Next time you're at the mall, supporting your hometown merchants with holiday purchases, I would like you to consider something. Every store owner must comply with a list of regulations that govern their building, signs, how they treat employees, product safety and the veracity of their advertising.
While no merchant is clamoring for more government intrusion, most would agree that it is reasonable to impose standards to protect consumers from toasters that explode when plugged in or toys that contain toxic chemicals. Yet, over the past decade, similar regulations governing the very largest financial companies have been gutted in favor of a "buyer beware" attitude that rewards Wall Street executives for gambling with other people's money while putting our entire economy in peril. It has been heads we win, tails you lose.
When a local business fails, the damage is bad for the community but it is kept local. As devastating as it is for the merchant, employees and customers, it is unlikely to affect the broader economy in any profound way.
But what happens when AIG builds a financial house of cards on borrowed money, gambles on sub-prime mortgages, and insures hundreds of billions of dollars in credit default swaps without the capital to back them up? We know what happens: A world-wide chain reaction is set off that leads to double digit unemployment, banks failing in numbers not seen since the Great Depression and those financial institutions left standing locking up their lending windows, choking off Main Street and stifling innovation and technology.
And unlike the small businessperson who bears the brunt of their failure, those responsible for driving the world economy off the cliff are rewarded with bailouts and performance bonuses paid for by taxpayers who are on the hook because of the ridiculous concept that some companies are just "too big to fail."
Well, Wall Street is about to receive something new in their Christmas stocking this year - it's called accountability.
This week, I will vote for the Wall Street Reform and Consumer Protection Act, which addresses the issue of "too big to fail" by giving regulators the power to impose tough new requirements on systemically risky firms (companies whose failure would put the rest of the economy at risk). It also creates a new Consumer Financial Protection Agency to crack down on predatory loans, unintelligible mortgage documents and financial products which deliver great rewards for those selling them but leave consumers holding the bag; and regulates the $600 trillion derivatives market to ensure that those who participate in these transactions have the capital to back them up.
This bill is the culmination of more than a year of study and hundreds of hours of bi-partisan hearings. During that process, several of my amendments to strengthen the bill were adopted addressing issues that many believe led to last year's near-catastrophic financial collapse, including:
Limit on leverage
Any firm deemed systemically risky must keep its debt-to-asset ratio below 15 to 1. Until 2004, investment banks were limited by the SEC to a 12-1 leverage ratio. At the banks' urging the SEC eliminated that limit and by 2007 the leverage ratios of the investment banks that led the collapse - Bear Sterns, Lehman and Merrill Lynch - all topped 30-1 as they scrambled to borrow short term money to invest in mortgage-backed securities.
Clean up credit rating agencies
Credit rating agencies were a root cause of the financial meltdown. Moody's, Standard & Poor's and Fitch each had AIG and Lehman Brothers rated as investment grade just days before their collapse. Two of my amendments address this problem by banning the agencies from providing consulting services - including how to structure a security to get the highest rating - to the companies or issuers they get paid to rate, and doing away with the exemption that allows the agencies to use inside information to rate financial products.
Like everything Congress does, the Wall Street Reform and Consumer Protection Act is the result of compromises between many divergent views, including many Republican amendments. However, this bill accomplishes some very important things, and it is a true step forward toward ensuring that Main Street will never again have to bail out Wall Street.
You wouldn't buy a Christmas present for a loved one without knowing if it was safe. Reasonable regulation of the financial industry will provide consumers with confidence that the financial products we buy have been subject to review and pass basic guidelines. After all, if we hold our local toy store to these standards, it's not too much to ask Wall Street to abide by them as well.