Yesterday, after the Dodd financial takeover bill failed to achieve the 60 votes necessary to end debate, Senator Dick Durbin appeared on the floor to impugn the motives of Republicans. “It’s not surprising that the Republicans are reluctant to be a part of Wall Street reform… We’re trying to change the way Wall Street does business so we never have to face a recession like this again. The Republicans in the Senate, with only a few exceptions, have resisted our efforts to pass this bill.”

Durbin then hailed the amendment process, which in fact defeated every major Republican reform offered, including efforts to rein in Fannie Mae and Freddie Mac, which played such a major role in causing the financial crisis to begin with.

Durbin next posited his theory of why Republicans might oppose the legislation, “I only know of several groups across the country who want to stop the debate on this bill: Wall Street, the biggest credit card companies, and the biggest banks. They want to stop this bill, they want to kill it. And they’ve spent a fortune on lobbyists roaming around our offices here on Capitol Hill to try to convince members to stop this Wall Street reform bill. Well, they were at least successful today. They convinced all but two Republican Senators to come to their side of the issue and to stop this debate on Wall Street reform. Well, that is unfortunate because I think the American people expect us to get something done.”

Apparently, getting something done is better than getting it done right. Durbin continued by blaming Wall Street for economic crisis, and said, “I don’t think business as usual is the right way to go, but the Republican votes — all but two Republican Senators — voted to continue business as usual on Wall Street. They don’t want this bill to pass. And so they voted that way today. At the end of the day, 39 out of 41 Republican Senators voted for the status quo, to keep things just as they are on Wall Street.”

Senator Johnny Isakson, who probably didn’t like being impugned, then took to the floor to remind Durbin that one of the reasons Republicans voted no on cloture was in fact because the bill did nothing to address Fannie Mae and Freddie Mac, which drove the subprime mortgage market and the housing market as a whole to ruin.

“I think a little history lesson is due for all of us,” said Isakson. He noted that Fannie and Freddie built up so-called “affordable housing loans” into their portfolios. He rightly mentioned that the government sponsorship of these particular loans helped them to become very popular, and then the securities from Fannie and Freddie were sold all over the world.

Isakson is right. All told, Fannie and Freddie sold about $5 trillion worth of mortgage-backed securities by the time they went bankrupt. That included, in June 2008, some $1.835 trillion in higher-risk mortgages and mortgage-backed securities just before they were nationalized. These were high risk loans in whole loan form, most of which, $1.646 trillion, were GSE-issued mortgage-backed securities, and $189 billion of subprime and Alt-A private mortgage-backed securities.

Isakson explained, “The root of this problem is Freddie Mac and Fannie Mae and the direction of the United States Congress as to what they should do in their portfolios in terms of the securities they own… We have a financial reform bill in front of us that exempts Freddie Mac and Fannie Mae from reform. That doesn’t make any sense at all, and if you listen to the arguments in the debate as to why they weren’t there, is ‘cause it was too hard. Well, listen, these are hard times. Americans are having hard times. It’s time that we did the hard things.”

And then suddenly, a lapse of honesty broke out on the floor of the Senate. Durbin replied: “I will concede that this, what you pointed to as a fundamental flaw, a mistake that was made, there was a presumption made, that owning a home was such a valuable American ideal… but, we went too far, we extended the opportunity for home ownership to people who weren’t ready. And we believed that if you pushed them to the limit of how much they could pay, that the home would appreciate in value, their incomes would go up and everything would work out. And it turned out that gamble was wrong… on some people. And certainly, Fannie Mae and Freddie Mac as the ultimate guarantors of mortgages were part of that. So, there is a governmental element here, I don’t question that for a moment. So, certainly some blame lies there…”

Durbin continued, “I will concede to the gentleman from Georgia his premise. Do we need to reform Fannie Mae and Freddie Mac? Yes we do. And if we don’t we’re going to pay dearly for it. I don’t know that we can accomplish it in this bill, accomplish it at this moment, but it literally has to be done… [T]o argue that it doesn’t include Fannie Mae and Freddie Mac and therefore we can’t support it, I think that perhaps we just have a different point of view… [But] I think you’re right in what you said.”

