HUMAN EVENTS editors and staff were very pleased to be able to meet with Rep. Vito J. Fossella, Jr., a member of the House Committee on Energy and Commerce, who is taking a leading role in the debate over the reform of government regulation of banking institutions.
HUMAN EVENTS: Congressman Fossella, thank you very much for taking the time to join us.
VF: I’m very glad to be here to talk to you about something all Americans are concerned about, the faults revealed lately in our financial services regulation system. We’ve discovered, painfully, the high cost of a regulatory system that is outdated. It’s a competitive disadvantage to our financial institutions, and has proven inefficient in protecting the consumers and investors.
HUMAN EVENTS: Just what are the problems you see?
VF: We have a system of regulation — some of which dates back to the Civil War — that is outdated and terribly burdensome. The result is that we have banking houses and other financial institutions that simply go abroad to avoid the problems. The global financial markets have responded, in some cases, by turning out the lights in New York and moving to London. It’s also allowed other emerging markets to grow at the U.S. expense. And finally, another issue is the implementation of Sarbanes-Oxley, particularly section 404. You have some foreign companies who feel that if they come to the U.S., their compliance cost will grow by 300, 400, or even 500 percent, in order to comply with Sarbanes-Oxley in that section. So all these reasons add up to the bottom line of decreasing shareholder wealth, decreasing profits for corporations, and not because they don’t want to come to the U.S. but because they feel they could do it elsewhere in a better, more efficient way.
HUMAN EVENTS: Let me ask about Sarbanes-Oxley, because I know a lot of conservatives, Heritage, CATO, and all that, have talked about their flaws and all of that. And some of them even want it repealed. But what about friends in Congress? Are they at all interested in at least ameliorating the …
VF: I think a good number of people have paid attention and realized that in some aspects, while Sarbanes-Oxley may have been good intentioned, some aspects of Sarbanes-Oxley have been a drag on our economy, that it’s led to, in some cases, unnecessary or duplicative work, that it has increased compliance cost by upwards in a factor of 6, or 600 percent for some companies. So it should be addressed. The Securities and Exchange Commission and the PCAOB have taken actions to limit what would have been a more detrimental impact. But ideally I think Congress needs to reevaluate how it would change section 404 to strike that balance of good corporate goverance, transparency, but not overregulation or undue compliance that only impedes growth.
HUMAN EVENTS: Who is really interested in reform? Are you getting support from any of the Democrats? Are even the “Blue dog” Democrats on your side?
VF: I don’t think that you’re going to see too much out of this Congress on addressing overregulation. If anything, my concern, over the next couple of weeks, is a movement towards government bailouts or overregulation or more taxation to solve the problem. And I think when you realize that something is hurting, you don’t err on the side of throwing more regulation at them. You figure out what’s wrong and fix it. And I don’t see that happening in this Congress under the current leadership.
HUMAN EVENTS: How do the investment banks — in other words, the idea of getting the Fed to — or, at least at the federal level — to hand out regulations for the investment banks as distinct from the commercial banks?
VF: What’s happened is Bear Stearns, in their situation, has shined the light on this issue. Over the past year, I have decicated my efforts looking at these types of issues and to assess what the problems are and how we can fix them. But Bear Stearns has forced everyone else to look at them. And I think, frankly, if you put taxpayer money at risk, you have to have thoughtful, deliberate review of what the conditions or the rules are. So, if an investment bank wants to have the rights or privileges extended to them to utilize the discount window, which is almost what happened with Bear Stearns, and they are really looking at some way to have the taxpayers there for them, then you have to play by the strictest rules possible. And I don’t think Bear Stearns or anyone else should be able to go and look for the Fed or taxpayers, for help if they’re not willing to play by the rules.
HUMAN EVENTS: One of the things I want to focus on is, even before Secretary Paulson came up with his plan for banking regulation reform, you had a plan of your own that was coming out. Let me just ask you to give us the elements of your plan and talk a little bit about Secretary Paulson’s plan and where you’re planning on going from here.
