Sens. Durbin, Harkin Hold Hearing on Oil Market Oversight; Durbin Promises More Resources to Fight Excessive Oil Speculation and Market Manipulation

U.S. Senators Dick Durbin [D-IL, pictured] and Tom Harkin [D-IA] chaired a hearing today to investigate how excessive speculation in the oil market may be contributing to the historic run on oil and gas prices.

Durbin is the chairman of the Appropriations Subcommittee on Financial Services and General Government, the subcommittee responsible for overseeing the budget of the U.S. Commodity Futures Trading Commission [CFTC]. Last month, Durbin chaired a hearing on the budget request for the CFTC.

Last week, at a hearing before the Senate Agriculture Committee, the agency charged with oversight of the agency, CFTC officials testified that additional resources, including more staff, are needed to help this agency carry out this mission.

Today's hearing, held jointly before the Senate Appropriations Subcommittee on Financial Services and General Government, and the Senate Committee on Agriculture, Nutrition, and Forestry, probed the CFTC's role in regulating the market and what tools and resources the agency needs to ensure it is able to be a robust market watchdog.

"With the economy in a tailspin and with the average price for a gallon of gas topping $4 across the country, people are asking ‘Why is this happening?'" Assistant Majority Leader Durbin said. "Is excessive speculation taking place, or is it simply supply and demand? The answer is that no one knows, and the CFTC lacks the information, resources and, in some cases, the legal authority to tell us."

Testifying before today’s joint panel were the chief executives of the New York Mercantile Exchange [NYMEX] and Chicago Mercantile Exchange [CME], as well as the vice president of IntercontinentalExchange [NYSE: ICE]. Also testifying were representatives of the Consumer Federation of America and the Air Transport Association.

“In the past year, gas costs have risen 30 percent," said Harkin. "Consumers are seeing the results of this increase in rising costs for everything -- from the gas they put in their vehicles, to the loaf of bread at the grocery store. We deserve to know why.

"We rely on the CFTC to tell us whether our commodity markets are working, or whether manipulation or distortion of markets by excessive speculation is causing price bubbles that should be addressed. With CFTC officials testifying previously that additional resources, including staff, are needed to carry out their oversight responsibilities, Congress has a responsibility to provide them with the resources and authorities they need to do their job. We addressed some of this in the Farm Bill, but further resources may be needed."

CFTC is the nation’s leading regulator of futures markets. However, a lack of resources and weakened authorities have prevented them from being able to gather information and effectively monitor the full breadth of the oil market.

Currently, CFTC is only able to monitor the activity that takes place on U.S.-based exchanges – a fraction of the total market for oil transactions. They are unable to gather information about trades which take place on global markets, like ICE, or on over-the-counter exchanges between firms.

In addition, trading in commodity markets has exploded from nearly 500 million trades in 2000 to over 3 billion trades in 2007. CFTC’s staffing levels, however, have not kept pace. Full-time employee [FTE] levels have dropped over that same period of time, from 546 in 2000 to 437 last year – nearly a 21 percent decline. "CTFC simply doesn’t have enough cops on the beat," Durbin noted.

To address these shortcomings, Durbin introduced the Increasing Transparency and Accountability in Oil Prices Act of 2008, which:

*Authorizes new resources, including staff and better information technology, for the CFTC. These 100 new employees would immediately address the staffing shortfalls at the agency, and the technology funding would help the agency update woefully antiquated monitoring and analysis systems. "We could hire 100 people and put them to work tomorrow, given the inflow of trading volume," CFTC Chairman Walter Lukken said just two weeks ago. "We are doing the best we can in difficult circumstances."

* Improves transparency in market. CFTC currently has limited visibility of trades that take place on NYMEX, and very little visibility of over-the-counter trades -- such as trades from one hedge fund to another, or those that take place on ICE in London. Durbin’s legislation would close the so-called “London Loophole” by requiring all U.S. traders on oil futures markets to report transactions in a detailed manner to the CFTC. The bill also directs the CFTC to investigate the impact of these trades on the price of oil.

