Senate Proceeding on May 12th, 2010 :: 7:31:10 to 7:48:25
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7:31:06 to 7:31:26( Edit History Discussion )

Judd Gregg: transparency that has worked in markets and are tried and true parts of our capitalist system. i thank the president. i yield the mr. dodd: mr. president? the presiding officer: the senator from new hampshire. dodd -- support of the saxby-chambliss

7:31:10 to 7:48:25( Edit History Discussion )
Speech By: Judd Gregg

7:31:27 to 7:31:47( Edit History Discussion )

Judd Gregg: amendment, senator chambliss of georgia, and express my concern, my very serious concerns about the language which has been brought forward by the chairman of the committee, both the agriculture committee and banking committee, relative to derivatives. let's begin with what our purpose should be here. let's rember that derivatives, as has been said before on this

7:31:48 to 7:32:08( Edit History Discussion )

Judd Gregg: floor numerous times before -- i think the senator from alabama said it extraordirily well. our critical part of how main street maintains its economic vitality. credit is what makes america work. i mean, one of the great geniuses of our society is that we are able to produce credit in

7:32:09 to 7:32:30( Edit History Discussion )

Judd Gregg: a fairly ready manner, which is reasonably priced and which people who wish to take risk can take advantage of in order to create economic activity and jobs. the oil that basically keeps the credit active is derivatives for

7:32:31 to 7:32:54( Edit History Discussion )

Judd Gregg: all intents and purposes. as has been pointed out, if you're manufacturi an item somewhere in america and you enter into a contract to sell that item, let's say, overseas, there are a lot of risks on how you're going to make money on that item that you have no control of. let's say you make it one day

7:32:55 to 7:33:15( Edit History Discussion )

Judd Gregg: and sell it six months later. you enter into a contract, you can sell six months later. there is a lot of risks there you don't have control over. you know how to manufacture it, you know how to create it. if it's credit, you know how to produce it. but you don't have control over the exchange rates which you're dealing with.

7:33:16 to 7:33:37( Edit History Discussion )

Judd Gregg: you don't have control over the cost of the raw materials which you're using. you don't have control over whether various parties that enter into this transtion as it moves through the commercial stream survive or go out of business or experience some huge economic upset.

7:33:38 to 7:33:59( Edit History Discussion )

Judd Gregg: well, in order to avoid all of that and just be the person who wants to produce the good and sell it, you buy derivatives, which are essentially insurance policies to make sure that the risks which you can not control, you have insurance against. that's derivatives in its simplest form. it also affects all sorts of other instruments, of course.

7:34:00 to 7:34:21( Edit History Discussion )

Judd Gregg: financial instruments and commodity instruments. but basically it's a capacity of somebody to make an agreement with somebody else and know that that agreement is not going to be affected by outside events. or if theutside events do occur, it's going to be in place a vehicle to protect you from

7:34:22 to 7:34:43( Edit History Discussion )

Judd Gregg: the risks which that outside event may create for you. so, derivatives are crucial to our capacity as a society to be economically vibrant. now, we also know that during the economic downturn, during the very severe financial crisis which we had, that the fact that

7:34:44 to 7:35:04( Edit History Discussion )

Judd Gregg: we had so many derivatives in place which were based off of contracts which are not properly supported created a huge cascading event which almost forced our entire financial structure to come to a halt. in fact, it did on one evening. and was about to put our

7:35:05 to 7:35:25( Edit History Discussion )

Judd Gregg: economic house into extreme distress, because the derivatives markets had not been properly regulated or managed. now, that wasn't the primary cause of the event of the late 2008 period. the primary causes of the events of the late 2008 period were very bad underwriting. in fact, virtually no

7:35:26 to 7:35:46( Edit History Discussion )

Judd Gregg: underwriting standards in some instances where loans were being made. easy money and arbitrage. but the accelerant which took those causes and basically turned it into an event of immense proportions which almost shut down america and would have used massive dislocation in

7:35:47 to 7:36:07( Edit History Discussion )

Judd Gregg: our nation had it been allowed to go uncontrolled, had the fed and treasury not stepped in and taken very definitive action, the accelerant was the derivatives market. and the classic example of it, of course, was the a.i.g. situation which has been cited on the floor numerous times as the example of what was wrong with a regulated market where

7:36:08 to 7:36:29( Edit History Discussion )

Judd Gregg: essentially you had a company which was issuing insurance based on its good name. virtually nothing else behind the insurance besides its good name. and when that insurance started to get called because the contract started to fail, and the counter parties became concerned, there was no capacity

7:36:30 to 7:36:51( Edit History Discussion )

Judd Gregg: to support the insurance. so our purpose here should be to reorganize our regulatory structure so that that type of event doesn't occur again. that should be our purpose. while at the same time recognizing that we need a very robust and vibrant derivatives market if we're going to be successful as a nation, if we're going to continue to have an economic vitality as a nation.