VF: Well first, again, the overall issue was that the regulatory framework is outdated. In some cases, it dates from the Civil War. Then you have a patchwork of different regulatory agencies — many of whom want to do the right thing and maintain integrity in our capital markets.
But the principle we have is to move towards a prudential, principles-based approach to give people guidelines or a road map to do what’s right as opposed to what we currently have, as erring on the side of rules based with checking the box. Second, we want to eliminate, remove, consolidate, where appropriate, agencies that are outdated or duplicative and which are forcing compliance costs to skyrocket, and therefore decreasing shareholder wealth, and punishing innovation and punishing creativity. Third is to begin to look at the implementation of areas like Sarbanes-Oxley and where that should be modified or changed to strike that right balance ensuring good corporate governance standards, but not unduly burdening public corporations. This is what has forced many businesses to go private or to go overseas.
The issue for me is American competitiveness, and how do we best create a climate here that allows international capital to come to these shores tocreate jobs. It’s not unusual to have new standards come down the pipe, new rules imposed, that, in this day and age, with technology being what it is, with the flip of a switch you will have a financial institution with offices in London and New York, that if a new rule is imposed across the board, in a broad stroke, that entity would just say, ‘well, we’re closing up the New York office and we’re shifting all our operations to London.’ And that’s happening as we speak.
As an aside, you have issues like patent reform where intellectual property is the root of so much that’s happening in this world, and yet there’s a sense that the debate over that intellectual property has put some companies at such a disadvantage that they think nothing of shipping their operations elsewhere.
I think the core of what we’re trying to do is assess and reevaluate and ultimately introduce legislation that is consistent with things like minimizing the burden of litigation, bringing about some sense of rhyme or reason to have an effective regulatory model, one that doesn’t punish innovation, punish success, and a model that looks to the free market to be the best risk regulator, but also understands that as our time has changed, that there should be a role, and needs to be a role, for some regulator to understand the systemic risk that exists throughout our system that doesn’t exist right now.
HUMAN EVENTS: In terms of your core principles, then, how does the treasury secretary’s proposed plan measure up? Is it good enough? Is it better?
VF: The secretary’s plan is actually a very good starting point for thoughtful debate. It puts a lot on the table — with 218 pages if I’m not mistaken. It looks at the entire system. There are some areas of agreement. However, some of the recommendations will not be easy to achieve politically.
But I think, in fairness to him, he’s acknowledged that it’s going to be anywhere from two to eight years to put these types of changes in place. And by way of example, the last major change to the financial sector was the Gramm Leach Bliley Act, which occurred in 1999. The framework for that, or the foundation for that legislation, really was released in 1991, under the first President Bush. So it took eight years of debate to get to that point. And hardly anybody wants to go back and put that genie back in the bottle after it’s been a success. It proved that the markets were ahead of Congress, were ahead of the regulatory framework. In the case of Bear Stearns, what has happened is the market itself has responded. It is becoming the best responder to bad decisions, reckless decisions, by individuals and businesses. And in some cases, a resignation is better than new regulation.
HUMAN EVENTS: So, what’s your overall view in terms of government regulation and intervention. Everyone is familiar with the Bear Stearns bailout. Some conservatives would say that that’s maybe not a great idea, because it’s the government intervening in a free market and they shouldn’t do it, as a general principle. What’s your thought on the Bear Stearns bailout?
VF: I don’t have all the information that the Fed had, for example. So I can’t step in their shoes and say was it exactly right or exactly wrong. But I do think that if you make the assumption that the Fed has an obligation to sustain the soundness and safety of the system, and one of their mandates, or one of their charges, is not to see destabilized financial systems, and if they felt that in the event that Bear Stearns were to collapse that it would bring about a destabilized financial system and cause an uproar or panic or markets to crash, then they probably did the right thing.
