To Members of the H.R. 4173 Restoring American Financial Stability Act of 2010 Conference Committee
Washington, DC 20510
Re: Support House Offer on Title I – Systemic Risk to Improve Regulatory Capacity to Prevent the Next Financial Crisis
June 17, 2010
Dear Member,
The over 250 consumer, employee, investor, community, small business and civil rights groups who are members of Americans for Financial Reform (AFR) write to express our vigorous support for the House offer on Title I. We urge the Senate to accept the House offer with one exception: to add the Senate’s stronger Office of Financial Research provisions to ensure that regulators are no longer in the dark about Wall Street’s activities.
In many ways, the credibility of the Wall Street Reform bill rests on whether it closes the gaps in federal oversight and removes the regulatory discretion that led to the loss of 8 million jobs and $17 trillion in household wealth. The House offer on Title I makes substantial progress over the Senate bill, by advancing the following key principles:
1) No More Shadow Banks: Shadow banks – un- or loosely-regulated investment banks, finance companies and other non-bank financial companies – were at the heart of the crisis and received hundreds of billions of dollars in taxpayer bailouts. The House offer ensures that we learn the lesson of the crisis: potential threats to our economy should have “no place to hide” from regulatory oversight. The offer allows regulators to oversee emerging risky activities wherever they arise, instead of blocking regulators’ authority with an arbitrary company size limit or worse, an 85/15 financial-to-commercial formula that shows future shadow banks how to avoid regulation.
2) Firewalls for Mixed Commercial & Financial Firms: In the era before the crash, mixed financial and commercial firms like GE Capital (the largest issuer of commercial paper in 2007 and recipient of $50 billion in bailouts) escaped proper oversight and nearly brought down their commercial affiliates – and the entire economy. The House offer provides regulatory certainty to the small number of these firms that are systemically important, with detailed provisions for “intermediate financial holding companies” that will firewall the financial entity from the parent company. These firewalls will allow regulators to issue safeguards for the high-risk financial entity without interfering with the company’s main line(s) of business.
3) No Treasury Veto for Essential Regulatory Action: In a bill that depends heavily on regulatory discretion for such basic functions as raising capital requirements, the Senate language erects an unnecessary roadblock to systemic risk council action: a super-majority vote of the council is needed, with an effective veto by a presidential appointee, the Treasury Secretary. The House offer provides for a simple majority vote by the systemic risk council, in consultation with the regulated firm’s primary regulator.
4) Statutory Leverage Requirements: The unprecedented increase in financial sector debt that began in the late 1990s was a major cause of the financial crisis. The SEC’s decision to relax the 12-1 leverage ratio for broker-dealer subsidiaries of investment banks set the stage for Lehman Brothers’ and Bear Stearns’ collapse, and underscores the need for statutory limits. The House offer would place a statutory minimum leverage ratio of $15 in debt for every $1 in assets on systemically risky institutions. The systemic risk regulator would retain discretion beneath this maximum debt level.
5) Other Regulatory Improvements: The House offer also includes more provisions that credibly address the problems exposed by the financial crisis, such as:
a) Short-Term Debt Limits for systemically-risky financial firms. Banks’ over-reliance on short-term debt such as “repo” agreements enabled the liquidity runs of 2008.
b) Prompt Corrective Action rules to provide early warning and market-based action for companies at the first sign of distress, diminishing the risk for government assistance or company failure.
c) Detailed Rapid Resolution “Funeral” Plans so that systemically risky firms provide a “living will” to guide regulators in case of failure.
d) Off-Balance Sheet Inclusion in Capital Standards to ensure that firms have sufficient capital to cover their true potential exposures.
e) Mitigatory Action Authority to combat systemic risk by ordering divestiture, among other options, if stricter prudential standards do not fail to eliminate a company’s economic threat. The House offer’s “Kanjorski Too Big to Fail Amendment” requires a majority vote by the systemic risk council instead of a 2/3 vote with Treasury veto, though it provides more process to affected firms after the initial regulatory determination.
Nearly two years after the onset of the worst financial crisis since the Great Depression, the American people are still waiting for Congress to credibly rebuild the public structures that will protect Main Street businesses and families from Wall Street excesses. AFR believes that, with some exceptions, the House offers a stronger framework for combating systemic risk, and we urge the Senate conferees to adopt it.
Sincerely,
Americans for Financial Reform