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An Interview With Barney Frank

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Rep. Barney Frank (D-Mass.) has had a big year. The acid-tongued chair of the House Financial Services Committee has been Congress's point person throughout the financial crisis and is now crafting the regulatory reform package that could reshape Wall Street. He's also the subject of a new biography, one that covers a lot in the subtitle alone -- Stuart Weisberg's "Barney Frank: The Story of America's Only Left-Handed, Gay, Jewish Congressman." The Washington Post's Ezra Klein spoke with Frank about financial regulation, yelling back at town hall protesters and whether the banks still have power on Capitol Hill.

Are we lucky that we're not in a second depression?

Not lucky -- it took a lot of hard work. There was a three-step process. From last September to spring of this year, we were just trying to dig out of that hole. We have avoided a worse disaster. You don't get reelected by saying, "Things would've been worse without me." Now we're in the phases of making things better and putting down rules so it doesn't happen again.

What's the most important part of financial regulation?

Limiting securitization. I believe the single biggest issue here is that people invented ways to lend money without worrying if they got paid back or not by securitizing the loan. When I was younger, the theory was if you had a high risk tolerance, you went into stocks. If you were safe and stodgy, you bought debt. But debt became the volatile aspect here.

Do you worry that the banks that are "too big to fail" have gotten even bigger?

Banks do fail. Wachovia failed. The problem is not banks but non-banks. The answer is: We will be restricting their activities. They will not be as big, as they will need much more capital. And if they do get big, they will not be so leveraged. It's not the size of the institution that's the issue, it's the amount of leverage.

Sen. Dick Durbin recently said that the big banks "frankly own the place" after they killed "cramdown" bankruptcy legislation in the Senate. Won't banks brush off financial regulation reform?

No. The big banks have been somewhat discredited. That's why the credit card bill went in pretty easily over their objections. I believe reining in derivatives and reducing leverage at high levels will be somewhat easy to do.

What killed the primary-residence bankruptcy bill [cramdown] was not the big banks but the community banks and credit unions. They do have a lot of clout. And they have a legitimate grievance: They have not been behind the abuses. If we only had community banks and credit unions, we wouldn't be in this problem. And it's important to note that they're not just powerful because they have money, but because they're in everybody's district, and they're responsible and thoughtful citizens.

So you think the big banks really have lost their power on the Hill?

Look at the credit card bill. Small banks don't do credit cards.

But didn't you pass credit card reforms because the Federal Reserve was going to implement them anyway?

No. The Federal Reserve did it because we did it first. We passed a bill in 2007. The Federal Reserve didn't move on credit cards until the House began it. The Federal Reserve has started to move on consumer protection, but in every single case, only after we initiated the action.

Should the administration have started on financial regulation sooner?

No! They were busy. I understand the media always wants to have bad things to say. But they were working on undoing where we were. They were working to put liquidity back. The problem was that 2008 took longer to end than we thought it would. It didn't really end till April of 2009. The early months of the Obama administration were spent trying to dig out of the hole. Let me ask you a question. What harm came from waiting?

The argument is that you won't get as much regulation because the banks are stronger now.

That's nonsense. But you are implicitly acknowledging that nothing bad has happened. We didn't need to worry about excess. We had to worry about minus. We worried about getting things back to normal. Now that things are getting back to normal, we can worry about excess. But I believe we will have regulations in place well before we reach that point.

Is executive compensation a big part of the problem?

Absolutely. The problem is not just the amount. Shareholders will deal with that. It's the incentive. People had incentives to take risks because they got paid off if the risk paid off and paid no penalty if the risk blew up. They were taking risks free of the consequences of failure. Heads they won, tails they broke even.

One theory of the crisis is that the problem wasn't traders and their high tolerance for risk. It was people fooling themselves into thinking this stuff was safe by slapping a triple-A rating on everything.

I agree; the theory has always been that people bought debt because it was safer. The basic problem was that 30 years ago when people lent other people money, they expected to be paid back by the people they lent money to. So they were very careful. Two years ago, most loans were being made by people who were going to sell those loans to other people and didn't expect to be paid back.

You became a YouTube celebrity a few weeks ago for snapping at a town hall protester who held up a picture of Barack Obama with a Hitler moustache. You said that arguing with her would be like debating a dining room table. Why don't more of your colleagues yell back?

So the question is, you're asking me, who yelled back, why other people don't yell back? Can you see where I'm going with this?

