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Senate Proceeding 05-04-10 on May 4th, 2010 :: 0:11:55 to 0:31:45
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Judd Gregg

0:11:51 to 0:12:11( Edit History Discussion )

Judd Gregg: to make sure that the minnows get a chance and that we have an economy that is just mr. president, i yield the floor. mr. gregg: mr. president? the presiding officer: the senator from new hampshire. mr. gregg: mr. president, i want to speak briefly here on the bill that is before us, and how i think it can be improved. first, i want to congratulate

Judd Gregg

0:11:55 to 0:31:45( Edit History Discussion )
Speech By: Judd Gregg

Judd Gregg

0:12:12 to 0:12:33( Edit History Discussion )

Judd Gregg: the chairman of the committee working i understand they've reached an agreement on how to do the issue of resolution which addresses the issue of too big to fail, which is a very critical part of this bill. i congratulate them for make that type of initiative and i ho that the rumors are true and such an amendment that will address a strong too big to fail

Judd Gregg

0:12:34 to 0:12:55( Edit History Discussion )

Judd Gregg: language so the american taxpayers will not be on the hook for institutions which overextend themselves and take on too much risk, but are institutions so large that it is felt that they are too big to fail, that that concept will no longer be part of our lexicon and we will essentially put an end to it. i con

Judd Gregg

0:12:56 to 0:13:16( Edit History Discussion )

Judd Gregg: that and the ranking member. it there are, however, other major issues within this bill that need to be addressed and th substantive and rather complex. a few of the ones that aren't even in the bill, for example, is how we address fannie mae and freddie mac. we know that the american

Judd Gregg

0:13:17 to 0:13:37( Edit History Discussion )

Judd Gregg: taxpayer today is on the hook for somewhere between between $400 billion an and $500 billion. $400 billion to $500 billion that we're going to have to underwrite in order to stablize those two entities on the debts which they have run up or the credits which they have run up which have gone bad and they

Judd Gregg

0:13:38 to 0:13:58( Edit History Discussion )

Judd Gregg: have purchased. and that's serious. there will be a proposal that comes from it from our side of the aisle. it won't totally restructure fannie and freddie. it should. i'd like to see that. it's too complex in this bill. but will address some of the core issues that need be a addressed. we need to tell the american people forthrightly how much

Judd Gregg

0:13:59 to 0:14:20( Edit History Discussion )

Judd Gregg: they owe. we ought to put on budget what the obligations are, because they're very scorable, relative to the costs the american taxpayer's going to have to bear in order to bailout and maintain fannie and freddie and it's going to be somewhere aroun around $400 billion to $500 billion of additional

Judd Gregg

0:14:21 to 0:14:42( Edit History Discussion )

Judd Gregg: debt and we know it's coming and we want to talk about it. it affects other debt obligations of our country in a lot of different ways, but primarily through crowding out. secondly, the bill has language on underwrierks but it's really not -- underwriting, but it's really not strong enough. if you want to know what caused this event in the back of 2008,

Judd Gregg

0:14:43 to 0:15:03( Edit History Discussion )

Judd Gregg: what caused this traumatic event which almost brought the entire financial system of america down, which almost put us into a depression, put us into a very dear recession, cost a lot of people their jobs and there's a lot of people experiencing trauma because of it. there are three or four main caes. i talke -- i have talked about them

Judd Gregg

0:15:04 to 0:15:25( Edit History Discussion )

Judd Gregg: before. one i believe the money was made too easy to get, at too low a price for too long by the fed. another was the fact that the congress specifically encouraged and in fact forced lenders for all intents and purposes to lend to people who couldn't afford the homes that they were buying because it became congressional policy to do that. another was that people were

Judd Gregg

0:15:26 to 0:15:47( Edit History Discussion )

Judd Gregg: shopping for the weakest regulators. this is what happened in the derivativesarket. the derivatives were not structured in a way that actually put capital, liquidity or margin behind derivatives. and the fourth -- and i think it was probably the most significant -- was there was a total breakdown in underwriting standards. in other words, the people who were making the loans on

Judd Gregg

0:15:48 to 0:16:08( Edit History Discussion )

Judd Gregg: subprime mortgages and on other types of exotic instruments so that people could buy houses who couldn't afford them were making those loans and not looking at the underlying value of the asset, and they weren't looking at the ability of the person to pay back that loan. what they were doing, quite simply, was making the loan because they were going to get a fee for it.

Judd Gregg

0:16:09 to 0:16:29( Edit History Discussion )

Judd Gregg: then they were going to sell the loan, securitize it. it was going to be chopped up and sent out and syndicated, and they didn't really care what the loan did, because they basically were just making the loan for the purposes of getting a fee. and in the banking industry, those were the one off lenders, but in the banking industry, you had a complete breakdown.