Durbin even repeated himself, “I’m with you in terms of the reformation [of Fannie Mae and Freddie Mac], I just don’t believe it is reasonable to require this bill to do everything that needs to be done.”

Isakson thanked Durbin, and then Senator Chris Dodd jumped in. He too was apparently feeling rather honest yesterday: “I acknowledge that we in Congress have failed at this responsibility actually going back to 2003… there were various attempts… and we didn’t get the job done.” Because he blocked them. He left that part out.

Dodd continued, “We in Congress collectively did not get job done with Fannie and Freddie… I acknowledge that.” Dodd objected to eliminating Fannie and Freddie without replacing it with another “housing finance system,” presumably some other type of government-sponsored entity, although he claimed to be ignorant of knowing what the best option of replacing them were.

“I totally agree with your premise [that Fannie and Freddie need to be reformed],” said Dodd, explaining, “the question is that as Chairman of this committee I didn’t know how… we fix this thing at this point. And I’ve never suggested with this bill that we were dealing with every financial problem in the country. I mean, it would be an impossible task for us to take that on…”

That’s Dodd’s answer: “I didn’t know how… we fix this thing.”

Dodd continued by simply passing the buck: “So all I can say to you as someone who won’t be here next January, that I hope whoever sits in this chair, in this desk, or at this desk, or at this desk… that this will be a priority…” Because, at his desk, it was not a priority. And it still is not.

Dodd was somehow convinced, despite the fact that for him it was not a priority, went on professing that it ought to be a priority, “I can’t think of a more important priority for the Banking Committee of the United States Senate than to have the reform of Fannie and Freddie because I think we’re going to be in deeper and deeper trouble both financially and in terms of home ownership if we don’t.” Right, just not on his watch. Maybe next time.

Dodd concluded, “I would also plead that the failure to deal with that in this bill ought not to be justification for walking away from all the other good things we’re trying to accomplish in this legislation.”

Good? Does he mean seizing any company the government wants for whatever reason it deems to be essential to preserving the “financial stability of the United States”? Or perhaps monitoring every financial transaction in the country so government can become better central planners? Or maybe he meant the part of the bill that offers unlimited authority to bail out politically-favored entities by taxing everyone else?

In Washington, getting “something” done is often the enemy of the good. Senator Isakson, and the Republican caucus, are to be praised for insisting upon a bill that actually addresses the root causes of financial crisis that government was responsible for. They must hold the line, before the Senate does “something” we all will come to regret.

Robert Romano is the Senior Editor of ALG News Bureau.

Republicans ended their three-day filibuster of a financial regulatory overhaul Wednesday, reaching agreement with Democrats to begin debate on a bill aimed at curbing the risky investment practices that brought the U.S. economy to the brink of collapse.

After voting three times this week to block debate, GOP senators decided to reverse course and attempt to reshape the bill through the amendment process. The change in tactics came after Senate banking committee Chairman Christopher J. Dodd (D-Conn.) and the ranking Republican on the panel, Sen. Richard C. Shelby (Ala.), announced that they had again reached an impasse in their efforts to reach a bipartisan compromise.

Democrats had embraced the GOP filibuster as an opportunity to portray Republicans as defenders of powerful special interests, in particular major banks and investment houses. Senate Majority Leader Harry M. Reid (D-Nev.) had threatened to keep the Senate in session overnight Wednesday to reap maximum political benefits.

Speaking at a rally in Quincy, Ill., an economically depressed Mississippi River town, President Obama hailed the bill’s advancement and assured an exuberant audience of 2,300 people that the financial sector would face tough new restrictions. “It was one of those heads, they [win] — tails, you lose” situations on Wall Street, Obama said. “What was working for them was not working for ordinary Americans.”

