on firms bailing out funds on the grounds of reputational risk. Similarly, clause (viii) ensures that investors recognize that the funds are subject to market discipline by requiring that funds provide prominent disclosure that any losses of a hedge fund or private equity fund are borne by investors and not by the firm, and the firm must also comply with any other restrictions to ensure that investors do not rely on the firm, including any of its affiliates or subsidiaries, for a bailout. Fifth, the firm or its affiliates cannot make or maintain an investment interest in the fund, except in compliance with the limited fund seeding and alignment of interest provisions provided in paragraph (4) of subsection (d). This paragraph allows a firm, for the limited purpose of maintaining an investment management business, to seed a new fund or make and maintain a ``de minimis'' co-investment in a hedge fund or private equity fund to align the interests of the fund managers and the clients, subject to several conditions. As a general rule, firms taking advantage of this provision should maintain only small seed funds, likely to be $5 to $10 million or less. Large funds or funds that are not effectively marketed to investors would be evasions of the restrictions of this section. Similarly, co-investments designed to align the firm with its clients must not be excessive, and should not allow for firms to evade the intent of the restrictions of this section. These ``de minimis'' investments are to be greatly disfavored, and subject to several significant restrictions. First, a firm may only have, in the aggregate, an immaterial amount of capital in such funds, but in no circumstance may such positions aggregate to more than 3 percent of the firm's Tier 1 capital. Second, by one year after the date of establishment for any fund, the firm must have not more than a 3 percent ownership interest. Third, investments in hedge funds and private equity funds shall be deducted on, at a minimum, a one-to-one basis from capital. As the leverage of a fund increases, the capital charges shall be increased to reflect the greater risk of loss. This is specifically intended to discourage these high-risk investments, and should be used to limit these investments to the size only necessary to facilitate asset management businesses for clients. Subparagraphs (H) and (I) recognize rules of international regulatory comity by permitting foreign banks, regulated and backed by foreign taxpayers, in the course of operating outside of the United States to engage in activities permitted under relevant foreign law. However, these subparagraphs are not intended to permit a U.S. banking entity to avoid the restrictions on proprietary trading simply by setting up an offshore subsidiary or reincorporating offshore, and regulators should enforce them accordingly. In addition, the subparagraphs seek to maintain a level playing field by prohibiting a foreign bank from improperly offering its hedge fund and private equity fund services to U.S. persons when such offering could not be made in the United States. Subparagraph (J) permits the regulators to add additional exceptions as necessary to ``promote and protect the safety and soundness of the banking entity and the financial stability of the United States.'' This general exception power is intended to ensure that some unforeseen, low-risk activity is not inadvertently swept in by the prohibition on proprietary trading. However, the subparagraph sets an extremely high bar: the activity must be necessary to promote and protect the safety and soundness of the banking entity and the financial stability of the United States, and not simply pose a competitive disadvantage or a threat to firms' profitability. Paragraph (2) of section (d) adds explicit statutory limits to the permitted activities under paragraph (1). Specifically, it prevents an activity from qualifying as a permitted activity if it would ``involve or result in a material conflict of interest,'' ``result directly or indirectly in a material exposure . . . to high-risk assets or high- risk trading strategies'' or otherwise pose a threat to the safety and soundness of the firm or the financial stability of the United States. Regulators are directed to define the key terms in the paragraph and implement the restrictions as part of the rulemaking process. Regulators should pay particular attention to the hedge funds and private equity funds organized and offered under subparagraph (G) to ensure that such activities have sufficient distance from other parts of the firm, especially those with windows into the trading flow of other clients. Hedging activities should also be particularly scrutinized to ensure that information about client trading is not improperly utilized. The limitation on proprietary trading activities that ``involve or result in a material conflict of interest'' is a companion to the conflicts of interest prohibition in section 621, but applies to all types of activities rather than just asset-backed securitizations. With respect to the definition of high-risk assets and high-risk trading strategies, regulators should pay close attention to the characteristics of assets and trading strategies that have contributed to substantial financial loss, bank failures, bankruptcies, or the collapse of financial firms or financial markets in the past, including but not limited to the crisis of 2008 and the financial crisis of 1998. In assessing high-risk assets and high-risk trading strategies, particular attention