New York, N.Y. – I believe in the power of the free market. I believe in a strong financial sector that helps people to raise capital and get loans and invest their savings. But a free market was never meant to be a free license to take whatever you can get, however you can get it.
Some on Wall Street forgot that behind every dollar traded or leveraged there’s family looking to buy a house, or pay for an education, open a business, save for retirement. What happens on Wall Street has real consequences across the country, across our economy.
That’s why I feel so strongly that we need to enact a set of updated, commonsense rules to ensure accountability on Wall Street and to protect consumers in our financial system.
A comprehensive plan to achieve these reforms has already passed the House of Representatives. A Senate version is currently being debated. Both bills represent significant improvement on the flawed rules that we have in place today, despite the furious effort of industry lobbyists to shape this legislation to their special interests.
The bill being considered in the Senate would create what we did not have before, and that is a way to protect the financial system and the broader economy and American taxpayers in the event that a large financial firm begins to fail. If there’s a Lehmans or an AIG, how can we respond in a way that doesn’t force taxpayers to pick up the tab or, alternatively, could bring down the whole system?
In an ordinary local bank when it approaches insolvency, we’ve got a process, an orderly process through the FDIC, that ensures that depositors are protected, maintains confidence in the banking system, and it works. Customers and taxpayers are protected, and owners and management lose their equity. But we don’t have that kind of process designed to contain the failure of a Lehman Brothers or any of the largest and most interconnected financial firms in our country.
We need a system to shut these firms down with the least amount of collateral damage to innocent people and innocent businesses. And from the start, I’ve insisted that the financial industry, not taxpayers, shoulder the costs in the event that a large financial company should falter. The goal is to make certain that taxpayers are never again on the hook because a firm is deemed “too big to fail.”
To that end, the bill would also enact what’s known as the Volcker Rule that places some limits on the size of banks and the kinds of risks that banking institutions can take. This will not only safeguard our system against crises, this will also make our system stronger and more competitive by instilling confidence here at home and across the globe.
Markets depend on that confidence. Part of what led to the turmoil of the past two years was that in the absence of clear rules and sound practices, people didn’t trust that our system was one in which it was safe to invest or lend. As we’ve seen, that harms all of us.
Number two, reform would bring new transparency to many financial markets. Part of what led to this crisis was firms like AIG and others who were making huge and risky bets, using derivatives and other complicated financial instruments, in ways that defied accountability, or even common sense. In fact, many practices were so opaque, so confusing, so complex that the people inside the firms didn’t understand them, much less those who were charged with overseeing them.
That’s what led Warren Buffett to describe derivatives that were bought and sold with little oversight as “financial weapons of mass destruction.” That’s why reform will rein in excess and help ensure that these kinds of transactions take place in the light of day.
There is a legitimate role for these financial instruments in our economy. They can help allay risk and spur investment. And there are a lot of companies that use these instruments to that legitimate end – they are managing exposure to fluctuating prices or currencies, fluctuating markets.
The problem is these markets operated in the shadows of our economy, invisible to regulators, invisible to the public. So reckless practices were rampant. Risks accrued until they threatened our entire financial system.
And that’s why these reforms are designed to respect legitimate activities but prevent reckless risk taking. That’s why we want to ensure that financial products like standardized derivatives are traded out in the open, in the full view of businesses, investors, and those charged with oversight. The only people who ought to fear the kind of oversight and transparency that we’re proposing are those whose conduct will fail this scrutiny.
Third, this plan would enact the strongest consumer financial protections ever. And that’s absolutely necessary because this financial crisis wasn’t just the result of decisions made in the executive suites on Wall Street; it was also the result of decisions made around kitchen tables across America. And while it’s true that many Americans took on financial obligations that they knew or should have known they could not have afforded, millions of others were, frankly, duped. They were misled by deceptive terms and conditions, buried deep in the fine print.
And while a few companies made out like bandits by exploiting their customers, our entire economy was made more vulnerable. Millions of people have now lost their homes. Tens of millions more have lost value in their homes. Just about every sector of our economy has felt the pain.
That’s why we need to give consumers more protection and more power in our financial system. This is not about stifling competition, stifling innovation; it’s just the opposite. With a dedicated agency setting ground rules and looking out for ordinary people in our financial system, we will empower consumers with clear and concise information when they’re making financial decisions.
So instead of competing to offer confusing products, companies will compete the old-fashioned way, by offering better products. And that will mean more choices for consumers, more opportunities for businesses, and more stability in our financial system. And unless your business model depends on bilking people, there is little to fear from these new rules.
Number four, these Wall Street reforms will give shareholders new power in the financial system. They will get what we call a say on pay, a voice with respect to the salaries and bonuses awarded to top executives. And the SEC will have the authority to give shareholders more say in corporate elections.
Now, Americans don’t begrudge anybody for success when that success is earned. But when we read about enormous executive bonuses at firms – even as they’re relying on assistance from taxpayers or they’re taking huge risks that threaten the system as a whole or their company is doing badly – it offends our fundamental values.
Some of the salaries and bonuses that we’ve seen creates perverse incentives to take reckless risks that contributed to the crisis. It’s what helped lead to a relentless focus on a company’s next quarter, to the detriment of its next year or its next decade. And it led to a situation in which folks with the most to lose – stock and pension holders – had the least to say in the process. And that has to change.
Edited from remarks made Thursday, April 22 at Cooper Union, New York, N.Y.
