Senators Corker & Brown, Goolsbee on Financial Reform on "This Week"

Senators Corker & Brown, Goolsbee on Financial Reform on "This Week"

By This Week - April 25, 2010

TAPPER: Good morning, everyone. Tomorrow, the Senate is scheduled to hold its first vote on the biggest overhaul in decades of the nation's financial system, changes that could impact your savings, your pension, maybe even your job. This as a big Wall Street investment bank comes under attack on Tuesday. Executives from Goldman Sachs, which is already facing government accusations of fraud, will testify before a Senate committee investigating whether the firm profited from the massive housing crash at the expense of its clients.

Joining me this morning, three key players in the middle of this storm. With me here, is Austan Goolsbee from the President Obama's Council of Economic Advisers. In Chattanooga, we have Tennessee Republican Senator Bob Corker, and in Cincinnati, Democratic Senator Sherrod Brown, both key members of the Senate Banking Committee. Gentlemen, welcome.

GOOLSBEE: Thanks for having us.

CORKER: Good morning. Good to be with you.

TAPPER: Before we start with Wall Street reform, I do want to talk about these Goldman Sachs memos, these emails that the Senate Permanent Subcommittee on Investigations has released, emails that seem to show executives rejoicing as the housing market crashed, and in fact, they seem to contradict the impression given by Goldman Sachs that they lost money as the mortgage related investment crash happened. In a private email, Goldman CEO Lloyd Blankfein wrote in November of 2007, "Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts."

Senator Brown, I want to ask you. What do these emails signify to you?

BROWN: Well, these emails signify that there are all kinds of conflicts of interest on Wall Street, that there are -- that Wall Street, while working for its clients and working against its clients in the same sort of bundled toxic securities, and that's why we need the Volcker rule. That's why we need really strong reform that will separate the proprietary trading from banking functions. I think that says it more articulately and more forcefully, that example, than anything we've seen so far.

TAPPER: Senator Corker, doesn't Senator Brown have a point? This is exactly why people think that proprietary trading, that is when a bank uses its own money to invest, should not be the same, it should not be in the same firm as trading for commercial banking, for clients? That there is an inbred conflict of interest there.

CORKER: Well, I can understand the sentiment. I know that certainly the emails do not read well. I look forward to seeing what the SEC investigation brings forth, and the Senate investigation through this subcommittee brings forth. At the end of the day, though, some of that has to do with making markets. I am in no way defending sort of the attitude expressed in the emails, but I think we're better off waiting to see exactly what has taken place.

I think, you know, at the end of the day, instruments are set up on Wall Street. People take either side of it. There are some conflicts of interest that can exist and do need to be looked at, but I'd rather wait and see how this investigation unfolds before making any judgments.

TAPPER: Austan, is there anything in the legislation that Democrats are pushing that President Obama wants to pass, is there anything that would have prevented what Goldman Sachs is accused of having committed?

GOOLSBEE: You know, I don't know the exact details, but there are a number of things that would go directly at the heart of some of these issues that are raised in these cases, like with securitizations, that the people who originate the securities have to maintain some ownership so that if they pack it full of things that are going to fail, they themselves are going to lose money when they do it. I'm certainly not going to comment on independent, you know, regulatory investigations, but these emails that are released, the CEO of Goldman is not going to win any popularity contests when over a period that ordinary Americans' pensions, houses et cetera were collapsing in value, they were actually making significant money off of it. If that's true, I think Senator Brown's point, that we've got to end the conflicts of interest and that the Volcker rule is really on point on that I think is also highly relevant.

TAPPER: Senator Corker, the status of the Wall Street reform bill. Right now, the members of the Senate Banking Committee are negotiating. Tomorrow, the majority leader, Harry Reid, is scheduled to bring it up for a vote. Do you think there will be a bipartisan compromise before that vote happens, and if not, are all 41 Republicans going to stand against proceeding to a debate?

CORKER: Look, first of all, I think everybody knows, Sherrod sure knows I want to see a bill. I think we do need to address regulation in our financial markets. You know, it's in play right now. The fact is, I know that Shelby and Dodd are actually on another program this morning. After that program, I know they're going to continue meeting, hopefully getting to a compromise before tomorrow evening.

