Second Annual Capital Markets Summit: Strengthening U.S. Capital Markets for All Americans, Remarks
THOMAS J. DONOHUE
President and CEO, U.S. Chamber of Commerce
March 26, 2008
As Prepared for Delivery
Origins of the Current Crisis
Thank you very much, David, and good afternoon everyone.
This morning you heard from some of the best financial minds in business, government, and academia discuss the short- and long-term challenges facing our capital markets.
Our first priority must be to deal with the current crisis. The meltdown in the subprime mortgage sector and the resulting credit crunch are threatening to drag down our economy.
We applaud the aggressive steps taken by the Federal Reserve Bank, the Bush administration, and Congress to prevent a systemic collapse of our financial markets, improve liquidity, and restore confidence.
Americans rightly want to know why this happened and what their leaders are going to do about it. That is understandable. However, the crisis is still unfolding, and there's a lot we don't know.
At the heart of the current problem are two things: lenders who made bad loans to borrowers, and major changes in how the real estate industry and our markets deal with the risk of home lending.
Mortgages used to be between borrowers and their local savings and loan. Lenders bore some risk that a loan might go bad, and they carried those risks on their balance sheets for several decades.
A new phenomenon emerged that changed everything. Banks and other non—bank lenders began packaging loans into specialized securities.
These lenders made money by originating the loans and securitizing them into debt instruments that passed the risk onto someone else and provided the lenders with the cash to begin the cycle all over again.
By selling bundles of homes loans to Wall Street investors, lenders moved mortgages off their balance sheets.
Knowing the risk was going to be passed onto to someone else, ever more riskier loans were made.
These new securities were highly rated by the rating agencies, and were then bought by investors attracted by their high yields. Those high yields were to be generated from the subprime loans within the packages.
Then home prices started to fall. Subprime borrowers—particularly those with adjustable rate loans—could no longer meet payments.
When defaults and foreclosures on those loans skyrocketed, the holders of these mortgage-backed securities saw their value plummet.
The result is billions—if not trillions—of dollars worth of commercial paper that can't be properly priced and we don't know where all the risk lies.
It has not only led to huge write—downs at financial firms, it's locked up credit, threatening the overall health of the economy.
If there's one thing the financial markets hate it's uncertainty, and the current crisis is full of it.
Even though the vast majority of mortgages, including subprime mortgages, are paying on time—and despite the fact there is underlying strength in many parts of our economy—there is currently a real subprime virus out there.
No one can tell at the moment who has it or how bad. In the absence of this information, there is an assumption that everyone is seriously infected.
Now we have a serious crisis of confidence that, if left unaddressed, could have even more dire consequences.
Where Do We Go From Here?
So, where do we go from here?
There are some things we can and should do immediately.
We should continue to take whatever steps necessary to stabilize the markets to prevent a catastrophic meltdown that would plunge our economy into a deep recession
We should recognize that unlike Enron and WorldCom, this crisis was not driven by bad actors. The crisis was driven by systemic flaws in the structure of our regulatory system. But, to the extent fraud is uncovered, bad actors should be prosecuted and severely punished, as always
We should acknowledge that identifying and addressing the root causes of the current crisis are going to require all stakeholders working together cooperatively.
There are some things we should not do.
We should not rush to "fix" problems we do not yet fully understand
We should avoid Band—Aid solutions that may make us feel good in the short run but harm us in the long run
We should not reward bad behavior by individuals and firms who made bad business bets
Congress and the courts should not allow opportunistic trial lawyers and other third—party special interests to use the crisis as an opportunity to launch a wave of new lawsuits that will only add to uncertainty and hurt investors
And we should not seek to create a system that eliminates risk from the market and stifles innovation. That would destroy our capital markets and the tremendous growth they create for our economy and the financial security they provide for our citizens.
Above all, we need to be smart about how we respond.
There's a lot we'll need to examine.
The regulatory system governing our capital markets is the logical place to start.
Make no mistake. There was a regulatory failure here. But the failure came about not because we don't have enough regulation, but because we have an old patchwork system that can't deal with financial innovation.
