Wall Street Reform PDF Print

What went wrong and how to fix it

By U.S. Rep. Melissa Bean

(As published in the Daily Herald, May 6, 2010)

"What went wrong? And what are you doing to make sure it doesn't happen again?"

 Citizens have a right and a responsibility to demand answers to these two questions after any crisis. It's what our country asked its leaders after the Great Depression, Pearl Harbor, and 9/11.

 And it's what citizens have been asking of Congress since the 2008 financial crisis.

 The House of Representatives passed legislation in December that increases market transparency and accountability and ends taxpayer bailouts. Now it's the Senate's turn.

 So let's take a look at how we got here and how the proposals would prevent a repeat of this crisis.

 The problem started in our own neighborhoods, with too many homebuyers taking out loans they couldn't afford. Lenders encouraged or ignored these risky loans, because they didn't hold onto them. Instead they sold them to investors, who get stuck holding the bag if buyers default. The resulting wave of foreclosures was devastating to our communities and the catalyst of this crisis.

Solution? Require mortgage lenders to adhere to federal lending standards and require them to retain a portion of the loans they make when they sell them, so they give people loans they can repay.

Next, these investors used derivatives, a form of insurance, to balance their risk. As mortgage defaults rose and their investments went south, the institutions that sold these derivatives had to pay up.

Trading in these derivatives, called "credit default  swaps," had skyrocketed. Most of this multi-trillion dollar market was completely unregulated, and these trades created a web of interconnected relationships between companies that regulators had no knowledge of or control over.

When Lehman Brothers collapsed in September 2008, financial companies across the world who traded derivatives were suddenly unsure what investments they could count on. It sent the market into a tailspin and sent many of our 401(k)s crashing.

Solution? Regulate derivatives. Force the majority of derivatives to trade on public exchanges and ensure that all trades are transparent. Require derivates dealers to post collateral to back up their promises, just like insurance companies do.

Lastly, as Lehman's collapse proved, major financial firms are so interconnected that allowing one to haphazardly collapse would endanger the entire U.S. financial system. With few alternatives, the Federal Reserve and the Treasury Department stepped in to prop up AIG and ultimately resorted to the unfortunate but necessary step of asking Congress to create the $700 billion TARP fund.

Solution? An anti-bailout measure: dissolution authority. This allows the government, when all other options have been exhausted, to seize and shut down a failing non-bank financial firm and pay its debts with money from that firm's shareholders and from the financial industry – never using taxpayer money. If you fail, you're fired.

These solutions are already included in House and Senate proposals, along with increased tools for enforcement by the SEC, establishment of a system-wide risk monitor, stronger consumer protections, and other reforms.

These are not partisan, controversial ideas. They are a recognition of the real lessons taught by this crisis: Decades of trusting the market to self-regulate turned out to be costly for America. Transparency and prudential requirements are critical.

And everyone, from homebuyers in our neighborhoods, to wizards on Wall Street and regulators in Washington, must change the way we do business and pass these proposals into law so that this doesn't happen again.

Below are press releases and statements by the Congresswoman regarding Wall Street Reform:

 


 

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