And I think what we need to do is have a template. We don't need to address every issue in this compromise, but one that deals with derivatives, one that deals with consumer protection, and one that deals with this orderly liquidation. If we can get that template agreed to in a bipartisan way, then we can debate some of the amendments that Sherrod Brown wants to bring forth, some of the amendments I want to bring forth. But I think it's very, very important that we reach that bipartisan agreement first, because in the Senate, as you know, it takes 60 votes to change anything.

This is something, by the way, that everyone has committed to try to do, and that is to have this bipartisan agreement before it goes to the floor. I think it's important that we do so.

TAPPER: So if there is no bipartisan agreement, Republicans will block the motion to proceed to debating this bill?

CORKER: I think that's very likely. And I do want to say that we voted this bill, 1336 pages, we voted it out of committee in 21 minutes with no amendments, with the understanding that before the bill came to the floor, we would reach this bipartisan agreement.

So again, we just want to see what was stated honored. And I know Sherrod Brown and Austan both know I want to see a bill. But I think, again, having this template done first is very, very important. It's very likely, I think it's almost a given, that if we don't reach that bipartisan agreement, that Republicans will probably want to put in place something that allows those negotiations to keep going for a while until we do that. So yes, 41 Republicans in my opinion would block it unless we reached this agreement, which we've all stated needs to occur. TAPPER: Senator Brown, let me ask you a question about the legislation itself. I have a copy of it here, and it says right at the top of the bill that the purpose is to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end too-big-to-fail, and for other purposes. Senator Brown, does this bill end too-big-to-fail?

BROWN: Yes, it does. It can do it better, and Senator Corker was part of the negotiations that deal with the resolution authority. But I also--


TAPPER: Just to interject, the resolution authority is for the federal government to come in, and if there is a failing financial system, to take over and liquidate that firm. I'm sorry, Senator Brown, go on.

BROWN: But let me go back to something Bob just said, then I'll answer the question more specifically. You know, some Wall Street people have said the longer they can delay this, the more chance they can kill it. And I just don't want to see it delayed. We've been -- two years ago was the Bear Stearns problem. Ever since then, Senator Dodd in November put out a working draft. He then put teams together, including Senator Corker and Senator Warner and Gregg and others and Senator Dodd and Shelby, and it's -- and Senator Reed, and Jack Reed was part of that too -- so we've been working on this for a long time.

I hope that tomorrow night when we have a vote -- all we're asking tomorrow night is 60 votes. We need a Republican or two or three to simply say, let's move forward and debate, and then Bob Corker and I and others can offer any kinds of amendments we want. So I hope that they will not en masse -- and put it this way, I wish there were more Bob Corkers in the Senate Republican caucus, because he's been very open with negotiations. And then Senator Shelby and Senator -- Minority Leader McConnell pulled them back, I think on behalf of Wall Street lobbyists.

But put that aside, in terms of too-big-to-fail, we do have this resolution authority. It's well done, written by Senator Corker and Senator Dodd and some others bipartisanly. I think we need to do more to prevent too big, though. Too-big-to-fail is too big, and my amendment that Senator Kaufman from Delaware and I are offering next week or the week after will basically say that we'll put some limits on the size of these banks.

Let me give you one statistic, if I could, Jake. Fifteen years ago, the six -- the assets of the six largest banks in this country totaled 17 percent of GDP, 17 percent of GDP. The assets of the six largest banks in the United States today total 63 percent of GDP, and that's too -- we've got to deal with risk to be sure, but we've got to deal with the size of these banks, because if one of these banks is in serious trouble, it will have such a ripple effect on the whole economy. So we simply can't let them get this big and have this kind of economic power over Main Street, over a small business in Canton, Ohio, or a worker -- a manufacturing plant in Dayton. I mean, we just can't let this happen.

TAPPER: And Austan, Senator Brown is going to introduce an amendment that would cap the amount a bank can borrow to finance operations at 2 percent of GDP, 2 percent of the gross domestic product. Wouldn't that actually stop too-big-to-fail by preventing these banks from being too big? And why isn't the administration behind that?

