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Washington, DC -
FRANK:
All right. Let me begin by making an announcement. At least from my standpoint, those of you who cover this committee won't have Heather Wong (ph) to kick around anymore, since she's going to go over to the Department of Treasury. So you can follow Heather over there.
This is a meeting at which I'm going to talk about the agenda that we have for the year, and then I'll throw it open to questions.
There are several segments. The immediate agenda of the committee really was last year's agenda. Obviously, we had to finish up on the TARP.
We will in two weeks be getting a report from the auto industry as to what they think they can do to stay viable. It does seem to be clear with regard to the auto industry there is a short-term and a long-term issue.
The short-term issue is the credit crunch, which is affecting automobile companies all over the world, including some of those who were supposed to be so efficient.
I have spoken -- I spoke yesterday with Larry Summers and Tim Geithner, and I expect, frankly, to be working closely with the administration here. That is, we will get their plan, and the Obama administration is getting ready to evaluate that plan, and we will then have to, working with them, figure out what we do next.
But I -- I'm -- I'm very proud of the staff that works with the Financial Services Committee. There's a great deal of expertise and information here. But it's been in the financial service industry -- we have not historically had the role as a committee of doing industrial work.
So we will be calling in -- the speaker has asked some -- some substantive experts in. We'll be talking there as well.
But I -- I do -- my own view is that the administration will have a major responsibility in reacting to the plan, and we will then work with them.
Secondly, and most importantly, we get to the easy part of the financial questions. The easy part is figuring out how to stop it from happening again. Getting out of it right now is an ongoing and difficult issue.
Getting out of it -- my conceptualization of it is that we have terrible damage that was wreaked by both bullets and guns. The bullets were inappropriate instruments, bad loans that were made. Banks just -- the installation people get from -- from their own bad decisions through securitization.
And then the guns are the mechanisms that rocketed those through the -- through the system. One -- one set of bullets we know how to deal with, and this committee did it two years ago, and we can do it again -- is to pass, I think, even in a tighter form our prohibition on irresponsible subprime loans.
I say in tighter form, because, well, things have changed. In 2007, there were things I wanted to do, didn't have the votes for. We will have the votes for them now.
We will toughen up, I think, the penalties that people will get if they securitize inappropriately. There will be very strict explicit restrictions on abusive yield spread premium approaches. And I hope we will have that passed. The Federal Reserve has done good work there, but I -- I think we can go beyond that.
Then we get to the biggest issue for the near term, which is dealing with systemic risk. The biggest single problem we've had here is not just in subprime loans but in general.
There have been too few constraints on major financial institutions incurring far more liability than they could handle. And the number one job will be to empower some federal entity to be a systemic risk regulator.
If you look at the Paulson plan of last April, the Jackson Hole speech of Chairman Bernanke, Paul Volcker's recent report with the Group of 30, what the Obama administration has said, what many other of us -- of us have said, there is an emerging consensus, I believe, that probably the Federal Reserve will be given the power to do systemic risk regulation, covering all forms of financial activity.
And it will have some flexibility as to what the reach is. You cannot define this too specifically legislatively, because if you do, people will get around it. And there is a hope that this be done in the first part of the year.
April 2nd is the G-20 meeting. I don't think it's realistic to think that something could -- certainly, nothing could be law by then, and maybe not even pass the House, but I hope that we will have a general outline of what we are trying to do.
Now, I think it's possible -- it may not work out this way -- to -- to focus on systemic risk now and take the questions of investor slash consumer protection and market integrity and deal with them a little bit later, in the second phase.
That is, at this point, we are talking about giving powers that do not exist in the federal government to some entity, probably the Federal Reserve, to constrain excessive risk-taking. That's not going to take away from the SEC or the CFTC or any of the bank regulators.
Addressing their interaction, whether or not they need to be buffed up, coordinated better, et cetera -- I think it's phase two. Phase one is the systemic risk regulator.
A couple of important questions -- one that I focus on -- I notice the Volcker people talked about it -- one of the things I think we've learned is that if enough bad loans are made and securitized, it's hard to protect yourself against them.
No amount of due diligence works if you weren't in on the original loan. The rating agencies didn't work. Quantitative models didn't work.
One thing that appeals to me greatly is the notion that -- and securitization, I think, is important. It does multiply our use of money. We're not trying to get rid of securitization. But some requirement that the securitizer retain a certain percentage of what is securitized becomes more and more attractive to me as I think about it.
