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February 12: DON'T USE FEDERAL FUNDS TO BUY UP AT-RISK LOANS

February 13, 2009
Speech
Madam Speaker, today the White House apparently made an announcementthat they're considering a proposal to head off potentially millions ofmore home foreclosures by using Federal funds to buy up at-risk loansand apparently refinance them. It's one of several proposals that theWhite House is looking at.

I would urge the new President of the United States not toallow the Federal Government to purchase toxic assets, and I'm placingin the Record an article from late last fall by WilliamIsaac, the former head of the Federal Deposit Insurance Corporationduring the 1980s, the early part of the eighties, late seventies, whenover 3,000 banks in our country were resolved without going to the taxpayers to bail out the problem loans.

Essentially, the Federal Deposit Insurance Corporation usedsomething called the net worth certificate program whereby they wereable to resolve over $100 billion worth of insolvency in the savingsbanks for a total expenditure to them of less than $2 billion. Theprogram involved no subsidy and no cash outlay. The FDIC purchased networth certificates in troubled banks, and the agency determined thenwhether they could be viable over time, and banks entering the programhad to agree to strict supervision from the FDIC.

If such a program were enacted today, the capital positionof banks with real estate holdings would be bolstered, giving thosebanks the ability to sell and restructure assets and get on with theirrehabilitation. No taxpayer money would be spent, and the asset saletransactions would remain in the private sector where they belong.

The banks do not need taxpayer money to carry their loans.They need for the FDIC, time-tested in what it has done in the past, touse proper accounting and regulatory policies that will give them timeto work through all of these problem loans.

When the FDIC handled the Washington Mutual situation in an orderly manner, there was no cost to the FDIC nor the taxpayers.

What I'm fearful of is that the very same securities dealerson Wall Street that have benefited handsomely from the TARP and fromall of the housing bubble of the 1990s are now going to find anotherway to put these same loans together and make more money off of us, theAmerican people.

And you know, they're so powerful, they even sit on the NewYork Federal Reserve Board up there in New York City, primary dealerswhose names you will recognize: Goldman Sachs, JP Morgan, HSBC. Theworst wrong-doers in the crisis are sitting right up there in New YorkCity with their hands on the money spigots. They send their associatesdown here to head up the Treasury Department.

And what was interesting is that Countrywide used to be onthe Fed. They took them off a couple of years ago. I guess I complainedtoo much because I don't see Countrywide. I guess they collapsed.They're not on the list anymore.

You look down this list, Dresdner Kleinwort Securities overin Germany, that bank is on its knees. It's being bought by Commerzbankand then Commerzbank by the Allianz Insurance Group in Germany. They'reon the list of our primary dealers in New York City at the FederalReserve there. This is a closed circle.

Over the next few days, I will be talking about what happened during the 1990s, where these very same Wall Street and money center banks, thevery same ones on this list, planned to over-leverage the U.S. economyand housing market through such schemes as mortgage-backed securities,through which they benefited handsomely in home equity loans and theymade extraordinary profits, their executives, their shareholders, theirboard members.

And the net result of their combined actions has been to indebtour country on the private side and ultimately now try to shift all ofthat debt to us, to our children and to our grandchildren, and they siton the board of the Federal Reserve Board up in New York, the 10 or 15primary dealers, the very same ones that did all of this damage? Thesesame institutions lobbied all during the 1990s and in this decade tochange Federal laws that aided and abetted their plan.

In 1994, the Riegle-Neal Interstate Banking and BranchingAct was passed into law that hastened all these mergers that made thembigger; and then in 1993 and 1994, changing the rules over at theDepartment of Housing and Urban Development to allow home builders likeCountrywide to approve their own loans, they changed the underwritingand appraisal standards; and then, again, allowing lenders to selecttheir own appraisers back in the early 1990s; and then in 1995 changedthe Securities Litigation Act here; and finally the Graham-Leach-BlileyAct overturned in 1999.

Madam Speaker, I have to tell you, the American people willbegin to see how the pieces of this puzzle fit together and they alllead back to the Wall Street megacenter banks.

Let's not reward Wall St. and the money center banks that havecaused America and the world such great harm. How did they do it?

In the 1990's--Plan is set in place by Wall Street and thelargest money center banks--like JP Morgan Chase, Citigroup, Bank ofAmerica, HSBC, Wachovia, and Wells Fargo--to over-leverage U.S. housingmarket through such schemes as mortgage-backed securities and homeequity loans to make extraordinary profits and enrich executives,Boards, and their shareholders. The net result of their combinedactions has been to indebt the U.S. on the private side, and ultimatelyshift the cost of their excesses to the public side.

These same institutions lobbied changes to Federal laws along with executive actions that aided and abetted their plan.

1994--Riegle-Neal Interstate Banking and Branching EfficiencyAct of 1994 was passed into law with Congress hastening bank mergerswith further concentration of financial power in large money centerbanks. The traditional concept of community banking where residentiallending took the form of a ``loan'' which was made on the time-testedstandards of character, collateral, and collectability was transformedto a ``bond'' or ``security'' which was then broken into pieces andsold into the international market, largely through Wall Streetdealers. Essentially, collateral was overvalued, risk was masked, andproper underwriting and oversight of the loan were dispensed with.

1993-1994--HUD removes normal underwriting standards (HUDMortgage Letter 93-2, ``Mandatory Direct Endorsement Processing'' gaveauthority to homebuilder owned lenders like KB Mortgage and affiliatelenders like Countrywide to independently approve their own loans; in1994, Mortgage Letter 94-54 allowed lenders to select their ownappraisers. Secretary of HUD, Henry Cisneros, upon departure from theDepartment became a KB Home Board Member as well as a Countrywide BoardMember.)

In 1995 the Private Securities Litigation Reform Act, theonly bill ever passed over a Clinton veto and a part of the Contractwith America, made securities class action law suits more difficult.Congressman Ed Markey offered an amendment to that bill that would havemade those that sold derivatives still subject to class actions. Theamendment failed.

1999 Gramm Leach Bliley Act passed Congress and for thefirst time since the 1930's removed the regulatory barriers betweenbanks, commerce, insurance and real estate. Over the next severalyears, the fury of an inflating housing market and mergers of financialinstitutions increased. Today, Dresdner, the second largest bank inGermany, has been victimized by the subprime crisis, and has been putup for sale, and is likely being acquired by Commerzbank which is ownedby Allianz Insurance Group of Germany. Effective June 5, 2008, DresdnerKleinwort Securities LLC was listed on the Federal Reserve Bank of NewYork ``Primary Government Securities Dealers.'' This means a foreigninstitution, with severe financial problems, is brought under theumbrella of the Federal Reserve. In addition, if one studies thePrimary Dealer list, one will also note the presence of CountrywideSecurities Corporation, one of the subsidiaries of Countrywide, themost egregious subprime lender in the U.S. The Federal Reserve hasbecome an encampment for the most culpable.

The Boards and executive staff of U.S. housing secondarymarket instrumentalities, like FNMA and Freddie Mac, further enflamedthe boom housing market during the 1990's by masking risk andfraudulent account schemes. All the while, their Boards and executiveswere making handsome compensation and benefit packages.