In a recent speech to the Council of Institutional Investors, Deputy Treasury Secretary Neal Wolin outlines who’s to blame for the current collapse. Not surprisingly, he doesn’t even mention the Federal Reserve or Fannie or Freddie. Here are some of his bigger howlers with my comments in brackets:
Wolin Remarks before the Council of Institutional Investors
April 12, 2010 TG-636
Deputy Secretary of the Treasury Neal Wolin Remarks to the Council of Institutional Investors As Prepared for Delivery
Good afternoon. Thank you for that kind introduction. Before I start, let me say: I’ve spent a lot of time over the past year meeting and talking with groups that, usually on the basis of one special interest or another, are working to weaken or defeat financial reform. It’s a pleasure today to be with a group that recognizes the importance and the urgency of financial reform. I commend the Council of Institutional Investors and you, CII’s members, for your leadership.
The banner here says “Opportunity Knocks.” I believe that is absolutely true: we have an historic opportunity to fix the broken rules that govern our financial system; to make both Wall Street and Washington more accountable; and to secure greater financial stability and prosperity for the millions of everyday Americans whose pensions are entrusted to your care. We cannot afford to let this opportunity pass.
Under the leadership of Chairman Barney Frank, the House passed a financial reform bill last December. That bill is comprehensive and strong. And under the leadership of Chairman Dodd, the Senate Banking Committee has now voted out its own financial reform bill. Senator Dodd’s bill, too, is comprehensive and strong. We expect that bill to go to the Senate floor soon. As the President has made clear, we will fight hard against any efforts to weaken that legislation, and we will work to strengthen it further where we can. Given where we are in this process, I’d like to focus largely on the Senate bill today – on what it does, and on why it matters.
Last week, Chairman Bernanke said that one of the central lessons of the Great Depression, eighty years ago, is that “economic prosperity depends on financial stability.” There should be no room for dissent on that point today. The crisis of the past two years demonstrated, beyond doubt, that what happens on Wall Street and in other financial centers around the world has a direct and profound effect on Main Streets across America.
Just over two years ago, the collapse of Bear Stearns laid bare the fundamental flaws in our financial system. The subsequent panic, which reached its peak in the fall of 2008, brought the financial system to the edge of collapse. Across the country, families and businesses paid a heavy price. When President Obama took office in January 2009, Americans were losing jobs at a rate of seven hundred fifty thousand a month. Home prices were plummeting. Businesses large and small were closing their doors. At the height of the crisis, American families had lost trillions of dollars in household wealth. Median losses at public and corporate pension funds in 2008 exceeded 25 percent.
We are now on the path to recovery. But even now, far too many Americans are struggling to find work. Too many small businesses still cannot get the credit they need to operate and to grow. That is why we cannot afford to let the memory of the crisis fade without taking action. We cannot afford to wait to fix our flawed, outdated regulatory system – To establish stronger supervision for financial firms – especially for the largest, most interconnected; To bring transparency and oversight to derivatives and other key financial markets; To create an independent consumer financial protection agency to set and enforce clear rules of the road; To protect taxpayers from risk of loss, by separating the business of banking from speculative proprietary trading; And to give us the tools to end the belief that any firm is “too big to fail”. That’s what the Senate bill will do. So let me focus in more detail on a few of those issues.
First, consumer protection. As anyone knows who has ever had to wade through the jungle of mortgage disclosure forms when buying a house, or discovered that the interest rates on their credit card balance went up retroactively, or tried to finance a car only to have the terms changed after purchase, our current approach to consumer financial protection is entirely inadequate. Today, seven different federal agencies have authority to write rules for consumer financial products and services, enforce the rules, or both. But none of them sees consumer protection as its top priority. And large parts of the consumer financial marketplace still operate without meaningful federal oversight. In place of this fragmented, ineffective system, the Senate bill will establish one independent bureau of consumer financial protection with a clear mission: to prevent abusive and deceptive practices and to promote transparency and consumer choice. This reform is long overdue.
Second, regulation of the derivatives market. Businesses large and small depend on the smooth functioning of the derivatives markets. The manufacturer who exports machinery around the world, the farmer deciding what crops to plant, the construction company that has to purchase steel or wood – each relies on derivatives to manage their risks and run their business. But today, the market for over-the-counter derivatives operates largely in the shadows. And the derivatives market was right at the center of the financial crisis. In place of the opaque, unregulated market we have today, the Senate bill provides for strong regulation and transparency for all derivatives, customized or standardized. Standardized derivatives will be centrally cleared and traded. Over the counter derivative dealers and major swaps participants will be subject to strong prudential standards and regulation, including capital and margin requirements. The bill protects the ability of end users to manage their risks, and secures for end users the benefits of a more disciplined, transparent market.
We are fully committed to preserving the risk management tools American businesses need. But we will oppose all attempts to create loopholes or carve-outs that undermine the basic goals of transparency and comprehensive oversight. The American people – everyday Americans, whose pensions and retirement savings you manage – simply cannot afford another AIG or another Enron.
