This is an official communication from the Office of Senator John Ensign. Any tampering or alteration of this communication is prohibited and may result in criminal investigation or prosecution.

June 9, 2010

Thank you for contacting me about the Restoring American Financial Stability Act of 2010 (RAFSA). I value the opinions of every Nevadan and am always grateful to those who take the time to inform me of their views.

As you may be aware, RAFSA was recently passed in the Senate. After the financial meltdowns and taxpayer bailouts, I support financial reform that would protect taxpayers, strengthen our economy, and preserve the competitiveness of our financial markets. That said, I have some serious concerns that RAFSA would not accomplish those goals; therefore, I voted against the bill. For the reasons identified below, I believe that RAFSA would allow for continued taxpayer bailouts and institutionalize “Too Big to Fail.”

RAFSA would establish a Financial Stability Oversight Council, which would have the authority to require that nonbank financial companies fall under direct supervision of certain regulations of the Federal Reserve (Fed). Under the guise of providing extra regulation for the riskiest firms, this would essentially create an official “Too Big to Fail” club, allowing for backdoor bailouts and propping up by the Fed of any nonbank financial company that the Council deems to be a potential threat to systemic stability. Specifically, the Council could require a company (perhaps a politically favored one) to be supervised by the Fed, which also gives the company access to the Fed’s discount window for favorable lending treatment to bail out the firm or prop up a failing institution.

This is exactly what happened with the mortgage investment companies Fannie Mae and Freddie Mac, the government-sponsored enterprises that played a key role in the financial meltdown. The government selected Fannie and Freddie as “Too Big to Fail,” and as a result, smaller competitors withered, and Fannie and Freddie engaged in ever-riskier lending with the implicit backing of the federal government. The resulting fallout devastated our economy and left American taxpayers on the hook for hundreds of billions of dollars. RAFSA would do nothing to stop the ongoing, unlimited bailouts of Fannie Mae and Freddie Mac that, to date, have cost the American taxpayer $146 billion. Perhaps what is most alarming about the lack of attention to Fannie and Freddie is the fact that there is no end in sight.  Losses continue to mount and taxpayer exposure is unlimited. In fact, while the Senate was debating the RAFSA, Fannie and Freddie asked for another $19 billion in taxpayer money. Yet, there was not a single mention of reforming Fannie and Freddie in the legislation.

I offered an amendment to RAFSA that would have limited the size of Fannie and Freddie to less than 3% of the of the United States’ annual gross domestic product (GDP).  My amendment would have protected taxpayers from future bailouts of Fannie Mae and Freddie Mac by imposing meaningful restrictions on their size so that the federal government could no longer label them “Too Big to Fail.” Unfortunately, my amendment was defeated, largely along party lines.

Further, the bill does not end taxpayer-funded bailouts. Under RAFSA, the Federal Deposit Insurance Corporation (FDIC) would have expanded authority to take over, manage, and liquidate troubled financial companies.  The FDIC would take over the assets and operate the financial company with all the powers of the management, directors, and shareholders.  In that way the government, acting through the FDIC, would be able to continue to determine which financial companies survive and which do not.  RAFSA would essentially institutionalize the kinds of bailouts that have occurred in the recent crisis, which only incentivizes institutions to take on unnecessary risk.

As an alternative, I cosponsored an amendment which would have made failing companies utilize an enhanced bankruptcy process to ensure that the costs are covered by the financial institutions and their creditors, not the taxpayer. The amendment would have created a new pathway to limit the cascading spread of risk and panic through the financial system and assured the more orderly wind-down of financial institutions insulated from bailouts and political influence. Unfortunately, the Democrats decided to go in a different direction, one that moves away from protecting the taxpayers, and swiftly defeated this bankruptcy amendment.

Moreover, RAFSA would create a Consumer Financial Protection Bureau (CFPB), housed within the Fed, which would have autonomous rulemaking authority for banks and nonbanks that offer financial services or products. The CFPB would have a Director, appointed by the President, who would have sole discretion to determine the Bureau’s funding level. This new government bureaucracy would have broad jurisdictional reach and the authority to write and enforce rules that could ultimately tighten the availability of credit and discourage business investment at a time when we can least afford it. I introduced an amendment that would exempt from the CFPB businesses that give customers flexible repayment options, and fortunately, my amendment was adopted. However, my amendment fixes but one problem with the CFPB. This new bureaucracy, which will have almost no oversight and access to billions of dollars, will only grow and extend its reach and impose burdensome requirements on more and more businesses across this country.

RAFSA will cause serious damage to the economy, consumers, and the financial services industry. This bill will do nothing to address real reform of the financial industry, but it will ensure that the taxpayers guarantee the bad debt of Fannie and Freddie, just as these companies guaranteed bad debt that eventually brought them to their knees. This is not what the government should be doing. Government should not be picking winners or losers. The economy of the United States is rooted in free-market principles. These principles, coupled with our nation’s entrepreneurial spirit, have helped America become the richest and most innovative country in the world. Even though our economy is struggling right now, we cannot abandon those principles.

This bill now awaits action in conference committee, where members from both chambers of Congress will attempt to reconcile the differences between the House and Senate reform proposals. Though I have not been appointed as a conferee to the conference committee, I will continue to fight for financial reform that would strengthen the U.S. economy and put an end to taxpayer bailouts and “Too Big to Fail.”

Thank you again for sharing your thoughts with me. Rest assured that I will continue working closely with my colleagues as we deal with this difficult and important issue. Please feel free to contact me in the future on matters of importance to you. Should you have any other questions or comments or would like to sign up for my newsletter, please do not hesitate to either write or e-mail me via my website at http://ensign.senate.gov.

Sincerely,

JOHN ENSIGN

United States Senator

JE/u1

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