I can guess.

I don't know. Ask them.

This article originally appeared in the Outlook section.

Photo credit: AP Photo/J. Scott Applewhite.

By Ezra Klein  |  September 27, 2009; 3:39 PM ET
Categories:  Financial Regulation , Interviews  
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Comments

Chicken: What's the most important part of chicken regulation?

Fox: Stronger coops.

Do you see where I’m going with this Ezra? Perhaps not, so I’ll explain.

Do you know why Canada has had NO bank failures during this crisis? OK, I’ll tell you.

1. Canadians cannot deduct the cost of interest on their home loans (thus removing the incentive for homeowners to buy too much house).
2. Canadian banks are far less leveraged compared to American banks.

You are asking Barney Frank (the fox) how to stop chickens from getting eaten. Instead of him telling you some of the many problems with existing government regulations that contributed to this crisis, he tells you that we need even more government regulations.

Then he tells you that we need to limit the activities of “non-banks.” How are hedge funds doing compared to regulated banks? Did you happen to read this great op-ed?

“LONDON -- When you think about future financial stability, ask yourself this contrarian question: Why is it that the nefarious hedge funds, supposedly the bad boys of the financial world, came through last year's crisis in relatively good shape?

It was widely predicted that these funds, which invest huge pools of capital for their wealthy clients, would have a crackup like that of the regulated banks. Some did go under, but the general catastrophe never happened. Why? The answer partly is that the hedge funds still had to live by the old capitalist rules: There was no lender of last resort to bail them out. So these unregulated managers turned out to be more cautious than the regulated ones.

http://www.washingtonpost.com/wp-dyn/content/article/2009/09/24/AR2009092404187.html”

Frank’s responses are typical politician nonsense. He never accepts any responsibility for his part (surely you’ve heard his quote about Fannie Mae by now) in this, he blames someone else and then he recommends solutions which will do nothing to prevent future problems which he helped create.


Posted by: kingstu01 | September 27, 2009 5:00 PM | Report abuse

"Is executive compensation a big part of the problem?"

Like every politician, Frank won't let facts get in the way of a good story...

"And he says there is little evidence that compensation reform would have helped head off the crisis. For example, he says, “neither bank C.E.O.’s nor regulators thought that banks were taking excessive risks.” So if the risks were viewed as small, he adds, “compensation incentives would not induce them to avoid those risks.”

He points out that in 2006, a collateralized-debt obligation with a triple-A rating didn’t look like a huge risk. “On the contrary, it looked like an extremely low-risk asset,” he says. “Yet, banks incurred extremely large losses on such C.D.O.’s.”

Regulations that would have encouraged executives to take on less risk, he adds, might have made matters worse because executives “might well have chosen to invest even more in AAA-rated C.D.O.’s and other asset-backed securities.”

http://www.nytimes.com/2009/09/27/business/27stra.html?ref=business"

This whole interview is filled with populist nonsense. I know you are not an investigative journalist but you should not let Frank get away with what he is saying here.

Posted by: kingstu01 | September 27, 2009 5:06 PM | Report abuse

A few things you could have thrown at him other than the ridiculous softballs you threw:

1) So Barney, why do you still refuse to take any responsibility for the Housing debacle? Even though you were one of the ones that said Fanny Mae and Freddie Mac were doing just peachy.
Here's an article that COMPLETELY destroys any Lib that refuses to acknowledge this fact:
http://online.wsj.com/article/SB122091796187012529.html?mod=most_emailed_day

2. Why is your colleague Charlie Rangel STILL in charge of well...anything with the current problems he has hanging over him, and why do Democrats in Congress keep stonewalling investigating him?

3. You confronted that woman with the Obama as Hitler poster. Good for you, that was silly of her, I agree. But my question is this, did you take the same amount of umbrage when the EXACT SAME THING was done to Bush.

Posted by: websterr1 | September 27, 2009 9:16 PM | Report abuse

Good God, are conservatives still telling themselves that Fannie and Freddie were the root cause of the financial crisis? And using the opinion pages (it's not an article, websterr) as their evidence?

Posted by: JEinATL | September 28, 2009 9:59 AM | Report abuse

What a BLOWHARD (pun intended).

Frank is the one that promoted lending to those who couldn't pay the loans back because they were a minority.

HE'S THE PROBLEM

And now he wants to be the solution??

Posted by: ElViajero | September 28, 2009 7:51 PM | Report abuse

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