DELAY OF CONSIDERATION OF THE FINANCIAL CONTRACT NETTING ACT OF 2000, H.R. 1161 -- HON. JOHN J. LaFALCE (Extensions of Remarks - September 19, 2000)

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HON. JOHN J. LaFALCE OF NEW YORK IN THE HOUSE OF REPRESENTATIVES Tuesday, September 19, 2000

Mr. LaFALCE. Mr. Speaker, last Friday, notice of expedited floor action on H.R. 1161, legislation to insure against potentially destabilizing legal uncertainties in the financial markets, was circulated in the House. The Committee on Banking and Financial Services has reported favorably. In fact, all committees of jurisdiction on the Financial Contract Netting Act of 2000 have acted. Controversy on this bill is virtually non-existent. Broad bipartisan support for the measure is assured. Signature by the President has long been assumed should Congress complete action of the bill. Moreover, the bill, as a separate noncontroversial part of the more general and contentious Bankruptcy Reform Act, has passed both the House and the Senate. The bankruptcy legislation itself has not, of course, been finally adopted due to its long-pending conference and highly contentious provisions.

Yesterday, the netting bill was pulled from consideration on the suspension calendar. The precipitous action of the Republican leadership calls into very serious question the ability of Congress, given the short time until adjournment, to enact this vital legislation under the most favorable of circumstances.

H.R. 1161, while highly technical and complex legislation, has broad support because of the critical need it fills. The legislation is a top priority of the Federal Reserve and the Treasury Department. It is essential to provide an orderly structure through which financial corporations can work out their debts in bankruptcy without destabilizing financial markets. It is consensus, must-pass legislation.

In contrast, the successful conclusion of the longstanding conference on the Bankruptcy Reform Act is increasingly in doubt, because of fundamental problems and substantial controversy surrounding that underlying legislation. Apparently, companies supporting passage of that controversial legislation have now mustered the political clout to block the non-controversial H.R. 1161. I deplore what I view as a cynical effort by some industry lobbyists to hold the vital netting legislation hostage. Doing so will not save the otherwise controversial bankruptcy bill, and such tactics are irresponsible in the extreme. Not only are they contrary to good and necessary public policy, they are also very risky for many of the affiliated banks and brokerage firms of the obstructing companies involved. These firms are also active in the very sophisticated financial markets which risk being thrown into disarray in the event of failure of a major domestic or, indeed, foreign financial institution, absent the netting legislation.

The Financial Contract Netting Act is essential to ensure that financial markets function smoothly, especially in the event of the failure of a large institution. Monetary experts have been strongly urging the approach of H.R. 1161 since the Promisel Report in 1991. From then to the present, the need for this legislation has become more acute each year, because of the increasingly outdated nature of statutes which are supposed to set the bankruptcy and receivership rules for financial firms. The rise of the $40-50 trillion swaps market is the main force which has rendered these statutes increasingly irrelevant and effectively inoperable.

Under H.R. 1161, a bankrupt financial firm's debts, that are related to financial instruments in the exposed process of transfer, can be quickly reduced to clear, single amounts owed to other healthy financial companies, according to their respective claims. Under present law, such simplification might well not be able to occur due to inconsistencies among governing statutes. Needless litigation and disavowal of debt could therefore occur. Such disruption is highly risky in an environment where clarity regarding debt obligations and payment is a must if our value and claims transfer system is to work with the flawlessness demanded by this increasingly sophisticated economy.

The public dangers here are quite real. I deplore the fact that companies pressing for bankruptcy legislation seem focused only on their narrow interests without giving due consideration to stability of the financial markets these companies heedlessly jeopardize and the broader issues confronting American finance. In particular, potential financial disruptions due to stresses on the energy supply and in the currency markets make the netting legislation imperative before Congress adjourns sine die.

I urge expeditious and independent action on the netting legislation.
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