Keep in mind that England just experienced a similar situation with the bank called Northern Rock. For five months — not to be critical of the British — but for five months there was that question of what’s right to do? Well, ultimately, that bank was nationalized. So the silver lining to the Bear Stearns situation is that it wasn’t nationalized. The markets responded — let’s see, from $2 to 10 or $11, wherever the final place is going to be –it’s not nationalized. It has illuminated the need to ask the questions of why did we get to this place to begin with. This has spurred debate and discussion as to how we can change things so we can avoid another Bear Stearns from ever happening again.
HUMAN EVENTS: What really is at the bottom of this? And, I think the political concern is, how does the average American see this play out? Is this something that the average person is going to see have a beneficial result in their bank? Or is there something that is kind of at a different level with that people may not see but will have a beneficial effect nevertheless?
VF: With what I’m talking about or Bear Stearns?
HUMAN EVENTS: With yours.
VF: I think it is of tremendous impact to the ordinary American, whether you live in Staten Island or Brooklyn or San Francisco. If you’re a retail investor, you have set aside some of your hard-earned money for investment or to create a nest egg, for your kids or family. You want to make sure the market is as efficient as possible. Those who want to invest in the U.S. want to have a degree of certainty that the markets are free, that the markets incentivize innovation, incentivize wealth and don’t punish creativity or punish the desire to make wealth. And any burden that’s in place or obstacle on that path hurts the retail investorbecause it brings down the shareholder profits, it brings down the value that someone may have of that stock in their portfolio. And in the aggregate, this represents billions of dollars, if not hundreds of billions of dollars. So I do think whether it’s taxation or regulation, it’s clear that anything that’s unnecessary is a drag on the market and hurts the person on Main Street, and not just the person on Wall Street.
HUMAN EVENTS: First of all, is there something that you can say you absolutely are for in the recommendations made by Paulson?
VF: One of the things that’s been suggested is to consolidate the Office of Thrift Supervision under the OCC. And that’s an example where I think you could look to consolidate, maintain a solid regulatory presence in the businesses and elevate the supervision of that, say, towards the Fed. So there are clearly areas of agreement, and that’s one of them.
HUMAN EVENTS: Don’t we know what really happened with Bear Stearns — the lenders made risky loans to people who clearly were not capable of paying them off? I just really don’t understand the whole thing, because people were saying ‘well, they were worried about the falling price of houses,’ and all the rest of it, but I’ve got a home; it doesn’t make any difference what the price of the house was, whether it went up or down, as long as I had a job and could pay off the mortgage. So the point is, this is the crux of the problem, and that is the risky loans, and how are you going to get to the bottom of that?
VF: Well, let me add to another thing about what I support. I think the Secretary and I feel that there’s got to be — that there should be — some entity regulator that has a broader perspective on the risk inherent across the system that doesn’t exist right now. So, in principle, we probably share that goal.
What it actually looks like may differ on the margins, but I do think there’s a role for an entity to look at risk, at systemic risk, if you will. Think of it this way: the vast majority of people that I know assume individual personal responsibility, secure a loan and buy a housethat they can afford. They make their payments, they tend not to overextend themselves, they set aside money for a car, for their kids’ education. That represents the overwhelming majority of people.
However, those who overextended are those who entered into financial arrangements because they were betting that the value of whatever they were buying would go up indefinitelyor maybe those who lied about their income. So you can segment or separate the problem in a lot of different classes.
I think the first order of business we have in Congress is not to undo or burden people who have made very good, wise decisions — and that’s the vast majority of the people. We have an obligation not to punish people who have made good decisions over time. We also have to remind ourselves that there’s a risk involved whenever you make an investment. Whether it’s a stock, bond, or a home, or a business — and Congress cannot legislate away risk.
Over the last 6 to 9 months, probably, risk is being reevaluated. And risk premiums are going up, as they should, as asset market prices adjust and find what their truer market level is.
I think a big debate that’s going to continue is to what extent Congress and the administration comes in with taxpayer money to wipe away bad decisions. I think that should be as minimal as possible. I think that the burden — much if not all of the burden — should be on those who made the bad decision.