After Shelby and Dodd announced their impasse, Reid and Senate Minority Leader Mitch McConnell (R-Ky.) delivered back-to-back Senate floor statements, agreeing that proceedings would begin at 12:15 p.m. Thursday. Reid said he would allow votes on numerous GOP amendments, a pledge that some Republican senators had sought before agreeing to lift their objections.

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Washington, D.C. – Senate Majority Leader Harry Reid and Senate Banking Committee Chair Chris Dodd sent a written response to Senate Republican Leader Mitch McConnell today, responding to a recent letter from the Senate Republican Caucus outlining Republicans’ intent to protect Wall Street and keep the same rules in place that brought America’s economy to the brink of collapse.   In their response, Reid and Dodd call out Republicans for “mischaracterizing the legislation and protecting Wall Street,” and urge them to “reverse course and join with us to produce a strong bipartisan bill.”

Further, Reid and Dodd reminded Senate Republicans about “the stakes for America’s economy” related to Wall Street reform.  Senate Democrats are committed to passing Wall Street reform this year to help create a financial system that works for all Americans – not just the sort of Wall Street executives that Senator McConnell recently met with behind closed doors.

Excerpts of Reid and Dodd’s letter to Senator McConnell:

“As you know, Democrats have been working in a bipartisan manner for months.  Any claim to the contrary at this late stage of the process seems nothing more than a transparently partisan effort to kill Wall Street reform.”

“Based on this process, Chairman Dodd developed a bill that incorporated numerous ideas from the bipartisan working groups and his discussion with individual Republican members of the committee.  Indeed, while referring to the committee-reported bill, Senator Shelby, the ranking member, was reported to have said that ‘lawmakers are 80 percent in agreement,’ certainly not the hallmark of a partisan product.”

“Unfortunately, the Senate Republican leadership seems more interested in mischaracterizing the legislation and protecting Wall Street.  As Nobel Prize winning economist Paul Krugman noted recently, ‘It’s a truly shameless performance…pretending to stand up for taxpayers against Wall Street while in fact doing just the opposite.’  Krugman went on to observe that Senate Republican leaders have held meetings with Wall Street lobbyists in an effort to coordinate their political strategy.”

“Given that the stakes for America’s economy and our taxpayers could not be higher, we strongly urge you to reconsider your approach and truly work with us on this much needed reform.”

Below is the text of the letter to Senator McConnell:

April 20, 2010

The Honorable Mitch McConnell

Republican Leader

S-230, The Capitol
Washington, D.C. 20510

Dear Senator McConnell:

We write in response to the April 14 letter signed by the members of your conference asking that a “bipartisan and inclusive approach” be used to develop Wall Street reform legislation.  As you know, Democrats have been working in a bipartisan manner for months.  Any claim to the contrary at this late stage of the process seems nothing more than a transparently partisan effort to kill Wall Street reform.

Beginning last year Banking Committee Chairman Dodd led dozens of bipartisan meetings and committee hearings to develop a consensus for a comprehensive, Wall Street reform bill.  Additionally, beginning late last fall, Chairman Dodd created bipartisan working groups within the committee and worked intensively with Senators Shelby and Corker to resolve any lingering policy differences.

Based on this process, Chairman Dodd developed a bill that incorporated numerous ideas from the bipartisan working groups and his discussion with individual Republican members of the committee.  Indeed, while referring to the committee-reported bill, Senator Shelby, the ranking member, was reported to have said that “lawmakers are 80 percent in agreement,” certainly not the hallmark of a partisan product.

With so much bipartisan progress on the substance of the legislation, it seems clear that we could quickly pass a bipartisan bill if both sides were working in good faith.  Unfortunately, the Senate Republican leadership seems more interested in mischaracterizing the legislation and protecting Wall Street.  As Nobel Prize winning economist Paul Krugman noted recently, “It’s a truly shameless performance…pretending to stand up for taxpayers against Wall Street while in fact doing just the opposite.”  Krugman went on to observe that Senate Republican leaders have held meetings with Wall Street lobbyists in an effort to coordinate their political strategy.