Judd Gregg

0:16:30 to 0:16:50( Edit History Discussion )

Judd Gregg: banks were lending to people who they knew couldn't repay it on the loans reset and they knew the value of the asset could only support that loan if there was appreciation in the markets which was a gamble. this happens every time we go through one of these events, by the way, one of these real estate-driven recessionary events. it happened in the late 1970's. it happened in the late 1980's

Judd Gregg

0:16:51 to 0:17:13( Edit History Discussion )

Judd Gregg: when i was governor of new hampshire and new england went through a horrific contraction as a result of an expansive effort of lending money in the real estate markets. underwriting standards break down. there needs to be a clear national definition of what proper underwriting standards are. and senator isakson and i and a mber of other people, senator

Judd Gregg

0:17:14 to 0:17:34( Edit History Discussion )

Judd Gregg: corker, are going to put forward an amendment in that area. but one of the core areas here that needs to be addressed and hopefully it will be included in this bill and improve the bill in this area, but one area of this bill that simply has to be changed if it is going to be effective in doing what it has to do is in the area of derivatives -- the language of derivatives. now, most americans don't

Judd Gregg

0:17:35 to 0:17:55( Edit History Discussion )

Judd Gregg: understand derivatives. it's understandable. they are complex products. but basically try to think of it this way. if you're on main street and you have got a business, usually a fairly large business, and you're making a product you want to be able to sell that product to somebody at the price you quote that person and make the profit that you expect at

Judd Gregg

0:17:56 to 0:18:16( Edit History Discussion )

Judd Gregg: that quoted price, but there are a lot of things that affect that product that you can't control. if you're selling it to another country, you can't control what the dollar is going to do in relationship to the currency of that country. for example, if you're selling it to brazil, whether their currency is going to go up or down or vis-a-vis the dollar.

Judd Gregg

0:18:17 to 0:18:37( Edit History Discussion )

Judd Gregg: if you make a contract today, make a contract to sell it today but can't make it for six months, your whole profit could be wiped out by the dollar devaluing. or the materials which you buy to make that product may change in value or availability. or the person you're getting a loan from to subsidize you -- not subsidize you but to allow you to expand your businesses to

Judd Gregg

0:18:38 to 0:18:58( Edit History Discussion )

Judd Gregg: build that product, that person, that person who is giving you that loan may have troubles, financial troubles, and may not -- and you may have an issue there or vice versa. you may have an issue with that person. all of this are things which are usually beyond the ability of the individual who is making the product. in this case, i'm talking about

Judd Gregg

0:18:59 to 0:19:20( Edit History Discussion )

Judd Gregg: making products to control. so there is something called a derivative, which is an insurance item. basically, someone insures for you over those risks. and there is a lot of complexity to this because these insurance items mutate into all sorts of different instruments. they can affect financial instruments, they can affect commodities, they can affect goods, they can affect just

Judd Gregg

0:19:21 to 0:19:41( Edit History Discussion )

Judd Gregg: plain currencies. but they are critical instruments, derivatives, for making the economic engine work. they areort of the grease you put in the nick engine to make sure it -- in the economic engine to make sure it doesn't seize up, to allow the economic engine to move down the they are so critical that there

Judd Gregg

0:19:42 to 0:20:03( Edit History Discussion )

Judd Gregg: is approximately $600 trillion in notional value. notional value is not what the risk is because there are underlying assets here, but that's a big number, big number. and so we have to make sure that when we amend the derivatives section of this bill to try make them stronger -- have a stronger derivatives industry,

Judd Gregg

0:20:04 to 0:20:24( Edit History Discussion )

Judd Gregg: we don't make big mistakes and basically undermine the ability of people to use this te of instrument to get credit and to make the markets work and to create jobs on main street, because are all tied back to jobs on main street. even if you're not working for the company that uses the derivatives, you're probably working for somebody who does business with the does derivatives.

Judd Gregg

0:20:25 to 0:20:45( Edit History Discussion )

Judd Gregg: in are a lot of big companies that do business with derivatives. there are a lot more smaller companies that sell products to those companies. on main street. so it will affect main street if we do th wrong because credit will contract. and in america, the unique advantage america has is that we're the place in the world where if you have got a good idea and you're willing to take

Judd Gregg

0:20:46 to 0:21:06( Edit History Discussion )

Judd Gregg: a risk yourself and you're an entrepreneur, you can usually get capital and credit to allow you to do that idea, take that risk and thus create jobs, which is the bottom line for all of this, we want to create jobs. so derivatives play a large role in making that system work. well, this bill, unfortunately, adopted language which was put

Judd Gregg

0:21:07 to 0:21:27( Edit History Discussion )

Judd Gregg: forward in the agriculture committee which really undermines, literally undermines, first the safety and soundness of the derivatives market and secondly the ability of america to be the leader in the derivatives market. now, our goal here should be very simple. our goal should be two steps. one, make our banking and