Now, with respect to Bear Stearns, I think you can maybe separate out a little bit, because I think it’s what the Fed did. Did the Federal Reserve evaluate the situation? I said before, I don’t know all the facts. I’m humble enough to say I don’t. If the Federal Reserve felt that Bear Stearns’ collapse would have destabilized the markets, then they probably did the right thing. I would argue that many of Bear Stearns’ shareholders got severely punished — almost wiped out totally. Is it 100 percent? Is it ideal? No. But did they do their best with a bad set of circumstances? Yes.
As we talk about updatingand modernizing some of our regulatory laws, some of which were put in place in the 1930’s, we must not develop Bear Stearns-reaction legislation. We should be putting in place a framework that 40, 50, 60 years from now, when Congress decides once again to revisit these issues, includes injecting more flexibility into the system, upholding the values of the American people — like greater transparency, a commitment to hard work, and market discipline. And when you allow a situation to get so totally out of control, history has proven it can crash. And the other thing about regulation is that, very often, regulation is not the answer because as soon as you put in regulation, there are a few guys out there looking to circumvent it.
HUMAN EVENTS: [Some of what they did includes] $4 billion in grants to local governments to buy and refurbish foreclosed homes, new authority for states to issue bonds to refinance subprime mortgages, a $7,000 tax cut — it’s something that I don’t think I’m for — for people buying new homes on foreclosure. And then, this is the nanny state really coming up, $100 million for housing counselors. What is this housing counseling? They tell people now, who are about to buy a house, “here, you can have a counselor now, who can advise you? And this is from the Federal government”? And this is what a lot of conservatives are fearful of, is this true nanny state. I mean, you can say as many things as you want, and I’m with you on your principles, but this is the kind of legislation that is coming out.
VF: Whatever comes before the House — and we don’t know what that is yet — but, I think this is a real, legitimate question to ask: Is Congress going to overreact to the situation and make it worse? I believe that we need to fully understand the nature and scope of the problem.
For example, if you have a situationin which an individual a couple of years ago put no money down, essentially borrowed the down payment, and has been living in the house for two years making payments, that person should be treated a little bit differently than someone who has equity in their homes and for whatever reason, maybe a loss of a job, maybe a change in their life, whatever happened, now they’re having difficulty making mortgage.
To me, those are two different situations because in the first example, the person has been paying rent, basically, for the last two years. They haven’t lost anything, other than an emotional attachment to a building, or a dwelling. Or there are some who bought a house just on spec and never even lived inside it. These situations happen on a fairly regular basis. The question is, to what degree, if any, should Congress step in and help these people?
In terms of counseling, there are many not-for-profits across the countrythat can help people free of charge. In fact, if you go to the service provider, and you’re behind on your mortgage, you may be able to work out a modification of your own without any assistance from the government. This is probably a reasonable possibility for individuals who are having problems making their mortgage payments — go seek a lender, a service provider, or originator, and see if there’s a way that you can work out that loan so you can stay in your home, change the payments without having to rely on the government for the solution. It’s my understanding that one out of two individuals who go to foreclosure never even call or contact the service provider. My understanding is the banks don’t want to become the homeowners, the service providers don’t want to become the homeowners, so there’s an incentive for both parties to work it out. And the best way to do so is to do it voluntarily.
RED STATE: Congressman, I would tell you that back in August I was at dinner with the chairman of Deutsche Bank in Berlin. And he had a very, very interesting graph he was showing us having dinner with him, showing equity markets around the world, and there was a little bitty blip on the graph. And after that you see the London and Hong Kong and the German stock exchanges taking off and the New York Stock Exchange and NASDAQ going down, and he asked if people knew what the little blip was, and nobody had an answer, and he said that that was three months after the passage of Sarbanes-Oxley. And all of a sudden, the stock markets in Europe and in Asia started going up in the amount of equity available, and New York started going down. So I would just really echo to you your own point, that sometimes Congress wants to take some of the risk out of market, and in the process, makes things worse on our end.