Nothing's definite yet. But I don't think -- I have not yet found a substitute for giving the person who make the loans some incentive not to make -- a better incentive not to make bad loans than he or she now has. And I think that loss sharing is a -- is a part of that.
People in the insurance business have pointed out if they want reinsurance, they have to keep part of the risk, and so we're there. But that's -- that's the first thing we'll be doing.
Then we'll be reaching the rest of the questions of market integrity. One thing I think is clear -- there had been a view that investor protection was only for lower income people.
That is, kind of the view was if you're rich, you must be smart, and if you're smart, you don't need to be protected against your investments, so that what we had was if you had a million dollars to invest, you could invest in a hedge fund, and that was the basic investor protection.
Some of the most sophisticated people in the world got involved with auction rate securities and other things, so you're going to have to do some -- some investor protection across the board.
One of the things that's on the table is this notion of a financial products safety commission that Elizabeth Warren has been so active in. That -- that's in -- you know, by the second piece I mean later this year.
Next, we will be in the housing business. I think the biggest difference you will see in this area between our control and the Republican control is they basically decided that the federal government should not be in the business of helping build housing.
I think we have had -- we have suffered, and I think that's part of the subprime crisis. A lot of the people who were sold subprime mortgages should have been people who were being helped to get rental housing. This notion that home ownership was the goal for everybody ignored political, social and economic reality.
And what we really need to do is to get back in the business of not just helping people rent existing affordable housing, which can add to the demand but not the supply and drive up prices, but help build housing.
The first thing, actually, is to prevent the diminution of housing. Forty years ago, and since, the federal government had a number of programs to build affordable housing in a public-private partnership, but they had limitations, and after 40 years the restrictions on rents would disappear, and in some cases after 20 years.
We have hundreds of thousands of units of affordable housing. The Republican policy was to let them all go out of the affordable inventory, to protect the existing tenant with a voucher, but then let them go to the market.
We -- we're going to reverse that. We had a big example of it in New York. You may -- some of you know about the Starrett City case where we did pass legislation to keep thousands of units from being lost.
So we will do this preservation. And this is something that Shaun Donovan understands. I look very much to working with Shaun Donovan.
We're going to redo Hope VI. We're going to be doing some other things to improve the extent to which the federal government helps provide, in partnership with the private sector, affordable rental housing.
Third, we will get back to consumer protection, which we started on. We passed a credit card regulation bill. I believe we will do that again. And I want to address the balance -- and I've told the secretary of the treasury -- between federal and state authority here.
Under the Bush administration, the federal government exercised its preemptive powers to cancel virtually all state regulation in the consumer area. I think that was a mistake, and I think it has diminished consumer protection. And I've told the secretary I expect that we can -- we will -- we will go back at that and reallocate that.
States do a better job -- I'm talking -- you know, there's investor protection and the like. There's also sort of individual consumer protection.
FRANK:
I will tell you this. It's been my experience that the closer you are to people who run for office, the more likely you are to get consumer protection. There's a great incentive to do it. That happens better at the state level than at the federal level. So I want to put the state authorities back in that.
On the state-federal question, one thing that's on the table -- when we do the systemic risk regulation, we will go to our European and other allies -- the Japanese -- and say, "We've got to coordinate."
I mean, the one thing that's very clear about systemic risk regulation -- it has to be done with international coordination. You cannot regulate something as mobile as capital these days if it's going to have vastly different rules in different places.
I've said Lenin wrote a big pamphlet about how you could have socialism in one country, but good regulation in one country is not going to work.
When we do that, I know one of the first things we will be asked by the E.U. and the British is, "What about an optional federal charter for insurance?" And particularly for life insurance, that question is going to be dealt with. Paul Kanjorski will be working on that.
Fourth area -- after consumer protection, I have felt a little guilty because in my earlier years on the committee I was very active in our jurisdiction with -- regarding the international financial institutions.
A few years ago, you may remember a coalition that was (inaudible) out of this committee put through debt relief for the highly indebted poor countries.
It was actually a coalition of -- of Jim Leach, Maxine Waters, Spencer Bachus, me, Bono and the pope, and we got, over the objections of the Clinton administration and the congressional leadership, significant debt relief. It's worked out very well. We will return to the debt relief issue.
We will also be pushing to make sure that there is no right-wing bias, frankly, in the advice that's given to poorer countries from the international financial institutions, the World Bank and -- and others.
The World Bank in particular -- they have a publication called "The Doing Business Report" in which they rate countries on how hospitable they are to doing business. The more you mistreat your workers, the better you look.
