March 12, 2009


Washington, DC – Senator Chris Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, today addressed the Consumer Federation of America at its 2009 Consumer Assembly, “Challenges and Opportunities in a Year of Recession and Political Change.”  In his address, Dodd discussed the causes and consequences of the financial crisis and emphasized the inextricable link between strong consumer protections and economic growth.
“While we must ensure we do not unduly cramp innovation and creativity, for me the need for stronger protections for ordinary Americans is not negotiable,” said Dodd.  “It is the key to restoring confidence in our financial system and, as such, must be the bedrock foundation upon which we build our new regulatory architecture.”
Dodd delivered his remarks as the Committee pursues an intensive schedule of hearings, briefings, and meetings to modernize our financial regulatory system so that America can grow, prosper and lead in the 21st century.   The Committee has already held five hearings in recent weeks and plans many more, with the intention of building a legislative record to help pave the way for this significant undertaking.
Senator Dodd’s remarks as prepared are below:
What a pleasure it is to be before so many consumer activists today. 
Indeed, whether you are here representing cooperatives or non-profits, business or government, you all share something so critical – a genuine concern for the public interest. 
Over four decades, the Consumer Assembly has offered a forum for the best minds in the country to discuss the best ways to protect it. 
To be sure, from workshops on activism and in-depth analyses of the changing political climate to sessions on emerging issues and concerns—such as this year’s discussion on the role of medical debt in personal bankruptcies—this assembly provides a remarkable opportunity for important discussions with policymakers and others. 
Whether it is building political and logistical support for new ideas, or keeping tabs on issues as they develop over time, this assembly helps all of us remain informed and responsive. 
This Sunday marks forty-six years to the day since President Kennedy delivered his “Special Message to the Congress on Protecting the Consumer Interest.”
In that speech, he established four very simple rights to ensure the health of the American consumer:
The right to safety – to be protected against the marketing of hazardous goods.
The right to be informed – to be given the facts needed to make informed choices.
The right to choose – to have access to a variety of products and services.
And lastly, the right to be heard – to be assured that consumer interests will receive full and sympathetic consideration in the formulation of government policy.
President Kennedy recognized, as all of us here do today, society’s need to grow and evolve must never leave the public interest behind. 
Unfortunately, we meet today at a moment where it appears that is precisely what happened – when America’s economy is withering and the traditional confidence and optimism of the American people is at record lows.
By the time we put our children to sleep tonight, another 20,000 jobs will have been lost across the country. 
At the same time, another 10,000 homeowners will open their doors tomorrow to find foreclosure notices on their doorsteps. 
Representing a state like Connecticut, I am confronted with both ends of this financial crisis every day – from layoffs throughout the financial sector, which employs 1 out of every 8 workers in my state, to subprime mortgage foreclosures that have devastated cities from Bridgeport to Hartford.
In the last Congress, the Banking Committee held some 80 hearings to identify the causes and consequences of the financial crisis at the root of our economic troubles. 
We looked at everything from predatory lending and foreclosures, to the risks of derivatives in the banking, security and insurance industries.
What we found was that at the heart of the problem in these areas was a single, fundamental breakdown:
A catastrophic failure to protect consumers and investors.
By no means is this problem exclusive to financial services. 
Whether it is poisoned toys imported from China or meat with deadly pathogens knowingly sold to supermarkets, for too long some have been willing to cross the bright lines of basic business operation—fair treatment of the consumer—to bolster their bottom lines.
But nowhere was that failure starker or more catastrophic for our economy than in our housing market – where lenders, brokers and banks offered or financed an array of unsuitable mortgage products without regard for the borrower’s ability to repay. 
For too long, many in the industry focused solely on large profits, and ignored the major risks that accompanied them. 
They were willing to gamble with not only their own futures, but those of their customers, who were encouraged to take on more and more risk.
And the result is clear, with unemployment now the highest in 16 years, 8 million homes in danger of foreclosure, and some of our largest financial institutions in ruins.  
Today, I pledge that over the coming months, we will rebuild the nation’s financial architecture from the bottom up. 
We will put the needs of regular consumers and investors not at the margins of our financial services system – but at its very center. 
Just as a failure to protect the American people was the cause of our financial collapse, so too must our efforts to rebuild be premised on a strong foundation of consumer and investor protections. 
Protections that put an end to the abusive and predatory practices that too many market actors engaged in or endorsed.
Protections that put an end to the culture of “securitization gone wild,” in which financial products grew so outrageously complex that it wasn’t only the investors who didn’t know what they were buying – just as often, the salesmen had no idea what they were selling.