* Finally, the legislation would move the CFTC’s Inspector General’s office out from under the office of the agency’s chairman, giving it clear independence.

Durbin Promises More Market Oversight Staff and Computer Technology to CFTC to Fight Excessive Oil Speculation
After hearing Lukken's testimony today, Sen. Durbin released the following statement:

"Increasing evidence shows that the run-up in crude oil prices and gasoline is being driven by larger trader banks, pension and hedge funds. Speculation may have as much, if not more, to do with high gas prices than any Saudi sheik.

"The announcement at our hearing that CFTC it is now going to require more complete disclosure of speculative trading information is critical to stopping the excessive speculation and market manipulation that is driving up gasoline prices.

"Now, we need to give this agency the professionals and computer tools they need to stop any market manipulation. As chairman of the Appropriations Subcommittee which oversees the agency’s budget, I will work to secure a substantial increase in CFTC’s funding to make sure it has the resources to keep excessive oil speculation in check."

GoodBiz113's take: Now that gas has topped the $4-per-gallon tipping point in many U.S. markets, the oversight efforts of Sens. Dick Durbin and Tom Harkin are greatly needed and appreciated -- by consumers, small-business owners [e.g., farmers, independent truckers], air transport carriers, plus countless other entities. We applaud the senators for investigating the roles that CFTC and other entities play during this unprecedented run on oil and gas prices [oh, and the fattest paychecks that Big Oil CEOs have ever received], and for taking action to halt the excessive speculation and market manipulation that's driven those prices sky-high.
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Bush Administration Failing to Safeguard Taxpayer Dollars Targeted to Small Businesses

Today, Sen. John Kerry [D-Mass., pictured] called on the Bush administration to protect taxpayer investments in government-backed small-business loans, and reinstate a program that uses lenders to recoup losses from defaulted loans.

There is currently an estimated $404 million in fixed asset loans through the U.S. Small Business Administration’s [SBA] CDC/504 Program in default. Yet, the Bush administration has failed to request $2 million to fund the program that reimburses 504 lenders for loan-recovery costs and, last Friday, the Bush administration announced it intends to suspend the program.

“The Bush administration’s willingness to stick taxpayers with a $400 million bill is just bad business,” said Sen. Kerry, chairman of the Committee on Small Business and Entrepreneurship. “The choice is clear: Spend $2 million today to help recover up to $404 million in defaulted loans, or continue on the current course of failed oversight and inadequate liquidation staff.”

Last week, the Bush administration admitted it made a mistake in the agency’s 2008 and 2009 budgets to cover costs incurred by Certified Development Companies [CDCs] that liquidate the defaulted 504 loans. However, instead of working with Congress to reprogram funds or seek additional funding in the budget, the SBA has changed the rules for lenders currently liquidating loans, and is working to get rid of the program. At the same time, the agency does not have enough resources to liquidate almost 1,000 defaulted 504 loans worth an estimated $404 million, currently in some stage of liquidation.

In 2000, Congress passed a law to delegate liquidation authority to CDCs because the SBA did not have a good track record for maximizing recoveries. After seven years, the SBA finally established reimbursement rates in April 2007. Then, on Friday, April 4, 2008, the SBA announced it would no longer provide those incentives to CDCs for future liquidations, and would reduce the reimbursement rate for CDCs for loans they were in the process of liquidating.

In 2003, SBA eliminated almost 200 staff from across the country who were responsible for overseeing loan liquidation, leaving only about eight full-time staff to oversee 504 loans in default.

Last year, Sen. Kerry introduced bipartisan legislation that would strengthen liquidation aspects of the 504 loan program. The Small Business Lending Reauthorization and Improvements Act, S. 1256, passed out of the committee, but Republican leadership in the Senate has blocked full Senate consideration.