If you give people vacations or pensions or higher wages, let them join unions, they say you're not a good place to do business. That's outrageous, and we -- we're going to demand that as a price for our continued cooperation that set of antilabor protections be withdrawn.
Now, there'll be some other specifics, but that just -- the regulatory area, housing, consumer protection, and international.
Let me just close with what some of you heard me say, and this is a very important message. I just told it to -- the people from Citicorp were in to see me. I told it to the -- Ken Lewis from B. of A. was in on Monday, and Vikram Pandit was -- was just in, or maybe he was here last week.
There has never in my experience been a greater division in opinion between the people who are kind of at the top of the pyramid of decision-making economically and politically and the average citizen.
And I -- I get lectures from Fred Smith, very good guy from FedEx, saying on Sunday, "Don't get into protectionism." An article in the Times op-ed -- "Don't do buy America." People need to understand their chances of talking the American public out of this kind of attitude are zero.
There is now a deeply rooted anger on the part of the average American at what he or she thinks is a very unfair set of arrangements. They see a financial industry that helped cause these bad problems, and they see themselves as the victims of the problems while some in the financial industry appear to be getting helped.
And there is a fact here that's a problem. We need to reestablish the credit system. We cannot create a whole new system for extending credit from scratch. You cannot get credit restored without doing some things that will be of benefit to the existing group of people.
And as I've said to a couple of the bankers, "Here's this problem: People really hate you, and they're starting to hate us because we're hanging out with you. And you have to help us deal with that. A, you have to avoid being stupid -- the airplanes, the bonuses."
I'm going to ask them again -- I asked one of the CEOs the other day, "If you didn't get a bonus, would you like leave early on Wednesday? I mean, what is it that a bonus -- what do we get from your bonus that we would not otherwise get (inaudible) you're paid a lot of money to do a job?"
They've got to be clear about how they're spending the TARP money. Neil Barofsky, the I.G. -- and I want to say with regard to the TARP -- and I'll close after this -- I think people underestimated the amount of oversight we put in there.
Frankly, some of you have done stories about how bad things have been with the TARP and said, "How come there was no oversight," when you were citing the results of the oversight to write the story.
Elizabeth Warren, the GAO, and now Barofsky have all -- we -- we put more oversight into this than any program ever seen, three separate, independent, fully empowered agencies.
Barofsky is now in the process of sending out a demand to every recipient of the TARP -- he's the inspector general -- that they account for how they spent the money.
And frankly, we ran into a situation where OMB told him that he couldn't send it out for 30 days because of the Paperwork Reduction Act, et cetera. I complained to OMB about that, and I complained to the secretary of the treasury because we need to get that information.
So we -- we finally -- and -- and I think Hank Paulson did a lot of good work in a lot of areas. I think he made this big mistake in the end.
And the way in which the TARP was administered -- the absence of foreclosure, the absence of pressure to lend, laxity with regard to compensation -- it has helped bring public anger to a fever pitch, to the point where it would prevent us from going forward in a lot of ways unless we alleviate it, and you can't alleviate it with hocus pocus. It's got to be done in a realistic way.
So they have got to understand the restrictions on compensation. I will have a hearing next week on this subject, or the committee will. And we will have these eight CEOs there. They have got to understand that they have to cooperate with us in avoiding bad things and showing how they are doing good things.
And the last point of that is that I was reassured by both Mr. Summers and Mr. Geithner yesterday that they understand the importance of foreclosure diminution, and we expect very soon to have a major program government-wide for foreclosure diminution.
We're going to try and do our part tomorrow -- today and tomorrow -- by fixing Hope for Homeowners, which I acknowledge we drafted badly, because we were under a lot of pressure to tighten it up, and it was added to by the Senate. And we tightened it up so much nobody can open it, and we have to -- we have to relax it some.
But one of the things we're going to do to address this understandable public anger is -- the fact that nothing has been done to diminish foreclosures, and I think within a few weeks we will have a very good set of foreclosure diminution programs in place.
With that, I'll throw it open and we'll take questions.
Yeah.
QUESTION:
The TARP bill was on the floor last month. You had said that municipalities were the most sympathetic victims of the financial crisis.
FRANK:
Yes.
QUESTION:
And do you have a better -- you said you were going to...
FRANK:
Yes.
QUESTION:
... do something to help them.
FRANK:
The municipalities -- let me tell you what you learn from my financial report next year.