Third, the problem of “too big to fail.” Put simply, the resolution authority established in the Senate bill puts that problem to rest: no firm will be insulated from the consequences of its actions, no firm will be protected from failure, and taxpayers will never foot the bill for Wall Street’s mistakes. Large financial firms facing insolvency in times of economic stress will be shut down or broken apart. Management will be replaced. Creditors will suffer losses. Equity holders will be wiped out. And large financial firms, not taxpayers, will be required to bear the costs. At the same time, the bill creates the limited tools necessary to protect healthy, solvent firms in times of crisis, so that the failure of even the largest firm does not put the rest of the system – and the broader economy – at risk. When the President signs financial reform legislation, the corrosive, destabilizing problem of “too big to fail” will be a thing of the past. And every American taxpayer has an interest in seeing that happen.
These sections of the Senate bill – consumer protection, derivatives regulation, resolution authority – have gotten a great deal of attention in the public discussion over financial reform. So have the provisions for managing systemic risk: establishing a council of regulators to monitor the system; strengthening prudential supervision and raising capital and liquidity standards, especially for the largest, most inter-connected firms. And so too have the provisions for limiting risky activities at banks – separating risky “proprietary trading” from the business of banking, and prohibiting banks from investing in hedge funds or private equity funds, to ensure that American taxpayers and deposit-holders are not put at risk solely in the interest of the bank’s bottom line.
In addition to these widely-discussed reforms, there are a series of issues that have received somewhat less public attention, but that are nonetheless essential elements of comprehensive financial reform – issues like corporate governance reform, securitization reform, credit rating agency reform. On each of these issues, the Council of Institutional Investors has been a consistent and vocal advocate for change, and on each of them, the Senate bill is strong. For example, on corporate governance: The Senate bill will make clear that the SEC has unambiguous authority to issue rules permitting shareholder access to the proxy. We support that proposal. The SEC’s rulemaking process will define the precise parameters of proxy access. But the principle is clear: long-term shareholders meeting reasonable ownership thresholds should have the ability to hold board members accountable by proposing alternatives and making their voices heard.
The Senate bill also requires that all public companies give shareholders an annual say on pay vote, to give shareholders a voice with respect to executive compensation. Firms will be required to disclose more information about the relationship between pay and performance, which will encourage firms to take an appropriately long-term view of performance. Firms will be required to put in place policies to “claw back” erroneously awarded bonuses.
Taken together, the provisions in the Senate bill represent a significant enhancement of corporate governance – promoting shareholder rights and creating important tools to rein in the irresponsible pay practices that led so many firms to act against the interests of their shareholders. Anyone who invests in the stock market, and anyone who has a pension or retirement account invested on his or her behalf will benefit from these reforms.
The Senate bill also includes important changes to the securitization market. The financial crisis demonstrated all too clearly the dangers of disintermediating loan origination from exposure, or of burying risks in opaque, complex products. The result was bad for ordinary Americans, who too often were misled by loan originators incented to close a deal without regard for the borrowers ultimate ability to pay. And the result was bad for the economy as a whole. Because through the market for asset-backed securities, irresponsible lending destabilized the entire financial system. The Senate bill addresses the problem directly: requiring originators or underwriters of asset backed securities to retain an appropriate piece of the risk, and imposing substantial disclosure requirements.
Finally, the Senate bill includes important provisions with respect to credit rating agencies. There will be a dedicated office of Credit Rating Agency oversight within the SEC, critical to ensure accountability. There will be detailed standards to increase transparency with respect to the data and the methodologies and assumptions used by Credit Rating Agencies. The bill will increase accountability for compliance within rating agencies. And importantly, to help reduce and discourage regulatory reliance on Credit Rating Agencies, the bill will require federal agencies to review their regulations and either remove or justify references to ratings. As we saw so painfully in the recent crisis, a triple-A rating was too frequently not a reliable indicator of risk. Credit rating agencies serve an important function in our economy. But they cannot be a substitute for due diligence, and they need substantially more effective regulation.
It would be impossible to talk today about all of the reforms now moving towards enactment in the Senate. But I want to be clear: the bill currently before the Senate represents the most significant set of reforms to our financial system in generations. Economic prosperity does depend on stability and every single American has a stake in seeing these reforms enacted. Collectively, you are the custodians of a vast amount of America’s wealth. The pensions and retirement savings of millions of Americans – firefighters, teachers, accountants, auto workers, machinists, Americans of nearly every calling from every corner of the country – have been entrusted to your care.
You know, better than anyone, how much Wall Street reform matters to Main Street. You know how much the American people have at stake. In the wake of the worst financial crisis since the Great Depression, we have a responsibility to build a financial system that works for families and businesses, not just for bankers or brokers; for long-term investors, not just for traders looking to turn a profit; a system that lets the private sector allocate capital where it can do the most to promote real economic growth; a system far less prone to panic and collapse. Thank you.