Judd Gregg

0:21:28 to 0:21:48( Edit History Discussion )

Judd Gregg: financial system safer, sounder and a system which will, to the extent we can anticipate it, avoid systemic risk. and second goal in doing that, while doing that, our goal must be to have a vibrant credit market and capital market and be the place, the primary place in the world where people come to create credit and capital because that gives us a

Judd Gregg

0:21:49 to 0:22:09( Edit History Discussion )

Judd Gregg: competitive advantage over the rest of the world. that creates jobs here in the united states. well, unfortunately, this bill as structured doesn't accomplish that. in fact, it undermines that. a good would essentially create an atmosphere where derivatives are more transparent, where the

Judd Gregg

0:22:10 to 0:22:30( Edit History Discussion )

Judd Gregg: price something more transparent, and where there is standing behind the two parties to an agreement on a derivatives contract assets, liquidity, margin, something that can be turned to should one of the parties fail to perform on the contract.

Judd Gregg

0:22:31 to 0:22:54( Edit History Discussion )

Judd Gregg: this can be done by creating a reasonable exception for end-use derivatives. those are the ones where you basically have a pure commercial purpose, and if people don't fall into that reasonable exception, then requiring essentially derivatives be cleared and go through what's called a clearinghouse. and the clearinghouse becomes

Judd Gregg

0:22:55 to 0:23:15( Edit History Discussion )

Judd Gregg: basically the situation where two parties to the contract or multiple parties to the contract essentially put up collateral, margin, liquidity, so that the contracts are supported, the counterparties are supported. and the clearinghouse also itself has to be capitalized dratly so

Judd Gregg

0:23:16 to 0:23:36( Edit History Discussion )

Judd Gregg: a risk because it's going to be the i contracts. all very doable through new regulatory restructure or modified regulatory restructure. and then as these contracts become more standardized or are standardized, they move over to an exchae, and a lot of them

Judd Gregg

0:23:37 to 0:23:58( Edit History Discussion )

Judd Gregg: could do that right now but some of them simply can't because of the exchanges, their con are too customized to move directly to an exchange. but over time, most of them probably will, and that's the way it should be structured. unfortunately, in this bill, it is directed that we set up a new process for doing these

Judd Gregg

0:23:59 to 0:24:19( Edit History Discussion )

Judd Gregg: derivatives by taking basically market makers in these derivatives, which are the desks, and moving them out of the financial institutions into separate institutions. where this idea came from is hard to fathom because on the face it makes absolutely no sense. i mean, it is so counterproductive to the purpose of making the derivatives

Judd Gregg

0:24:20 to 0:24:40( Edit History Discussion )

Judd Gregg: maets safer, sounder and more efficient and as a result a better market which credit in a transparent, fair, effective and sound way. it is so counterproductive to that on its face that you would have thought that anybody who suggested this would have immediately -- it would have been immediately been pointed out that this doesn't work. but for some reason, it's found

Judd Gregg

0:24:41 to 0:25:01( Edit History Discussion )

Judd Gregg: its way into this bill, and the practical effect of doing this is that you're going to create these separate entities, these separate entities are going to have to be capitalized because you have got to hav capital behind these derivatives desks. that's the whole point. you have got to have somebody standing behind these desks to

Judd Gregg

0:25:02 to 0:25:24( Edit History Discussion )

Judd Gregg: make them viable so you don't end up with an a.i.g. what was the a.i.g. problem? thereas nothing behind the derivative contracts except for the name a.i.g. you don't want that again. you want capital. it is estimated it would cost $250 billion to set up these separate desks. what does that mean? that means that capital is not going to be available for the creation of credit.

Judd Gregg

0:25:25 to 0:25:46( Edit History Discussion )

Judd Gregg: you're going to contraction. it's estimated by the industry -- again, this is an industry number, not mine. you can take it with a grain of salt. that will cause a three quarter of a trillion contraction in credit. that's main street, main street not being able to get credit. you can give them credit, you can say they have exaggerated and say it's only going to contract 80%.

Judd Gregg

0:25:47 to 0:26:08( Edit History Discussion )

Judd Gregg: that's still $600 billion to $700 billion of credit that's not available on main street, to do business, to create jobs, take risks. it's type of contraction and to set up this structure. plus, you've got nobody that's going to oversight this as effectively as theeople who oversight the present derivative

Judd Gregg

0:26:09 to 0:26:29( Edit History Discussion )

Judd Gregg: market makers. the fdic won't be able to get on the fed probably will have trouble getting on top of this. you're going to create an actually less stable platform from which to do these markets when the whole purpose of this bill was to make it more stable. it makes absolutely no sense. section 106 in the ag bill, i think it's section 714 or

Judd Gregg

0:26:30 to 0:26:50( Edit History Discussion )