GOOLSBEE: Well, the president is totally committed and it's one of his key principles that we're going to end too-big-to-fail, we're going to end the bailout era that began under the last president, for good. That's not going to happen anymore. We can open -- we're open to negotiating details obviously as we start getting into it. They're complicated. Some of these financial risks are more like worms where you could chop them in half, but it doesn't kill them, it just gives you two different worms. Bear Stearns, AIG, they weren't the biggest, they were just the most dangerous, and we've got to come at this from every side. Look, we're open to looking at ending too-big-to-fail on the size angle, on the what risky investments they're allowed to take, looking at the derivatives component so that AIG-like, they can't threaten to blow up the whole world because of -- because they have some of this $600 trillion pool of derivatives that we know virtually nothing about, that are in the dark. All of that ends when we sign this bill. If you look at the bill and take a step back -- I don't know much about the legislative strategies that are going on in the Senate. They are important. I do know that the president has laid out what this bill does, is we're going to end bailouts, we're going to hold accountable the people that get into the messes. So if they get in trouble, they fail. All we're going to do is pay funeral expenses, and we're going to have the strongest consumer protections ever in this country.

TAPPER: Let me stop you right there, because you said that we're going to hold accountable the people that get us into these messes. But Senator Corker, I think one of the problems that a lot of the American people have with bailouts and with this legislation is that they feel that after these firms fail, or are propped up by the U.S. taxpayer, they take billions of taxpayer dollars, then the CEOs and the board members drive off in their Austin Martins to their $20 million houses in the Hamptons with their $500 million in the bank, and there's no accountability whatsoever. Is there anything in this bill that provides any personal accountability for these CEOs?

CORKER: Before I answer that, let me refer to something Senator Brown said. I -- nobody pulled me back from negotiations. The fact is that Senator Dodd, and he said this publicly, left me at the altar. And the reason was, as we negotiated, Democrats were being lost, and I think he wanted to get the bill out of committee on a party-line vote. I mean, he has stated that publicly. So nobody has pulled me back. I'm my own person and I want to get a good bill here.

But back to the question you're asking. There is no question, and I think that first of all, I plan to offer changes to this resolution authority that say that, if a large entity like this has to go through this resolution where in essence they're liquidated in an orderly way, I think that everything that the executive team and the board members have earned through this company over the last five years needs to be clawed back. In other words, there needs to be some penalties assessed to the management that have caused the country to have to go through this orderly liquidation process. So absolutely, I will be offering an amendment that deals with that, so that we're taking back, we're clawing back all the earnings that management has made out of this firm, if it has to go through orderly liquidation. I think that's very appropriate, and certainly I'm going to be doing that on the floor if it doesn't make it into the base bill.

TAPPER: Austan, can the White House get behind that clawback provision? Are you being out-populisted by Republicans?

GOOLSBEE: Well, look, in the bill now -- the president went to Cooper Union this last week to revisit the spot where more than two years ago, he went and said we need to have fundamental reform--

TAPPER: But there is no clawback in this bill?

GOOLSBEE: There is a requirement that they're all fired. If you get to that point, all the management is fired--

TAPPER: So they take their $500 million to their home in the Hamptons.

GOOLSBEE: -- all the shareholders are wiped out. Well, look, as I say, on any details, we're open to looking at negotiating the details of how we carry out the president's principles. But if negotiation -- and Senator Corker, to his credit, is not in this camp -- but if the negotiators are going to come forward more as a delaying tactic and we're just going to put in hundreds of amendments and try to keep this going so as to stall, delay and kill reform, that's not going to happen. This is going to pass.

CORKER: Well, let me--

TAPPER: One of the big -- let me just move on to another subject if I could, but we will get back to you, Senator Corker. One of the big debates going on within the Democratic caucus is how strong the derivative legislation should be. Derivatives are these risky bets that big money men and women make on whether or not an industry will rise or fall in value, and it's a way to hedge a lot of risk.

Senator Brown, you are in favor of Senator Lincoln's provision, Blanche Lincoln from Arkansas. She wants to say, if you're a bank and you have federally insured money, you have to separate these derivatives traders. It's too risky what they do. We should not have any connection with taxpayer insured money. Do you think that the Democrats are going to put that in the bill? And if not, why not?