7:36:52 to 7:37:14( Edit History Discussion )

Judd Gregg: our goal should be, one, to put in place a structure which as much as possible foresees and limits systemic risk caused by the derivatives market -- that could be caused by the derivatives market. and two, maintain an extremely vibrant directors market

7:37:15 to 7:37:38( Edit History Discussion )

Judd Gregg: where -- be derivatives market where america remains the best place in the world to get credit. unfortunately, the pending bill undermines the second part of that effort. it could be argued the first part of the effort in trying to anticipate systemic risk is addressed in this bill, but it addresses it in such an unwieldy

7:37:39 to 7:37:59( Edit History Discussion )

Judd Gregg: and unmanageable and in some ways counterproductive way that it actually undermines the basic goal which is to keep the system sound and also keep t credit markets vibrant. and why is that? well, there are a number of reasons for it.

7:38:00 to 7:38:22( Edit History Discussion )

Judd Gregg: but the two most difficult parts of this proposal relative to getting it that it forces the wap desk to be -- swap desk to be spun off of financial houses and it essentially forces instant

7:38:23 to 7:38:45( Edit History Discussion )

Judd Gregg: movement from and basically almost total coverage from clearing houses into exchanges. in both those instances you're basically going to create fairly close the opposite result that you seek if you pursue this course. i would predict if this bill we to become law in its

7:38:46 to 7:39:06( Edit History Discussion )

Judd Gregg: present form, it would be likely that, one, a large amount of derivatives activity would move overseas. two, a large amount of derivative activity which presently occurs and which is necessary for commerce would have to be restructured in a way which would be extraordinarily expensive to people who are

7:39:07 to 7:39:27( Edit History Discussion )

Judd Gregg: doing tt commerce and would, therefore, curtail significantly commerce. three, the credit markets would significantly contract by a significant amount of money, probably by as much as three-quarters of a trillion dollars. four, the institutions which

7:39:28 to 7:39:50( Edit History Discussion )

Judd Gregg: would be responsible for creating the derivatives market would actually be ls stable, the market makers would be less stable than what we presently have today. now, you don't have to believe me to understand the seriousness of this and accept this as a statement or an assessment of what the present bill does.

7:39:51 to 7:40:11( Edit History Discussion )

Judd Gregg: i mean, granted, i'm just one member of this body that has an opinion on it. but we do hire people as a government to take a something like this and say does this work or does that work? and they are charged with the responsibility of accomplishing the two goals which i mention one, avoiding systemic risk. and, two, having a vibrant credit market.

7:40:12 to 7:40:33( Edit History Discussion )

Judd Gregg: one of those agencies is the federal reserve. they've taken a look at this language in the dodd-lincoln bill and they've concluded this. this is their conclusion, the federal reserve: section 106 would impair financial stability and strong prudential regulation of derivatives, would have serious consequences for the

7:40:34 to 7:40:56( Edit History Discussion )

Judd Gregg: competitiveness of the united states financial institutions and would be highly disruptive and costly both for banks and their customers. that's the conclusion of a fair umpire, the federal reserve. there are a lot of people around here who don't like the federal reserve. but their job is to look at something like this and say does

7:40:57 to 7:41:20( Edit History Discussion )

Judd Gregg: this work or does that work in making our markets more stable, sounder or risk-averse and more competitive. their conclusion is this language does just the opposite. would be highly disruptive and costly for both banks and their customers. but tpup don't like the federal reserve -- if you don't like the federal reserve, listen to the fdic.

7:41:21 to 7:41:42( Edit History Discussion )

Judd Gregg: the fdic under sheila bair has been one of the best performing agencies of oufederal government. they stepped in on numerous occasions and stabilize bed banks which far overextended their capacity and gotten into serious liquidity positions and settled those banks out in a way in which very few customers lost anything. what did the fdic say when they

7:41:43 to 7:42:04( Edit History Discussion )

Judd Gregg: looked at this, because their responsibility is to maintain safety and soundness of banks. sheila -- the chairman of the fdic, sheila bair, in a letter to who it went to, but i think it was to members of congress, said

7:42:05 to 7:42:25( Edit History Discussion )

Judd Gregg: "by concentrating the activity in an affiliate of the uninsured banks" that means spinning them off under the proposal under this bill -- "we could end up with less a lower-quality capital, less information and oversight for thedic and potentially less support for the uninsured bank in a time of

7:42:26 to 7:42:46( Edit History Discussion )

Judd Gregg: cris. thus, one unintended outcome of this provision would be weakened, not strengthened, protection of the insured bank and the deposit insurance fund, which i know is not the result any of us want. then we have chairman volcker