should be paid to the transparency of the markets, the availability of consistent pricing information, the depth of the markets, and the risk characteristics of the assets and strategies themselves, including any embedded leverage. Further, these characteristics should be evaluated in times of extreme market stress, such as those experienced recently. With respect to trading strategies, attention should be paid to the role that certain types of trading strategies play in times of relative market calm, as well as times of extreme market stress. While investment advisors may freely deploy high-risk strategies for their clients, attention should be paid to ensure that firms do not utilize them for their own proprietary activities. Barring high risk strategies may be particularly critical when policing market-making-related and hedging activities, as well as trading otherwise permitted under subparagraph (d)(1)(A). In this context, however, it is irrelevant whether or not a firm provides market liquidity: high-risk assets and high-risk trading strategies are never permitted. Subsection (d), paragraph (3) directs the regulators to set appropriate additional capital charges and quantitative limits for permitted activities. These restrictions apply to both banking entities and nonbank financial companies supervised by the Board. It is left to regulators to determine if those restrictions should apply equally to both, or whether there may appropriately be a distinction between banking entities and non-bank financial companies supervised by the Board. The paragraph also mandates diversification requirements where appropriate, for example, to ensure that banking entities do not deploy their entire permitted amount of de minimis investments into a small number of hedge funds or private equity funds, or that they dangerously over-concentrate in specific products or types of financial products. Subsection (e) provides vigorous anti-evasion authority, including record-keeping requirements. This authority is designed to allow regulators to appropriately assess the trading of firms, and aggressively enforce the text and intent of section 619. The restrictions on proprietary trading and relationships with private funds seek to break the internal connection between a bank's balance sheet and taking risk in the markets, with a view towards reestablishing market discipline and refocusing the bank on its credit extension function and client services. In the recent financial crisis, when funds advised by banks suffered significant losses, those off- balance sheet funds came back onto the banks' balance sheets. At times, the banks bailed out the funds because the investors in the funds had other important business with the banks. In some cases, the investors were also key personnel at the banks. Regardless of the motivations, in far too many cases, the banks that bailed out their funds ultimately relied on taxpayers to bail them out. It is precisely for this reason that the permitted activities under subparagraph (d)(1)(G) are so narrowly defined. Indeed, a large part of protecting firms from bailing out their affiliated funds is by limiting the lending, asset purchases and sales, derivatives trading, and other relationships that a banking entity or nonbank financial company supervised by the Board may maintain with the hedge funds and private equity funds it advises. The relationships that a banking entity maintains with and services it furnishes to its advised funds can provide reasons why and the means through which a firm will bail out an advised fund, be it through a direct loan, an asset acquisition, or through writing a derivative. Further, providing advisory services to a hedge fund or private equity fund creates a conflict of interest and risk because when a banking entity is itself determining the investment strategy of a fund, it no longer can make a fully independent credit evaluation of the hedge fund or private equity fund borrower. These bailout protections will significantly benefit independent hedge funds and private equity funds, and also improve U.S. financial stability. Accordingly, subsection (f), paragraph (1) sets forth the broad prohibition on a banking entity entering into any ``covered transactions'' as such term is defined in the Federal Reserve Act's section 23A, as if such banking entity were a member bank and the fund were an affiliate thereof. ``Covered transactions'' under section 23A includes loans, asset purchases, and, following the Dodd-Frank bill adoption, derivatives between the member bank and the affiliate. In general, section 23A sets limits on the extension of credit between such entities, but paragraph (1) of subsection (f) prohibits all such transactions. It also prohibits transactions with funds that are controlled by the advised or sponsored fund. In short, if a banking entity organizes and offers a hedge fund or private equity fund or serves as investment advisor, manager, or sponsor of a fund, the fund must seek credit, including from asset purchases and derivatives, from an independent third party. Subsection (f), paragraph (2) applies section 23B of the Federal Reserve Act to a banking entity and its advised or sponsored hedge fund or private equity fund. This provides, inter alia, that transactions between a banking entity and its fund be conducted at arms length. The fact that section 23B also includes the provision of covered transactions under section 23A as part of its arms-length requirement should not be interpreted to undermine the strict prohibition