My major investments for myself are full faith and credit general obligation bonds from the state of Massachusetts, because not even you guys could accuse me of anything illegitimate if I'm trying to help Massachusetts do well, and so I figure that's the best investment for me not to have conflicts of interest.
I had (inaudible) myself along with my campaign, so I just invested some money again in municipal bonds. I'm getting 4.6 percent on full faith and credit general obligation Massachusetts municipal bonds. They are Treasuries. I guarantee you there is zero chance of their defaulting. And I'm getting 4.6 percent, which is double tax free.
I'm getting 5.1 percent on school bonds that are AA, and I know the Massachusetts legislature would never allow those to default.
Here's the insult -- no, I take it back -- injury added to injury. General obligation municipal bonds have for years been told that they had to be insured because they might default.
In fact, as Warren Buffett's insurance guy, Arda Jane (ph), told us, if the rating agencies rated municipal bonds by the same standard that they rated corporate bonds -- i.e., likelihood of default, there would be no municipal bond insurance because it would be clear that none was necessary.
So they had these monoline insurance companies which began insuring the municipalities. That turned out to be very boring, because all you did was collect money and you never paid anything out.
So they had all this money, so they decided they would get hip like everybody else, and they went into collateralized debt obligation derivatives and lost money.
So what happened? The municipalities that never needed to be insured in the first place were pressured into buying insurance and then when their insurance screwed up, their bond rating went down. They had to pay higher interest rates.
So you have the insured paying higher interest rates because insurance they never should have had to have bought in the first place deteriorated.
What I am in favor of -- and I've talked to others -- George Miller -- I believe we should have for full faith and credit general obligation bonds issued by -- by -- by governments with full taxing power a federal insurance program paid for by premiums, like the FDIC.
And the answer is if you were to insure bonds issued by these municipalities, with some limitations, some multiple of their -- on the amount of insurance they get, some limitation on the -- on the total budget, some multiple, and you had the federal government repaid by insurance premiums if there were defaults, it would cost the federal government zero, because you could have it fully paid for, and it would substantially reduce the interest paid.
It's the best thing you could do for (inaudible) going forward, and we will be -- so I'm going to be pushing for that.
QUESTION:
What was Bank America -- Bank of America asking you for and what were you asking them for? And will they be one of the CEOs testifying next week?
FRANK:
Yes, Bank of America will be one of the CEOs testifying. It was a general conversation, not, you know -- well, a couple of things. I repeated to them with some intensity what I've said to you.
FRANK:
There are some -- one of the things I think we need to address, and from the banks (inaudible) -- we as the federal government inevitably are sending the banks a mixed message, because we have two things we want of them.
We want them to be safe and sound, and we want them to lend more. And those don't always put you in the same direction. Some of the banks have said -- I was recently asked by a reporter, "Well, some of the banks say they'd like to lend more, but they're being pushed to increase their capital."
There are these fears out there. I think it is clear there will be an increased federal role with some banks. We know that. But nobody I know of thinks you're going to do this without attracting more private capital in some degree.
You are not going to restore credit to America without restoring private capital. That's a factor which some of -- what some of my colleagues talked about could make that very difficult.
So we have to find a balance between holding them accountable and then still being able to attract private capital. We have to have a balance between encouraging them to lend but not letting anybody get into a dangerous situation.
There are a couple of issues here. One is the whole mark-to- market issue. My own view is that what we need to do with mark to market is not abolish it, because I think -- the last thing I think anybody wants, or one of the last things, is Congress legislating accounting.
You know, remember an important principle. If you don't want an issue to be decided politically, you don't ask 535 politicians to vote on it.
But mark to market clearly has procyclical effects. It can make bad situations worse. One of the things I think we should be exploring is the extent to which you can retain mark to market but make the consequences discretionary with the regulators rather than automatic.
If a bank has to vote -- write down its assets because of mark to market, that doesn't necessarily mean in my mind that they then have to cut lending by a proportionate amount, or that other people -- it doesn't necessarily -- you know, it's one thing if you have to write down because you made a dumb mistake. It's another if the economy as a whole has devalued assets that you might have bought very reasonably.
So we will be -- we will be looking at that. And there's also the question of, you know, what's the balance between -- are regulators telling some of the banks that they have to have a margin of capital, and if they do, what does that do to lending?
And these are inherent conflicts that -- you know, we have -- we have dual objectives, and I -- we're going to explore those better. And that's the kind of thing we -- we've talked about.
Yeah.