Below, are Senator Kerry’s two letters to the Small Business Administration:

April 7, 2008

The Honorable Steven C. Preston
Administrator
U.S. Small Business Administration
409 Third Street, S.W.
Washington, D.C. 20416

Dear Administrator Preston:

Last week I wrote to you and asked if you would delay publishing a notice in the Federal Register that would interfere with the liquidation of defaulted 504 loans. The notice is controversial, and I wanted to work with you to pursue what I believed, in talking to the SBA and the SBA’s lending partners, would be a better solution to address your lack of funding for reimbursements and the overall liquidation problem. Unfortunately, you went forward and published the notice despite my objections.

Because the underlying problem was caused by the SBA’s accounting error, I have a hard time understanding why the Administration has refused the Committee’s suggestion to seek a reprogramming or amend its budget request in order to correct the agency’s own mistake. Moreover, preservation of the 504 liquidation reimbursement program will save the SBA money in the long run.

If SBA estimates it will need about $2 million for reimbursements, that seems like a wise investment -- as opposed to continuing with the current liquidation system, in which SBA has let more than 200 of the almost 1,000 defaulted loans languish for so long that, in SBA’s words, there is “little or no remaining residual value” to recover, and therefore expects to charge them off.

The Committee has been told those loans are worth as much as $100 million. If the reimbursements were to continue, and CDCs were to continue to liquidate loans, even if they recovered a mere $4 million, the SBA would still be ahead.

Please provide the Committee with the total number and dollar amount of 504 loans to be charged off, and how that will affect the subsidy rate and fees on the borrowers and lenders who pay to participate in the 504 Loan Guaranty Program.

Please also provide the Committee with the estimated funding SBA would need to continue the reimbursements, instead of permanently suspending the practice, and explain why you will not pursue the funding in order to reimburse CDCs for their liquidation efforts and help protect the SBA’s 504 loan program.

I ask that you please provide the Committee with a response by Monday, April 14, 2008.

Sincerely,

John F. Kerry
Chairman

***

April 3, 2008

The Honorable Steven C. Preston
Administrator
U.S. Small Business Administration
409 Third Street, S.W.
Washington, D.C. 20416

Re: Compensation to CDCs for 504 Loan Liquidation Expenses

Dear Administrator Preston:

I am writing to urge the Small Business Administration to delay publishing a notice in the Federal Register that would interfere with the liquidation of defaulted 504 loans. Specifically, I am referring to the Agency’s intention to publish a notice tomorrow that would reduce the compensation rates for costs incurred by authorized Certified Development Companies to liquidate defaulted 504 loans, and then 90 days after the publication of that notice to suspend all compensation for any 504 loan debenture not yet purchased.

I understand that the Agency made a mistake in not requesting funding to reimburse authorized Certified Development Companies for these purposes in its FY2008 and FY2009 budgets, and I appreciate your leadership in admitting that mistake to our Committee. Nevertheless, I do not believe the solution is suspending reimbursements, which will exacerbate SBA’s liquidation problems.

We are told that SBA has nearly 1,000 loans, worth about $404 million, in some state of liquidation spread among the Little Rock, Fresno and district offices -- with only about eight staff dedicated to 504 liquidation, supported by district counsel who have many responsibilities. The growing number of loans in liquidation validates my concern and opposition to the Agency’s elimination of the almost 200 liquidation staff in the districts more than four years ago.

If the Agency stops compensating authorized Certified Development Companies that are currently helping liquidate defaulted loans, it will reduce their activities and exacerbate the SBA’s existing problems.

A better solution is for the Agency to right its budget mistake by seeking permission from the appropriators to reprogram funding to cover the estimated amounts needed -- a modest $1 million or $2 million by SBA’s estimates -- or send up an amended budget request for FY2009, as the President did in July 2005 for the FY2006 budget, requesting the appropriate funding. Otherwise, the longer SBA takes to liquidate loans, the less ability it has to recover funds through the property or from the guarantors, increasing the risk of writing off loans that average about $500,000.