For too long, some were willing to ignore a basic precept of business operation—fair treatment of the customer—to bolster their bottom line. 
And like professional athletes on steroids, too many actors took enormous, inexcusable risks for short-term gains, not only putting their teams in jeopardy, but ultimately, the entire sport. 
President Obama has said the time has come for a “new era of responsibility.”  And today, I want to speak very frankly about what that must mean for America’s financial services system in the 21st century.
We must rebuild our financial architecture from the bottom up.  Because if we have learned one thing from this crisis, it’s that putting unwarranted risk onto consumers puts the entire system at risk.
We must hold our financial institutions to a standard of ethical and professional conduct worthy of the greatest nation in the world while providing their customers with the safeguards and information they need to make responsible choices.
And we must have a regulatory architecture, from mortgage lending to credit cards, that recognizes when we all have skin in the game, we all take the consequences of our actions more seriously. 
To make any of that possible, we must recognize the role consumers and investors play in our economic growth.
We must recognize that strong, sensible protections to increase transparency and responsibility up and down the supply chain don’t punish innovation – they spark it, providing the confidence that puts us all on a far sounder, more stable footing.
Managing Risk to the Consumer
In recent months, in the context of regulatory modernization debates you’ve heard a lot about “systemic risk.”  Making sure that we appropriately weigh the overarching hazards to our financial system will be extremely important.
But we didn’t get to where we are today simply because we weren’t looking at the big picture – because we weren’t “managing the flight patterns.” 
The truth is, we had a problem long before these planes took off.
We got into this mess because we weren’t screening the bags – no documentation adjustable rate mortgages, teaser-rate credit cards. 
One-by-one, these products were loaded onto the consumers of our financial services system, and many of these products were explosive, literally and figuratively. 
As one trader said of one notorious subprime lender, money was being moved out the door to Wall Street so fast, with so few questions asked, these loans were not merely risky – they were, in fact, “built to self-destruct.”
So, when we talk about the need to manage systemic risk and consumer risk, what we’re really talking about is the difference between Air Traffic Control and Ground Control. 
For a healthy financial system, you need both.
And to press that metaphor even further, right now you have what amount to whole planes full of sick passengers – with as many as 8 million homes in danger of foreclosure over the next several years. 
The question we are all trying to answer is how you land those planes and get the passengers off safely. 
That’s one reason I’m so supportive of President Obama’s Homeowner Affordability and Stability Plan, which will help up to 7 to 9 million homeowners, including allowing bankruptcy judges as a last resort to modify mortgages for homes in danger of foreclosure. 
The plan represents a sharp change in direction from the previous Administration’s approach.  And with home prices down 18 percent, it comes not a moment too soon. 
The Building Blocks of Consumer and Investor Protection
But we can’t wait too long to begin building a strong foundation of consumer and investor protections. 
Securitization has been a remarkable innovation in many ways. 
But even though half of all households are invested in some way in securities, there were no incentives to make sure the risky loans at the heart of those products paid off down the road. 
As a result, the relationship between the consumer and their financial institutions was, in effect, severed.  And we all know what happened next.
So many of these products were built on mortgages that never should have been offered or accepted. 
As a result, they didn’t simply “re-allocate risk” which is what the financial analysts called it.
They spread risk throughout our financial system, passing it on to others like a high-stakes game of “hot potato.”
Going forward, we need to ensure that the creators of financial products have as much “skin in the game” when they package these products as customers do when they buy them. 
It’s a concept that has worked for nearly thirty years with Superfund – the historic environmental law enacted in the wake of the discovery of toxic waste dumps such as Love Canal and Times Beach in the 1970’s. 
For nearly three decades, Superfund has given the government the authority to compel responsible parties—some whose culpability goes decades back—to do their part assisting tens of thousands of environmental cleanups.
It’s simple:
Instead of passing on risk, everyone shares responsibility. 
We need more of that in financial services – a lot more.
Transparency is equally as fundamental. 
I introduced the Home Ownership Preservation and Protection Act to put an end to several predatory lending practices, many of which consumers weren’t even aware of. 
In the run up to the housing crisis, unbeknownst to the borrower, brokers would often pocket fees from the lender—so called “yield spread premiums”—for steering their client into risky mortgages. 
As a result, 65% of all subprime borrowers qualified for more stable prime loans, according to the Wall Street Journal. 
The Madoff fraud makes crystal clear how critical transparency and accountability are. 