7:42:47 to 7:43:07( Edit History Discussion )

Judd Gregg: who i think everybody agrees is a fair arbiter around here, and has also said that this language in this bill overreaches and does not work. and i'll submit his letter to the record. so we have these independent arbiters, these fair umpires of what we should be doing in order

7:43:08 to 7:43:30( Edit History Discussion )

Judd Gregg: to maintain financial stability and strong credit markets saying listen, don't do it this way. don't do it this way. there are ways to do this, however, ways to make sure that we have a strong derivatives market, which is also safer, sounder and is not subject to systemic risk. senator chambliss' bill accomplishes that in a very

7:43:31 to 7:43:51( Edit History Discussion )

Judd Gregg: effective way. how debaseically do it? well -- how debaseically do it? how did he basically do it? make sure all the derivatives are clear. they go through a clearing process. what does a clearing process mean? it basically means you get counterparts put up margin, they

7:43:52 to 7:44:12( Edit History Discussion )

Judd Gregg: have to put up actual assets, margin, liquidity in order to be sure that there's something behind their position, so that if they have a problem and they have to be called on to pay up their position, they have the capacity to do it and it's there. that's why we have a clearinghouse, because the clringhouse becomes basically the place where that occurs and it becomes the process by which

7:44:13 to 7:44:35( Edit History Discussion )

Judd Gregg: that occurs. and you make sure that the clearinghouse itself, because it is -- it stands in and basically is the guarantor, for lack of a better word, of the contract, that it has the capital and the adequacy to make sure that those contracts will not fail. so as a very practical matter,

7:44:36 to 7:44:57( Edit History Discussion )

Judd Gregg: you can do this by creating a proper structure using clearinghouses. and then to the extent -- and you make sure the clearinghouses have proper oversight from the s.e.c. or the cftc. and then as these instruments, these various derivatives, these various types of tkreurbts,

7:44:58 to 7:45:18( Edit History Discussion )

Judd Gregg: and -- derivatives become more standardized, and a lot already are standardized, you move them over to an exchange, which is the ultimate process of making sure that that you don't have an issue of solvency behind the instruments. and so as you move them to an

7:45:19 to 7:45:39( Edit History Discussion )

Judd Gregg: exchange, are you abl an even stronger market. but you don't mandate that everything go to an right out the door, because if you did that, you'd end up with a lot of derivatives which are still too customizedo be able to move to an exchange and they would not be able to be brought

7:45:40 to 7:46:00( Edit History Discussion )

Judd Gregg: forward unless you contract the market again. and you also don't take the swap disks and move them out of the financial houses, because in doing that, you would have to have a new capital base for the swap desk, which is expressed by

7:46:01 to 7:46:22( Edit History Discussion )

Judd Gregg: the fed and the fdic and chairman volcker, which would force a massive contraction in credit because that capital would no longer be available to underwrite credit and in addition you would have much weaker institutions standing behind the swap disk, which, again, is the point made by the

7:46:23 to 7:46:44( Edit History Discussion )

Judd Gregg: fed, the fdic, and chairman volcker. so it is not necessary to go down the root that's -- the route that's outlied in this bill in order to accomplish the goals which i all have. in fact, if you go down the route presented in this bill, you actually undermine the goals we all have, which is to have a

7:46:45 to 7:47:07( Edit History Discussion )

Judd Gregg: more -- a derivatives market which is less prone to systemic risk and which is strong, sound, and vibrant. rather what senator chambliss has proposed makes the most sense which is a comprehensive reform of the derivatives market in a way that insists that for

7:47:08 to 7:47:28( Edit History Discussion )

Judd Gregg: the vast majority of derivatives, they end up going through a clearinghouse process, and if they're standardizable, they end up on an exchange. if they're for purely a commercial purpose, a single purpose commercial undertaking, then they're able to be exempt from the clearing activity. this would create a much more

7:47:29 to 7:47:50( Edit History Discussion )

Judd Gregg: robust undertaking of credit -- of creation of credit in this country. it would maintain the vitality of the derivatives market in this country while at the same time protecting and ensuring that we had a sound derivatives market. it would avoid what i believe the inevitable outcome of this language would be under the doddincoln bill, which is that

7:47:51 to 7:48:12( Edit History Discussion )

Judd Gregg: we would weaken the derivatives market, weaken the systemic protections, and end up forcing overseas a large amount of economic activity which appropriately should be done here in the united states and which is important to our nation's capacity to be competitive on main street. and, remember, this is about main street. so i certainly hope people will

7:48:13 to 7:48:25( Edit History Discussion )

Judd Gregg: support senator chambliss' proposal. it makes a lot of sense. it's well thought out. it's not exactly what i would do were i writing this myself, but it's a very good piece of legislation.