Judd Gregg: something in this bill. on this. i mean, two of the major, premier regulatory agencies which have no real -- which are the fair they are the umpires, have both come out in a very unusual way

Judd Gregg

0:26:51 to 0:27:11( Edit History Discussion )

Judd Gregg: because they don't usually comment in the middle of the leslative process like this and said this is really, my paraphrasing, a stupid idea, a counterproductive idea, the type of idea which if it were to be put in place would be cutting off your nose to spite your face and would endp with a less sound system. let me read to you from the

Judd Gregg

0:27:12 to 0:27:32( Edit History Discussion )

Judd Gregg: commentary from the federal reserve staff on section 106, which is now, i believe, section 714. here is what the federal reserve staff said about this approach. "section 106 would impair financial stability and strong prudential regulation of derivatives would have serious consequences for the

Judd Gregg

0:27:33 to 0:27:55( Edit History Discussion )

Judd Gregg: competitiveness of the united states' financial instutions and would be highly disruptive and costly, both for banks and for their customers." i mean, that's pretty specific. that's pretty damning testimony as to the effect of this language. it's going to reduce our competitiveness because a lot of thes overseas.

Judd Gregg

0:27:56 to 0:28:17( Edit History Discussion )

Judd Gregg: it's going to make it much more difficult to have regulatory -- sound regulatory policy towards derivatives, and it will be highly disruptive and costly not only for the banks but for their customers. that's called main street, the people who create the jobs.

Judd Gregg

0:28:18 to 0:28:43( Edit History Discussion )

Judd Gregg: a reall inappro been put in this bill. don't just rely on the fed. if you're a fed hater -- and there appear to be a number of them in this body,or reasons i am still having trouble fathoming. it must be something against having a sound money policy. but if you don't like the fed, listen to the fdic. now, i don't think anybody ound here doesn't give great

Judd Gregg

0:28:45 to 0:29:06( Edit History Discussion )

Judd Gregg: sheila of the fdic handled the bank cris. very honestly, they stepped in, they settled out a lot banks. they did it in a way that was extraordinarily professional, and as a result, the markets remained calm, people got their money back, depositors were not at risk.

Judd Gregg

0:29:07 to 0:29:27( Edit History Discussion )

Judd Gregg: this is an credibility, and this is what sheila behr, chairman behr has specifically said about this. "if all derivatives market making activities were moved outside the bank holding companies, most of the activities would no doubt continue, but unless regulated -- but in less regulated and more highly

Judd Gregg

0:29:28 to 0:29:48( Edit History Discussion )

Judd Gregg: leveraged venues." in other words, be more risky." such affiliates would have to rely on less stable liquidity, which, as we saw during the past crisis, would be destabilizing to the banking organizations in times of financial distress which in turn would put additional pressure on

Judd Gregg

0:29:49 to 0:30:10( Edit History Discussion )

Judd Gregg: the insured banks to provide stability." in other words, bad idea. it undermines the banking industry to do it this way. "and final? -- and finally -- actually actually, this isn't finally. the letter is three pages. but the final point i'm going to read. "thus, one unintended outcome of this provision would be weakened, not strengthened,

Judd Gregg

0:30:11 to 0:30:31( Edit History Discussion )

Judd Gregg: protection of the insured bank and the deposit insurance fund, which i know is not the result any of us want." that's pretty specific. so you've got the fed on one side, one of the major regulators saying this idea doesn't work, it will undermine the structure of the banking industry. you've got the fdic on the other side saying this proposal

Judd Gregg

0:30:32 to 0:30:52( Edit History Discussion )

Judd Gregg: doesn't work, it's going to undermine the insurance deposit system. so you don't have to listen to myself or others who pointed out the failure of this section. listen to these regulators. this section has to be removed from this bill. there are other things that need to be done in the derivatives area which would improve the language. for example, you should not be

Judd Gregg

0:30:53 to 0:31:13( Edit History Discussion )

Judd Gregg: mandated once you're on a clearinghouse, you should not be mandated to go directly to an exchange because it simply won't work. there needs to be an intermediary step as standardization and the have -- the best thing to do would to be require regulators to look at these different instruments and if they aren't -- if they feel they can be standardized, tell them to be -- tell the people producing them to be standardized and then

Judd Gregg

0:31:14 to 0:31:34( Edit History Discussion )

Judd Gregg: move them over. but to just unilaterally say everything's got to go to an exchange sink going to be counterproductive and, again, push a lot of business offshore. but clearly this one section is really damaging to our efforts to produce a safer, sounder, more transparent derivatives regime which has adequate

Judd Gregg

0:31:35 to 0:31:46( Edit History Discussion )

Judd Gregg: liquidity and capital behind it and which keeps america as the primary place to do credit in the world so that our entrepreneurs can get credit at a reasonable price so that they

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