Ted Kaufman - United States Senator for Delaware

Levin-Kaufman Package of Amendments Introduced to Stop Wall Street Abuses

May 11, 2010

WASHINGTON – Sen. Carl Levin, D-Mich., and Sen. Ted Kaufman, D-Del., today introduced a package of amendments to the financial reform bill to stop Wall Street abuses examined in a series of hearings held by the Permanent Subcommittee on Investigations, on which both Levin and Kaufman serve as members.
 
“As working Americans continue to dig this country out of the hole that Wall Street threw us into, it is critical that the Senate pass as strong a financial reform bill as possible to rebuild Main Street defenses against the excesses of Wall Street,” said Levin, chairman of the subcommittee. “The Dodd financial reform bill is a very strong bill, and the intent of the Levin-Kaufman package of amendments is to strengthen it further by adding safeguards to stop abusive loans, misleading credit ratings, poor quality securitizations, and the revolving door for regulators.”
 
“Thanks to Chairman Levin and the Permanent Subcommittee on Investigations, Congress now has a public accounting of the extent to which conflicts of interest, misaligned incentives and outright fraud led our financial system into crisis,” said Kaufman.  “On each end of the mortgage origination and securitization supply chain, retail banks and investment banks were so conflicted they ran roughshod over retail customers and investors to maximize short-term profits.  In the middle of the chain, the regulators and ratings agencies which should have stopped the abuses were guilty of willful misconduct and neglect.  I am proud to support Chairman Levin’s package of proposed new rules, which will help to rein in the rampant excessive behavior that snowballed into a disaster for millions of Americans.”
 
In April, the Permanent Subcommittee on Investigations held four hearings in a series entitled, “Wall Street and the Financial Crisis.”  The hearings examined the role of high risk mortgage loans, bank regulators, credit rating agencies, and investment banks as contributors to the recent financial crisis.  The hearings were the culmination of an in-depth, bipartisan investigation that began in November 2008, encompassed over 100 interviews and the review of millions of pages of documents, and resulted in 30 hours of testimony and the release of over 2,500 pages of hearing exhibits.  
 
The hearings revealed that mortgage lenders like Washington Mutual dumped hundreds of billions of dollars of high risk and sometimes fraudulent home loans into the U.S. financial system; banking regulators like the Office of Thrift Supervision understood the risks, failed to stop them, and even impeded the examination efforts of the Federal Deposit Insurance Corporation (FDIC); credit rating agencies like Moody’s and Standard & Poor’s gave inflated ratings to risky structured finance products in an effort to keep market share and please clients; and investment bankers like Goldman Sachs assembled, marketed, and sold high risk mortgage related products, while betting against the very products they created.
 
The Levin-Kaufman package of amendments would address these problems and strengthen the financial reform bill in the following ways:
 
(1) Mortgage Standards:  The amendment would prohibit persons who sell more than 1,000 mortgages or mortgage-backed securities per year from including two types of high risk loans – stated income and negatively amortizing mortgages – due to their detrimental impact on the safety and soundness of individual financial institutions and the financial system as a whole.  
 
(2) Skin in the Game on Securitizations: The amendment would build upon the existing Section 941 in the Dodd bill by ensuring that the entity securitizing a pool of assets retains a stake in multiple securities produced from the asset pool, better aligning the securitizer’s interests with that of all investors.
 
(3) FDIC Exam Authority:  The amendment would strengthen protection of the Deposit Insurance Fund and minimize taxpayer bailouts by strengthening the FDIC’s authority to examine and take enforcement action against financial institutions that pose a threat of failure, in particular by allowing the FDIC Chairman, in addition to the FDIC Board, to initiate examinations of such institutions.  

(4) Credit Rating Agencies (CRAs):  The amendment would strengthen the credit rating process by reducing conflicts of interest, improving disclosure, and increasing oversight.  In particular, the amendment would:
·        Eliminate conflicts of interest by requiring use of an intermediary between issuers seeking to obtain credit ratings and nationally recognized statistical rating organizations seeking to provide those ratings.  The intermediary would receive fees from issuers, direct those fees to the credit rating agencies, and create incentives to reward accurate ratings.
·        Remove the existing statutory bar on federal oversight of credit rating models and methodologies, and require Securities and Exchange Commission (SEC) oversight of them to ensure that credit ratings have a reasonable foundation.
·        Require greater credit risk to be assigned to certain financial products.  For example, credit rating agencies would be required to assign a greater credit risk to products with inadequate historical performance data or products whose complexity and novelty prevent their performance from being reliably evaluated.
·        Require basic information to be included in the form mandated by the Dodd bill for each credit rating, including a statement of whether the credit rating is intended to be effective for less or more than one year.
·        Prohibit CRA reliance on a third party due diligence review that the CRA has reason to believe is inadequate.
·        Strengthen SEC enforcement by requiring CRAs to file certain information with the SEC and authorizing disciplinary action against persons associated with CRAs.
 
(5) Restrict Synthetics: The amendment would restrict the sale of synthetic asset-backed securities that have no economic purpose apart from speculation on the value or condition of referenced assets.    
 
(6) Gustafson Fix: The amendment would address a Supreme Court case that limited investor protections against material misstatements and omissions to public security offerings by restoring the original Congressional intent to impose similar liability for private offerings.
 
(7) Cooling Off Period: The amendment would impose a one-year cooling off period before federal financial regulators can work for a financial institution that they personally regulated or took an enforcement action against.  Enacting this provision would prevent the conflict of interest inherent in the situation of  federal regulators having the possibility of immediate employment at a financial institution they regulated.
 
(8) Foreign Bank Anti-Tax Evasion Remedy:  The amendment would give the Treasury Department discretionary authority to take a range of measures against foreign financial institutions or foreign jurisdictions that impede U.S. tax enforcement.  
 
In addition to this package of amendments, Levin and Kaufman are cosponsoring an amendment introduced by Sen. Jeff Merkley, D-Ore., to limit proprietary trading and conflicts of interest by financial institutions.

 

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