QUESTION:
Can you talk a little bit about -- some clarification on a question, the clarification on that you talked about, securitization -- do you -- were you referring to covered bonds that they -- they keep some sort of reference?
FRANK:
No, I'm saying any securitization. I'm saying any securitization. Look, the problem is I really think securitization is one of those economic phenomena that has enormous power to do good and in the absence of regulation does some harm as well.
But I think the problem we've got today is not deregulation, technically. It's non-regulation. Securitization comes up and it's very powerful, and it magnifies money and allows money to be used much more frequently.
But it turns out that people who are making loans and selling them to some other people are not as careful about the ability of the borrower to repay as they otherwise were.
Now, we need to -- we were told we had mechanisms for dealing with that. They haven't worked. And so one of the mechanisms, I think, for dealing with it -- it's not just covered bonds.
That's a -- it's if you want to securitize at all, you have to keep 10 percent, 15 percent, maybe that you take the first 10 percent of the loss.
That's -- that's the issue. It's to give people an incentive -- it's to give people more incentive than they now have not to lend to people who are not likely to pay back.
QUESTION:
On executive compensation, what -- what can you do on bonuses, Wall Street bonuses, given how that is woven into the whole...
FRANK:
Well, a couple things. First of all, I do want to say I told you so, very nicely (inaudible).
2006, we tried in this committee when the Republicans were in power to start dealing with executive compensation, which we believed was becoming a problem.
And we had a fairly mild approach, say on pay. All we wanted was to require that in the large corporations the shareholders had to vote on the total package of compensation -- golden parachutes, et cetera.
We were told at the time that this was class warfare, that it was an outrageous interference, and this -- and the American business community was doing so good, how dare we interfere. As the Republicans -- we -- we forced a hearing, but we couldn't get anything further.
In 2007, we actually brought a bill to the floor and it passed, and I would urge you -- go back and look at those debates and see these great defenses of executive compensation, and the argument that any intrusion in the total freedom of corporations to set their own compensation would endanger America.
But fast forward to now, and the world has, you know, caught up and -- and -- and we've moved beyond.
Two points. With regard to bonuses already given, there are some problems. The -- the principle against retroactivity is very important in a fair society.
But I think there are pressures that can be applied with some of these banks that have -- in fact, we are writing a letter, members of our committee, to Secretary Geithner saying, "We can't make them give these back, and maybe they can't make people give them back, but you can take into account the extent to which they are able to recover some of these as you give them more money."
Now, I'm not talking about the basic level person. You know, bonuses were built into some of the sort of average worker compensation, and the average worker compensation is not what we're (inaudible).
Although I have to say I am a little struck that people who thought the UAW workers were getting way too much money never minded when AIG workers were getting, you know, two and three and four times that.
But here's the problem. With regard to bonuses going forward, what we can tell them is you've got to -- if you want to pay them, pay them. And it's the bonuses -- the problem with bonuses is they're one-way streets.
The bonuses are heads, I win, tails, I break even. If I am a big decision-maker and I take a risk and it pays off, I get a bonus. If I take a risk and it costs the company money, I don't lose a nickel.
And what you've got, then -- and this is the context in which we're going to be considering executive compensation. It's in the context of the systemic risk issue. I think we need to write into this -- not just for TARP recipients, now, but as a general public policy -- prohibition on those forms of executive compensation that give perverse risk incentives.
And it has to be that anything beyond straight salary -- if it's incentivized, it has to be two-way street. It has to be that you make money if the incentive -- if the bet pays off. You lose if it doesn't. And there has to be a reach-back period.
One of the major rating agencies -- in this case, I would accept the -- actually, what they did, because it was statistical -- they found a correlation between companies that paid a lot of their CEO and top executive compensation in incentives and a subsequent need to rewrite the financial statements, meaning that the temptation to reach the targets distorted decision-making.
So we will be addressing that in that context, and it doesn't just go for TARP recipients.
Yeah.
QUESTION:
Yes. On the -- the entirety of the TARP bill and the stimulus bill, it's all going to have to be borrowed increasingly from foreign governments such as China.
Are you comfortable with the fact that we're -- we're using, in large part, foreign governments to finance America's economic recovery?
FRANK:
Yeah. Look, I'd say this. I -- I have one real problem with those sovereign wealth funds. Where are we -- where are they when we need them?
I mean, it's -- I don't understand what the problem would be -- I don't think it gives them any undue influence over us. If they want to lend us money, we could put it to productive use. That's a good thing.