It would be far more cost-effective to seek the modest amounts for compensation than to increase the number of loans SBA must write off. The Administration should also consider requesting additional funding for the now obvious shortage of liquidation staff.

Further, there is a question as to whether the SBA even has the right to change the maximum compensation rates that were published in the final rule on April 12, 2007, without putting the change out for public comment.

We understand from conversations with staff that the SBA is relying upon a provision in the Administrative Procedures Act to take the action in question. Before publishing this notice, please submit to the Committee an explanation, in detail, with statutory and regulatory references, of what legal justification the Agency is relying upon to suspend the notice and comment procedure its proposed action would normally require.

Last, my staff sought information from the SBA regarding this issue a month ago, on February 29th, 2008. The Agency never responded until it requested a briefing for yesterday, in which the Committee was informed that the Agency would publish the notice in less than 48 hours. Given the Agency’s silence for a month, and then the very short notice, I would hope that you would delay publication of the changed and suspended compensation fees, at the very least until the Committee receives the Agency’s legal justification for moving forward.

Sincerely,

John F. Kerry
Chairman


GoodBiz113's take: Once again, Sen. Kerry has stepped up to speak truth to power, to protect small-business owners' interests. We're fortunate to have his advocacy -- especially, during these challenging economic times.

SOURCES: GovTrack.us, U.S. Senate Committee on Small Business and Entrepreneurship
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Kerry Pushes for Increased Lender Oversight in Wake of $76 Million Loan Fraud Scheme

Today, Sen. John Kerry [D-Mass.] pushed for more aggressive oversight of small-business lenders, and called on the Bush administration to strengthen its commitment to preventing future fraud. The hearing was prompted by $76 million in fraudulent loans originated by Business Loan Center LLC [BLX], one of the Small Business Administration’s [SBA] largest lenders. Kerry raised concerns that the SBA’s oversight had been ineffective or nonexistent due to staffing shortages, insufficient funding and a lack of other necessary resources.

“Government-backed small-business loans for minorities, women and veterans are more important than ever as we brace for the full fallout from the subprime mortgage loan crisis,” said Sen. Kerry, chairman of the Committee on Small Business and Entrepreneurship. “The Bush administration’s lax oversight of these important loan programs ultimately costs the taxpayers money. It’s crucial that the agency fixes these problems in the light of day and works to make sure that these failures don’t happen again.”

Last month, the SBA Office of Inspector General publicly released a report summarizing its audit of the SBA’s oversight of BLX. The SBA requested a large amount of the report to be redacted, including many of the Inspector General’s recommendations and the agency’s plans to respond to those recommendations. Kerry pressed SBA Administrator Steven Preston to increase transparency and make changes to the agency’s lender oversight procedures publicly.

Inspector General Eric Thorson testified that, “Whether SBA has effective safeguards, and a means of overseeing lenders that facilitates the prevention and detection of fraud, has been an area of concern and focus for my office for a number of years.

“Our audits and investigations have identified significant weaknesses in the agency’s oversight of its lenders and, since 2000, we have identified lender oversight, guaranty purchase reviews, and loan agent fraud as major management challenges facing the agency. SBA has been slow to develop its lender oversight program and, only in recent years, has the agency made progress in addressing longstanding weaknesses.”

Sens. Olympia Snowe [R-Maine] and Kerry recently introduced legislation to measure the economic outcomes and improve the oversight of SBA’s 7[a] [working capital] and 504 [fixed assets] lending programs. The Small Business Lending Oversight and Program Performance Improvements Act [S. 2288] will ensure that the SBA fully assesses the quality and performance of lender portfolios so that these loan programs remain strong and benefit small businesses to the greatest extent possible.