Given that the stakes for America’s economy and our taxpayers could not be higher, we strongly urge you to reconsider your approach and truly work with us on this much needed reform.  As members who have worked hard on this legislation, we ask you to reverse course and join with us to produce a strong bipartisan bill.

We stand ready to consider additional suggestions from Senate Republicans before and after the bill reaches the Senate floor.  Senator Dodd is committed to continuing his dialogue with Senate Republicans and there will be opportunities for members of both parties to offer amendments to this bill on the Senate floor.   The American people expect us to work together to bring true accountability to Wall Street and do all we can to protect them from another financial crisis.

Sincerely,

HARRY REID                                                             CHRIS DODD

Majority Leader                                                           United States Senator

Democratic leaders scrambled Monday to peel away the Republican votes they need to bring a Wall Street reform package to the Senate floor this week — an effort hampered by sharp partisan divisions.

Both sides are eager to exploit a lingering resentment toward Wall Street in the election-year debate. Democrats have seized on the attempt to curb reckless investment practices as part of an effort to depict the GOP as out of touch with the concerns of average Americans. On Monday, Democrats sought to use a lawsuit brought against financial giant Goldman Sachs by the Securities and Exchange Commission as a cudgel to persuade Republicans to line up behind the bill.

Republicans, in turn, think voters have even less faith in Washington than in the banks and investment houses that played central roles in the nation’s economic collapse, and they are portraying Democrats’ overhaul attempt as a “bailout” that could cost taxpayers billions.

Get full story here.

The House has passed its version of a finance reform bill, and now Democrats seek to bring a Senate version up for chamber debate this week.

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Washington, DC— Senate Banking Committee Chair Chris Dodd and Senator Mark Warner will hold a press conference this morning to discuss efforts to reform Wall Street.  The Democratic plan for Wall Street Reform protects consumers, investors and financial institutions by ensuring the excesses and recklessness that crippled our economy never happens again.  While Senate Democrats have spent months trying to work in a bipartisan fashion to clean up Wall Street, some Republicans have been misleading about reform – threatening to allow the same rules to stay in place that brought the economy to the brink of collapse.

WHO: Senate Banking Committee Chair Chris Dodd

Senator Mark Warner, Senate Banking Committee Member

WHAT: Press Conference

WHEN: Today, Monday, April 19, 2010 at 10:30 a.m.

WHERE:        Senate Radio and TV Gallery, U.S. Capitol

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One thing can be said about the current debate over the administration’s financial regulation plan, or at least Senator Chris Dodd’s version: the debate has sharpened the issues so that Dodd, the Democrats, and the administration can no longer hide behind slogans. If the administration thought that the bill could be passed simply because the American people resent Wall Street and the big banks, they may have guessed wrong. Senate Minority Leader Mitch McConnell has called them on this, and pointed out that the Dodd bill has some troubling provisions. This required Dodd, in a speech yesterday, to defend the provisions of the bill. The fact that he did it with misinformation is really a step forward, considering where the administration and he have been for the last few weeks.

Does the bill, as McConnell said, “institutionalize too big to fail?” Of course. There can’t be any reasonable doubt about this. The bill authorizes the Fed to regulate all non-bank financial institutions that are “systemically important” or might cause instability in the U.S. financial system if they failed. These words mean something—that the companies designated for Fed regulation are too big to fail. It’s so obvious that it should not have to be repeated, but it seems that Dodd and the administration believe that as long as they don’t actually say these companies are too big to fail no one will notice.

That, with all respect, is ridiculous. The market will see immediately that the government has created Fannie Maes and Freddie Macs in every sector of the financial system where these large companies are designated for Fed regulation, including insurance companies, hedge funds, finance companies, bank holding companies, securities firms, and any other kind of financial institution the government wants to regulate. Since these firms will be too big to fail, they will be seen in the market—as Fannie and Freddie were seen—as ultimately backed by the government and thus safer firms to lend to than small firms that are not government backed. This will permanently distort the financial market, favoring large companies over small ones, and eventually force a consolidation of each market where these firms exist into a few large competitors operating under the benign supervision of the government.