Our current system is badly outdated. There are multiple agencies with overlapping jurisdictions. Start with the fact that you can't name which regulator has the primary responsibility for mortgage—backed securities and work from there.
No one in their right mind would say that having overlapping jurisdiction among four federal banking regulators, the SEC and the CFTC, the Department of Justice—along with various self—regulators, 50 state securities administrators, 50 state attorneys general, and 50 state insurance regulators— makes any sense. And I just named the big ones. There are more!
No regulatory system will ever be able to prevent market losses or economic downturns. That should not be our goal.
Our goal should be to create a nimble regulatory system that can identify potential problems early and deal with them more quickly and efficiently so that they do not reach crisis proportions.
It would be wrong to buy into the argument being peddled by some that the current difficulties prove that the findings of our independent commission released last year have now been "invalidated" by the current crisis.
They base that conclusion by first claiming that what we were calling for was wholesale deregulation and, now, we have all been proven terribly wrong.
That's simply not the case.
Yes, we pointed out some instances where new regulatory requirements, auditing standards, and compliance measures were confusing, contradictory, wasteful, and didn't make much sense.
But the overriding principle of our report— and the reason we founded the Center for Capital Markets Competitiveness—was not necessarily to call for less regulation or more regulation, but better regulation. Regulation that, in fact, reflects the times in which we live, not the by—gone era of the 1930s.
Government always faces the challenge of racing to catch up with the markets—and no where is it r than in the financial markets.
Our report and our mission have not been invalidated—they have been proven correct, necessary, and urgent.
We must have a modern regulatory structure put into place that reflects today's markets and the global competition for capital we now face.
In some instances, perhaps in the mortgage lending and credit businesses, this may, in fact mean some stronger requirements and guidelines.
So do we need smarter, more modern regulation? You bet. Do we need more regulation layered onto our creaky old system? Absolutely not.
We also need smarter enforcement. There's no question we should vigorously pursue and prosecute bad actors. By the same token, we must eliminate the gotcha mentality of our current enforcement agencies.
Business critics often argue that we are seeking to weaken the SEC so that it provides little or no regulation and weak enforcement. That's nonsense. Detecting and punishing fraud on the markets benefit everyone.
What we seek are regulatory changes to modernize our markets. We seek enforcement mechanisms that protect due process and identify and punish the bad actors, while being fair to all participants.
In some cases, this will mean expanding the authority of the SEC or other regulators as we streamline and consolidate agencies with overlapping jurisdictions.
In other cases, it will mean that regulators must exercise reasonable restraint and resist the urge to follow a "ready, fire, aim" approach designed to score political points.
Fairness in enforcing the law is important for encouraging businesses to take risks to grow. Businesses must be able to take risks if we are to get out of this crisis.
The demand for heads to roll over the current situation will soon reach a crescendo, but fairness must always be our guideposts in enforcing the law.
It would be a tragedy if the lesson Americans draw from the current crisis is that our capital markets are the cause of our economic problems, when, in reality, they must be central to the solution.
Every company—large or small, public or private—needs capital. New ideas, innovations, and jobs must have financing to take root and grow.
Individuals, too, rely on capital markets. A clear majority of families are now investors, depending more than ever on markets to fund retirement, college tuition, and a high quality of life.
Every citizen, family, and business has a critical stake in ensuring that our nation is home to the strongest, fairest, and most efficient markets in the world.
That's why we need a thorough and careful evaluation of our capital markets. But as we fix the engine under the hood, we've got to make sure that when we're done, the car still runs—and runs at peak performance.
We must make sure that at the end of the day, America has the most successful and prosperous capital markets in the world that they benefit all investors from Main Street to Wall Street that all actors in the markets are guided by clear, fair rules with tough penalties for those who break those rules and that we don't end up killing the goose that lays the golden eggs in our free enterprise system.
That's why our Center for Capital Markets Competitiveness exists. It is why we have gathered together smart, solutions—oriented experts to have a timely discussion about the future of our capital markets.
We have important work to do. Let's roll up our sleeves and get to it.