on such transactions in paragraph (1). Subsection (f), paragraph (3) permits the Board to allow a very limited exception to paragraph (1) for the provision of certain limited services under the rubric of ``prime brokerage'' between the banking entity and a third-party-advised fund in which the fund managed, sponsored, or advised by the banking entity has taken an ownership interest. Essentially, it was argued that a banking entity should not be prohibited, under proper restrictions, from providing limited services to unaffiliated funds, but in which its own advised fund may invest. Accordingly, paragraph (3) is intended to only cover third- party funds, and should not be used as a means of evading the general prohibition provided in paragraph (1). Put simply, a firm may not create tiered structures and rely upon paragraph (3) to provide these types of services to funds for which it serves as investment advisor. Further, in recognition of the risks that are created by allowing for these services to unaffiliated funds, several additional criteria must also be met for the banking entity to take advantage of this exception. Most notably, on top of the flat prohibitions on bailouts, the statute requires the chief executive officer of firms taking advantage of this paragraph to also certify that these services are not used directly or indirectly to bail out a fund advised by the firm. Subsection (f), paragraph (4) requires the regulatory agencies to apply additional capital charges and other restrictions to systemically significant nonbank financial institutions to account for the risks and conflicts of interest that are addressed by the prohibitions for banking entities. Such capital charges and other restrictions should be sufficiently rigorous to account for the significant amount of risks associated with these activities. To give markets and firms an opportunity to adjust, implementation of section 620 will proceed over a period of several years. First, pursuant to subsection (b), paragraph (1), the Financial Stability Oversight Council will conduct a study to examine the most effective means of implementing the rule. Then, under paragraph (b)(2), the Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission shall each engage in rulemakings for their regulated entities, with the rulemaking coordinated for consistency through the Financial Stability Oversight Council. In coordinating the rulemaking, the Council should strive to avoid a ``lowest common denominator'' framework, and instead apply the best, most rigorous practice from each regulatory agency. Pursuant to subsection (c), paragraph (1), most provisions of section 619 become effective 12 months after the issuance of final rules pursuant to subsection (b), but in no case later than 2 years after the enactment of the Dodd-Frank Act. Paragraph (c)(2) provides a 2-year period following effective date of the provision during which entities must bring their activities into conformity with the law, which may be extended for up to 3 more years. Special illiquid funds may, if necessary, receive one 5-year extension and may also continue to honor certain contractual commitments during the transition period. The purpose of this extended wind-down period is to minimize market disruption while still steadily moving firms away from the risks of the restricted activities. The definition of ``illiquid funds'' set forth in subsection (h) paragraph (7) is meant to cover, in general, very illiquid private equity funds that have deployed capital to illiquid assets such as portfolio companies and real estate with a projected investment holding period of several years. The Board, in consultation with the SEC, should therefore adopt rules to define the contours of an illiquid fund as appropriate to capture the intent of the provision. To facilitate certainty in the market with respect to divestiture, the Board is to conduct a special expedited rulemaking regarding these conformance and wind-down periods. The Board is also to set capital rules and any additional restrictions to protect the banking entities and the U.S. financial system during this wind-down period. We noted above that the purpose of section 620 is to review the long- term investments and other activities of banks. The concerns reflected in this section arise out of losses that have appeared in the long-term investment portfolios in traditional depository institutions. Over time, various banking regulators have displayed expansive views and conflicting judgments about permissible investments for banking entities. Some of these activities, including particular trading strategies and investment assets, pose significant risks. While section 619 provides numerous restrictions to proprietary trading and relationships to hedge funds and private equity funds, it does not seek to significantly alter the traditional business of banking. Section 620 is an attempt to reevaluate banking assets and strategies and see what types of restrictions are most appropriate. The Federal banking agencies should closely review the risks contained in the types of assets retained in the investment portfolio of depository institutions, as well as risks in affiliates' activities such as merchant banking. The review should dovetail with the determination of what constitutes ``high-risk assets'' and ``high risk trading strategies'' under paragraph (d)(2). At this point, I yield to Senator Levin to discuss an issue that is of particular interest to him involving section 621's conflict of interest provisions.