$50 billion invested by charities, pension funds and investors evaporated because regulators had no idea a massive fraud was occurring right under their noses – this despite the fact that he apparently hadn’t completed a single trade in thirteen years.
Linda Alexander might have liked to have known that. 
Linda is a 62-year old telephone operator from Bridgeport who makes less than $480 a week.  She lost every penny of her retirement savings in the Madoff scandal – $10,000. 
And I would add that right now, we’re pushing the IRS to dedicate resources to helping victims like Linda. 
The lack of disclosure in credit cards is equally troubling. 
A quarter century ago, a typical credit-card contract was about a page in length – today, it’s thirty times as long and usually incomprehensible. 
Fifty lines of text explaining how interest rates will be calculated before concluding , quote, “We reserve the right to change the terms at any time for any reason” is not disclosure. 
It’s obfuscation. 
Recently, I learned of a woman named Samantha Moore from Guilford, Connecticut. 
Not long ago, she was three days late on a credit card payment – the first late payment in 18 years. 
For that seemingly minor transgression, she had her interest rate raised from 12% to 27% and her credit limit slashed from $31,400 to $4,500. 
What is a middle-class family supposed to do if they were counting on that credit line to help them through a medical crisis? 
That single decision could mean the difference between scraping by during a recession and a lifetime of financial catastrophe.  All because a single payment after 18 years was three days late.
The truth is, credit card issuers and banks have increasingly turned to abusive and deceptive practices that are responsible for a ten-fold increase in the penalty fees customers have been charged over the last decade – $17 billion at last count. 
I have written the Credit Card Accountability Responsibility and Disclosure Act to stop abusive credit card practices that drag so many families further and further into debt. 
The C.A.R.D Act prevents issuers from changing the terms of a credit card contract before the term is up. 
It protects the rights of financially responsible credit card users – so that if the credit card company delayed crediting your payment, you won’t be charged for their mistake. 
And perhaps most importantly, it says that credit card companies can’t use things like a single late payment on your utility bill to raise your interest rates on your credit card. 
These practices are wrong, and they’re unfair.  And mark my words:
In the coming months, they will end. 
I’ve been working to reform credit card practices since the 1980’s.  Abusive credit card practices were a part of the problem and reforming them is going to be part of the solution.
Whether we are homebuyers, city managers, or entrepreneurs, we can only make responsible decisions if we have all the necessary information. 
It’s time to insist on far more disclosure and transparency –where the focus isn’t quantity, but quality. 
If you agree that the consumers and investors must be protected—in the area of credit cards, mortgage lending, in securities—the first question you have to ask is who should be charged with that authority. 
We cannot afford to focus solely on the soundness of the largest financial institutions with the hope that it trickles down to the consumer.
In 1994, Congress gave the Fed authority to ban abusive home mortgages – and it failed miserably. 
So the critical question is, should we be piling more on the Fed’s plate?  Or should we be putting it on Weight Watchers?
My colleagues Dick Durbin and Chuck Schumer have suggested we set up an entity modeled on the Consumer Product Safety Commission, which protects the public from unsafe products used in the home, at school, and for recreation. 
As Elizabeth Warren, who came up with this idea says, no one suggests that the buyer is to blame for a toaster that catches on fire or a toy for your child that is contaminated with lead – should it be any different for the borrower who takes out a mortgage or signs up for a credit card? 
We’re talking about huge financial decisions – often the most significant of a family’s life. 
A New Era
Just as we didn’t get into this crisis overnight, it will take time to get out of it. 
But we can begin laying the groundwork for this new era of responsibility in financial services today.  That’s why I’ve been holding a series of hearings to modernize our regulatory architecture.
When President Kennedy began his consumer protection remarks nearly a half century ago, he began with the following words:
“Consumers, by definition, include us all.”
That is why, while we must ensure we do not unduly cramp innovation and creativity, for me the need for stronger protections for ordinary Americans is not negotiable. 
It is the key to restoring confidence in our financial system and, as such, must be the bedrock foundation upon which we build our new regulatory architecture.
There have probably only been a dozen years in American history where the future of the republic has been seriously in question – when Congress deserted George Washington at Valley Forge during the winter of 1777, a few years during the Civil War, and a handful during the Great Depression. 
I believe we meet at just one of those moments. 
When people talk about this period in history, I want them to talk about how, together, we turned this challenge into an opportunity for America. 
That in a broken time, what President Obama rightly described as “the winter of our hardship,” we came together.  That is our challenge today.
Working in partnership, I have no doubt we will rise to meet it.  Thank you.