Does the bill, as McConnell has said, provide for permanent bailouts? Yes, again without question. The administration and the Democrats, especially Dodd, seem wounded by this suggestion. To them it seems obvious that this can’t be true. Why, they protest, the bill says that these firms have to be wound down, not bailed out. But why then is there a $50 billion fund set up to assist this wind down? In his statement yesterday on the Senate floor, in which he said the opposition had used “falsehoods” to oppose his bill, Dodd said: “And middle class families on Main Street won’t have to pay a penny: the largest Wall Street firms will have to put up money for a $50 billion fund to cover the costs of liquidating the failed financial firm.” The costs of liquidating the failed financial firm? What might those costs be?

The answer is that the $50 billion will be used to pay off the creditors, so that the market’s fear of a general collapse will be allayed. Remember, the theory under which the administration and Dodd are operating is that the failure of one of these large companies will cause a systemic breakdown or instability in the economy. The way to avoid that is to assure the market—in other words the creditors—that they will be paid. Otherwise, they will run from the failing company, and every other company similarly situated. That act—paying off the creditors when the government takes over a failing firm—is a bailout. It doesn’t matter that the management lose their jobs, or that the shareholders get nothing. When the creditors are aware that they will get a better deal with the failure of a large company than they will get with a small one that goes the ordinary route to bankruptcy, that is a bailout.  And the signal it sends to the market is the most dangerous part of this bailout, because it tells the market that creditors will be taking less risk when they lend to small companies than if they lend to large ones, and this—as noted above—will simply provide the credit advantages to large companies that will not be available to small companies. Again, like too big to fail, this will distort and suppress competition in financial markets.

Both these provisions, then, have the potential to change and restructure our competitive financial system and thus the very nature of our economy. Republicans are right to oppose them with every resource available.

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute for Public Policy Research.

There are many reasons to oppose Sen. Chris Dodd’s (D., Conn.) financial regulation bill. The simplest and clearest is that the FDIC is completely unequipped by experience to handle the failure of a giant nonbank financial institution.

The country should be grateful for the determination with which the FDIC Chair, Sheila Bair, has thus far guided the agency through the financial crisis. But it is wrong to think that because the FDIC can handle the closure of small banks it is equipped to take over and close a giant, nonbank financial firm like a Lehman Brothers or an AIG.

Consider first that the largest bank the FDIC closed in the recent financial crisis, IndyMac, had assets of $32 billion. The largest bank ever to fail, Continental Illinois in 1984, had assets of $40 billion. At $639 billion, Lehman Brothers was nearly 15 times bigger; AIG had over $1 trillion in assets when it was kept from failing by the Federal Reserve.

The assets of a large, nonbank financial institution are also different. Neither Lehman nor AIG had insured depositors—or depositors of any kind—and their complex assets and liabilities did not look anything like the simple small loans and residential and commercial mortgages the FDIC deals with.

Moreover, the policies the FDIC follows when it closes small banks would be positively harmful if they were used to close a huge nonbank financial institution. The agency is used to operating in secret, over a weekend; its strategy is always to find a buyer. When applied in the case of a large, failing nonbank financial institution, this means that some other large, “too big to fail” institution will only become that much larger.

Get full story here.

“I want to congratulate Chairman Dodd for introducing a strong Wall Street reform proposal today. This proposal incorporates ideas included in the House-passed bill, but there are significant differences that will have to be worked out. I look forward to the Senate completing work on this legislation soon, so that we can go to conference and send a final bill to the President for his signature shortly thereafter.”

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“Chris Dodd has dedicated his life to public service and has always been on the front lines to make a difference where it counts. I know how much of an honor it has been for Chris to serve the people of Connecticut and how truly difficult this decision was for him to step away. His warm personality, sense of humor and optimistic spirit has won him great respect and many friends on both sides of the aisle. I salute Chris on his years of service and wish only the best for him and Jackie and their entire family as they look forward to the new challenges ahead of them.”

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