The National Association of Government Guaranteed Lenders and the National Association of Development Companies – trade associations for the 7[a] and 504 programs, respectively – both support the bill.

GoodBiz113's take: Once again, Sen. Kerry and his colleagues are moving federal agencies -- in this case, SBA, supposedly our nation's small-biz watchdog -- closer to full accountability and transparency. Small-business owners and all U.S. citizens deserve nothing less.

SOURCES: GovTrack.us, Library of Congress, U.S. Senate Committee on Small Business and Entrepreneurship
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Snowe and Kerry Introduce SBA Lender Oversight Legislation

U.S. Senate Small Business and Entrepreneurship Committee Ranking Member Olympia J. Snowe [R-Maine, right] and Chairman John F. Kerry [D-Mass.] today introduced the Small Business Lending Oversight and Program Performance Improvements Act of 2007 to measure the economic outcomes and improve oversight of the Small Business Administration’s signature 7[a] and 504 lending programs. The legislation will ensure that the SBA will assess the quality and performance of these loan programs, so that they benefit small businesses to the maximum degree possible.

“The 7[a] and 504 lending programs will not survive if we cannot prove to taxpayers that the money spent to guarantee small-business loans actually produces economic vitality, opportunity, and new jobs for our nation,” Sen. Snowe declared. “The only way to protect these vital programs and prove their effectiveness is through oversight and concrete measurements. The legislation we are introducing today is necessary for the SBA’s lending programs to expand and reach all of the small businesses that need access to capital.”

“Access to capital remains one of the top concerns for America’s entrepreneurs, so I am pleased to work with Sen. Snowe to ensure the government’s vital small-business lending programs remain strong,” said Sen. Kerry. “This bill will protect the integrity of the programs by establishing tangible performance measures, provide oversight transparency, and mitigate fraudulent lending. Ultimately, these improvements will get loans to the businesses that need them and provide us with details about the return on investment in these small firms.”

Based, in part, on recommendations made by the U.S. Government Accountability Office in a July 2007 report, Small Business Administration: Additional Measures Needed to Assess 7[a] Loan Program’s Performance, the bill would:

* Require a report on borrowers’ economic performance. Currently, the SBA estimates job creation, but the GAO recommends further measurements to demonstrate the economic growth that companies create after securing 7[a] and 504 loans. This will help the SBA and Congress measure the return on investment;

* Increase the transparency of lenders’ portfolio quality. The SBA’s lender monitoring system does not explain how some measurements determine a lender’s risk rating or where there are problems, so that lenders can act proactively to mitigate defaults or losses. Codifying portfolio quality principals will enable all lenders to understand the standards to which they are held. This will help to protect the programs’ performance;

* Create a 7[a] and 504 portfolio default rate that can be compared directly to commercial lenders’ default rates. At this time, the SBA does not calculate a portfolio default rate that is directly comparable to commercial lenders’ default rates, which makes it hard for Congress and the public to accurately track the programs’ performance; and

* Require the SBA to follow cost containment and cost control practices to hold down lender oversight fees and enable banks to use their capital for lending.

In May, Kerry and Snowe passed their bipartisan legislation to expand the 7[a] and 504 loan programs out of committee. The Small Business Lending Reauthorization and Improvements Act [S. 1256] now awaits consideration by the full Senate.

Sources: GovTrack.us, U.S. Government Accountability Office, U.S. Senate Committee on Small Business and Entrepreneurship
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Kerry Questions Bush Administration’s Decision to Withhold Fraud Findings; Seeks Explanation on Agency’s Decision to Heavily Redact IG's Report

Today, Sen. John Kerry [D-Mass.] called on the Bush administration to provide a detailed explanation as to why they chose to withhold from public scrutiny large portions of a recent Inspector General’s report on fraudulent loans made by Business Loan Center, LLC. The Small Business Administration [SBA] took the highly unusual step of requesting that the Inspector General redact large portions of its report -- including the majority of its recommendations, the agency’s responses to those recommendations, and the Inspector General’s comments on the agency’s response.