VF: Well that’s the tyranny of unintended consequences — while things may be well intentioned, the fact is investors, and particularly those who have an obligation or fiduciary responsibility to their shareholders, decide what’s best for them, consistent with those standards. And if they feel that they can set up shop elsewhere, and get a greater return for their shareholders, than why would they go where they know full well that they won’t?
Again, we don’t want to see a wholesale elimination of regulation. I do think there are certain regulations that are key to ensure the integrity of the markets. But clearly, when something has happened that we know is causing a problem, we have an obligation to revisit it, to evaluate it and to change it. And I think the implementation of Sarbanes-Oxley is one of those things. And it clearly has kept businesses out. It’s somewhat of a canary in a coal mine approach, but several years ago we started getting a feel for this.
I represent Staten Island and Brooklyn, and not just that the financial services industry is important to the U.S., but is disproportionately important to New York City. And in visiting the New York Stock Exchange and NASDAQ, you start to get the sense that many companies that otherwise would have proudly been listed in the New York Stock Exchange years ago, now are not. In fact, some of the largest IPO’s have been taking place elsewhere, primarily London — I believe nine out of ten of the largest IPO’s in one year, 24 out of the largest 25. So that should be an indication and a sign that things were happening. And it’s culminated, now, with companies thinking nothing of saying ’we’re going to turn the lights off in New York and open up in London or Singapore or Hong Kong.’ And it’s not one issue in particular, but among them is the implementation of Sarbanes-Oxley.
HUMAN EVENTS: I’m just a little disappointed that the conservative movement and others in Congress haven’t shed the light on the role of left-wing advocacy groups, especially Acorn — and others, Al Sharpton, and others — in pressuring lenders and financial institutions to make those risky loans. It seems like the industry itself is taking the hit. But what about the political angle on this and getting to the bottom of what’s been going on in that respect?
VF: I do think it would be worth observing for purpose of intellectual honesty. For instance, groups that years ago said that the floodgates of London should be opened up to those who may not have been able to afford it. I wouldn’t be surprised if they were among the first now to criticize lenders who in turn opened up the floodgates of London to those who couldn’t afford to pay. So I do think it’s a legitimate question to ask, to connect those dots.
I don’t think it was right then to force lenders to offer to people who couldn’t afford it, and now you would think that they would have that intellectual honesty, to stand up, and recognize their mistakes. One of the lessons learned recently is that not everyone has the ability to own a home, as much as it is part of the American dream. I’m always a strong advocate for homeownership and I believe that it’s a wonderful thing. But I think it’s highly inappropriate to encourage someone to enter into a financial arrangement that they know upfront they can’t afford.
HUMAN EVENTS: Do you think that making the Bush tax cuts, making them permanent — do you think they would be helpful?
VF: I do. I think the Bush tax cuts should be made permanent.
First of all, we have to be confident that the American people can see their way through any problem. We’ve been through a lot worse, and we’ll make it through this one. Secondly, I think the role of the president and Congress should be championing incentivizing, whether it’s a reduction in taxes or promoting free trade or promoting growth.
If you look around this town, you’ll see a lot of folks who can spend somebody else’s money in a heartbeat. The ideal situation is to believe that the American people, if left to their own devices, know how to spend their money more wisely and efficiently. And the Congress can accomplish this by making the Bush tax cuts permanent and sending a clear signal to the markets that we still believe in the American people and American businessmen and that Washington does not have all the answers.
HUMAN EVENTS: To sum up then, can you give us, from your standpoint and your agenda, can you give us like three or four bullet points of what you think needs to be done, most urgently and to fix some of the banking regulations and problems?
VF: Well, I think a thoughtful, deliberate debate should begin immediately on how we could consolidate, where appropriate, some regulators to take some of the burden off of the public corporations that spend too much money — too many millions, if not billions now — on compliance, to work towards a regulator that can better understand the systemic risk, and move towards a more prudential-based system of regulation that will free up the ingenuity, innovation and creativity of the American worker..
HUMAN EVENTS: Congressman Fossella, thank you very much.