FOR IMMEDIATE RELEASE
March 24, 2008
Portland - In the wake of the Federal Reserve's decision to use $30 billion in public funds to back the recent takeover of Bear Stearns by JPMorgan Chase, Democratic Senate candidate Steve Novick today reiterated his call for actions to prevent foreclosures on the mortgages of regular Americans. Novick called on Congress to adopt FDIC head Sheila Bair's proposal to freeze certain adjustable rate mortgages at the initial rate, and Congressman Barney Frank's proposal to reform the bankruptcy laws to allow bankruptcy judges to adjust mortgage terms.
"Bair and Frank's proposals fall into the category of 'rough justice.' We need to take steps to prevent a tidal wave of foreclosures, not just for the sake of the homeowners involved, but for the sake of the larger economy," said Novick. "Congress and the Administration should also work with Congressman Frank to establish appropriate federal oversight of the 'shadow banking system' that has become an increasingly large, unregulated portion of the American economy."
Novick said that the current credit crunch is largely due to the markets' loss of confidence in what has become a huge but poorly understood and largely unregulated facet of the economy – what the New York Times yesterday called the "private trading of complex instruments that lurk in the financial shadows."
As Congress and Republican and Democratic presidential administrations pushed for financial deregulation over the last decade, the biggest banks and brokerage firms created a dizzying array of innovative products that experts now acknowledge are hard to understand and even harder to value.
On Wall Street, of course, what you don't see can hurt you. In the past decade, there has been an explosion in complex derivative instruments, such as collateralized debt obligations and credit default swaps, which were intended primarily to transfer risk.
These products are virtually hidden from investors, analysts and regulators, even though they have emerged as one of Wall Street's most outsized profit engines. They don't trade openly on public exchanges, and financial services firms disclose few details about them. [New York Times, 3/23/08]
"Many observers think that the real reason the Fed engineered the Bear Stearns takeover was to avoid a collapse in the market for 'credit default swaps.' Most Americans have never heard of a credit default swap. But there is a $45 trillion market in these financial instruments," Novick said, "and it is completely unregulated."
Novick said that it is frightening that even experts acknowledge that they don't completely understand complex "derivative instruments" such as credit default swaps. Former Federal Reserve Chairman Alan Blinder acknowledged in Sunday's Times that "if you presented me with one and asked me to put a market value on it, I'd be guessing."
"So we have a huge portion of the American economy invested in financial products that the experts don't understand and the federal government doesn't regulate," Novick said. "Thank goodness Congressman Frank, one of the smartest members of Congress, is on the case."
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