“The Bush administration’s failure to provide proper oversight of this lender, or take wise action when they detected problems, resulted in years of undetected fraud,” said Kerry, who serves as chairman of the Committee on Small Business and Entrepreneurship. “We can’t get to the heart of the problem if the administration keeps hiding the facts from public view.

“The administration must explain their rationale for suppressing the Inspector General’s recommendations and their response. In order to combat future fraud and protect the integrity of this vital small-business loan program, the American people need access to all the relevant information.”

According to the Inspector General’s report, 19 individuals -- including a former executive vice president of the Business Loan Center [BLX] -- were charged with fraud for allegedly making more than $76 million in fraudulent loans to unqualified borrowers. After the SBA Inspector General conducted an audit of the agency’s oversight of BLX from 2001 to 2006, the SBA asserted that the Inspector General can’t fully disclose parts of the report because of exemptions in the Freedom of Information Act [FOIA] that protect trade secrets, deliberative process privilege, and banking examinations.

In his letter to the SBA Administrator Steven Preston, Sen. Kerry requested that the agency provide their “handbook,” or documents, that guide the agency on FOIA exemptions; fully explain the basis of each redaction; and give details about how the agency will respond to the report’s recommendations. In the near future, Kerry will also hold a hearing on this issue.

***

The full text of Sen Kerry's letter to SBA Administrator Steven Preston follows:

October 23, 2007

VIA FACSIMILE & FIRST-CLASS MAIL

The Honorable Steven C. Preston
Administrator
U.S. Small Business Administration
409 Third Street, SW, Room 7000
Washington, DC 20416

Re: U.S. Small Business Administration’s Inspector General’s Report No. 7-28 on SBA’s Oversight of Business Loan Center, LLC

Dear Administrator Preston:

As you know, the U.S. Small Business Administration’s Office of Inspector General issued Report No. 7-28 on SBA’s Oversight of Business Loan Center, LLC [OIG’s report] on July 11, 2007. The report resulted from an audit performed due to an OIG investigation of allegations regarding fraudulent loans originated by Business Loan Center, LLC. The OIG report was posted last week on the OIG Web site so the public could have access to it, but was heavily redacted at the request of SBA. In response to the redacted report, I am writing to request the following documents:

* Any Freedom of Information Act [FOIA] handbook or guidance that SBA utilizes;

* A detailed explanation of the FOIA exemption and basis of the assertion of such exemption for each redaction made to the IG’s report.

I understand that SBA is asserting three exemptions — trade secrets, deliberative process privilege, and banking examination — to deny full public disclosure of the IG report. The OIG has stated that it does not necessarily agree with the extent of the redactions, and I am inclined to agree. For example, it is surprising to see that the first three of the OIG’s recommendations, and both the agency response to the OIG recommendations and the OIG’s comments on the response, were redacted. What is the justification for those redactions?

Other examples of questionable redactions include: large portions of the “Results in Brief” section; the titles of some sections in the full “Results” portion of the report; and the entire Chronology of Events [Appendix III]. Please provide the exemptions you are citing and detailed justifications for those and all other redactions in the report.

Furthermore, please explain what the SBA is doing to respond to the recommendations in the report to improve lender oversight in order to mitigate any further fraud.

I request that you provide these documents no later than October 30, 2007. Thank you for your timely attention to this matter.

Sincerely,

John F. Kerry
Chairman

GoodBiz113's take: Thank you, Sen. Kerry, for holding federal agencies' feet to the fire. Please keep doing so until all agencies and the Bush administration “get it”: When the 110th Congress gavelled into session in January, a “new sheriff” suddenly took the reins; i.e., one that will boldly speak truth to power in the interest of promoting transparency, integrity, accountability and fairness for all.

Source: U.S. Senate Committee on Small Business and Entrepreneurship
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