BROWN: Well, I hope so and I think so. I -- this goes back to really your first question on the conflicts of interest on Wall Street, that you really can't serve two masters. You can't serve your clients and serve yourself and play these transactions one off against another. And I think that these -- anything we do in this bill, whether it's consumer protection standalone -- I hope that the Consumer Protection Agency, whether it's regulation of derivatives, whether it's too-big-to-fail, whether it's the Volcker rule separating out proprietary trading and, as I say, from standard banking practices. Any of those conflicts of interests, we have to address in this bill, and I think that -- I think that Senator Lincoln and her draft in the Agriculture Committee that we voted out last week, we got one Republican supporting it, Senator Grassley did. And I think that was a good sign. I think it means that there will be a number of Republicans that are as open-minded as Senator Corker, that will want to move forward Monday night.

And again, just to let us begin the debate. I mean, the Monday vote is going to be -- are we going to start the debate or are we going to shut it down and continue negotiating, negotiating, negotiating. I, to me, the legislative process is, you put a bill on the floor and then Bob Corker offers his amendment that I like that he just mentioned, in terms of in the resolution authority, what to do with these executives that brought us there. I offer my amendment on too-big-to-fail means too big. Dozens of other amendments will be offered, we'll see what happens, and then we vote on a bill.

TAPPER: Austan, can you get behind Senator Lincoln's provision to separate derivatives trading from banks that have federally insured deposits?

GOOLSBEE: If you take a step back, this issue of derivatives is totally central. Now, three years ago, virtually no one in America had even heard of derivatives, or if they had, they had nightmares of their, you know, college math class or something. The fact is that there are now $600 trillion of derivatives that are trading in the dark, that we know virtually nothing about and are unregulated. And it's not just a party that's taking place on Wall Street that has no impact on America. They're exactly the things that threatened to blow up the entire financial system with AIG. So the president's completely committed that we are going to bring the $600 trillion out into the open and under the regulatory umbrella.

Now, I think we made great progress that in both the Dodd and Lincoln's versions of what would happen with derivatives, we purged a bunch of the loopholes that some of the banks had gotten put into the bills before. The president is not going to allow putting loopholes in that let these $600 trillion get back into the dark and threaten the whole system.

We can work on the -- so the--

TAPPER: But you guys--


TAPPER: -- don't support separating it, though, right?

GOOLSBEE: Well, there are several very technical aspects of difference between the Lincoln bill and the Dodd bill--

TAPPER: It's not really actually that technical, whether or not--

GOOLSBEE: I don't agree with that.

TAPPER: It's whether or not commercial banks should be able to do this. Senator Corker, I hear you giggling--

(CROSSTALK) TAPPER: You think Senator Lincoln's provision goes a little too far, right? Senator Corker?

CORKER: Are you talking to--


TAPPER: Yes, yes, of course, Senator Corker.

CORKER: Yes. Yes, I mean, I think what -- I think what Austan is saying is he doesn't support it. And I don't either. Let me say this, I want to see as much traded through clearinghouses as possible. I absolutely agree that that needs to occur. We don't want to force those things that are not liquid to be traded on the clearinghouse, but I'm on the side of let's get as much as possible.

The fact is that Senator Brown is in a state where a lot of manufacturing takes place. I'm in a state where a lot of manufacturing takes place. And what people don't I think appreciate so much is that all of these tools are used for capital formation. They help companies hedge their risk. They help companies create capital, and I think if we start drawing lines in the sand where we take these tools away, what we really do is hamper companies' ability to access capital. So I don't think separation is appropriate. I do think clearing as much as possible so that on a daily basis, if somebody is money bad, they have to put money up to be money good or neutral, so that we don't end up in the kind of situation we have with AIG. But I think it hampers our ability, again, to create great companies if we just create an absolute separation.

TAPPER: Unfortunately, that's all the time we have. It was a great debate, and I really thank you, Senator Corker in Chattanooga, Senator Brown in Cincinnati and Austan Goolsbee here in the studio. Thanks so much for joining us. Really appreciate it.


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