Now, I'm not indifferent to the question of spending. I wish we didn't have the war in Iraq. I wish the hundreds and hundreds of billions of dollars that we have spent and will spend on that war were available for other purposes.
And I wish that people who are concerned about this would join me in trying to rein in some of the excessive military spending. George Bush in an article -- an interview with Kimberly Strassel of the Wall Street Journal said that yeah, he had serious deficit problems and the biggest single factor was defense spending.
And I think that's right, and I -- I think we can -- I just differ with him as to how necessary some of it was.
There are two fears with having the foreign money, and one is that they'll stop buying our stuff. I think it's very unlikely. We're the safest place in the world. Where are they going to put it?
If you're China, what are you going to do, go put it in Kuwait or -- you know, where else are you going to put it, Russia? I think that it's a tribute to the world's recognition of our security and stability.
Second, the question is inflationary, and I had a good conversation with Chairman Bernanke, and I think you're going to -- yesterday. You're going to see him talk about this. The Federal Reserve has been injecting liquidity into the system, but they have every capacity to take that liquidity back out if and when that becomes necessary. So I -- I do not think that that is currently a problem.
We are spending more than we should, given the level of taxation that we're willing to sustain. And I think you need to address that.
But I -- I am insistent that we address it by taking a big chunk out of military spending going forward.
Yeah.
QUESTION:
As the Obama team prepares to spend the second installment of the $350 billion (inaudible) still being expressed on both sides of the aisle about what happened to the first $350 billion.
Do you know -- does the Democratic leadership know -- does anyone know the final destination (inaudible) all of that money...
FRANK:
Well, as I said...
(CROSSTALK)
FRANK:
Yes. As I said before, the inspector general is demanding that precisely. That's what I was talking about when I talked about Barofsky. The inspector general is demanding that every recipient of funds already account fully for how they were spent.
FRANK:
But Citicorp tells me they're about to do that. But that's the issue that I mentioned that Barofsky -- Barofsky told me that last week. Look, part of the problem was Barofsky was appointed. His confirmation was delayed. But I'm -- he's -- of all the oversight people, he's the one who had the best ability to do that.
He is demanding as the inspector general a full accounting of all the TARP money already expended. He told me that he had just been told by the Office of Management and Budget that that was subject to the Paperwork Reduction Act and he had to wait 30 days and suggested alternative ways.
I was disappointed in that, and I called Mr. Orszag and complained about that, and I called Mr. Geithner. They were not fully aware of it. And I'm hoping that fairly soon that will get resolved, and his demand will go out, and then we'll -- we'll have that answer.
And then it will -- we put in our bill that didn't pass the Senate, although maybe if things are necessary they would, that it all to go instantly on a Web site. And I -- that'll happen.
So the answer to your question is that Barofsky is in the process of demanding that, and we are running interference for him to make sure he can get it done.
Yeah.
QUESTION:
(OFF-MIKE)
FRANK:
Yeah, I said we were going to do the -- well, it's securitizer liability.
QUESTION:
(OFF-MIKE)
FRANK:
But I did say with regard to subprime we're going to toughen it up, and particularly -- in my view, the liability is better on the securitizer than the assignee -- I sometimes get -- I'm loose in my language -- because I -- the assignee is the ultimate purchaser. I think the assignee has the least ability to figure this out.
The securitizer is the one -- that's the central figure who accumulates the loan and passes them on. So we -- we intend to toughen the liability on the securitizer in the bill we passed in 2007.
QUESTION:
(OFF-MIKE) news regarding the (OFF-MIKE)
FRANK:
Very important question.
QUESTION:
What do you want to do (OFF-MIKE)
FRANK:
Good. Two separate questions. What we do to help perform the function of housing finance going forward with Fannie and Freddie, what degree of market versus subsidy -- that's a very important question which we will reach, and I should have added that to the set of things we're doing.
For now, they are playing a very important role in the -- in the current situation, and Secretary Geithner made it very clear. When he promulgates a foreclosure policy, it will be a uniform policy for all of what the federal government has, which will include what the FDIC has.
The Fed, you may have noticed, just announced that it's going to be very aggressive in writing down mortgages that it holds through Bear Stearns or whoever else it acquired them. And that will include what Fannie and Freddie has.
So Fannie and Freddie will be used very aggressively in the mortgage foreclosure diminution.
We then have a broader question -- how do you sort it out going forward? We haven't reached that yet.
Yeah.
QUESTION:
(OFF-MIKE) from the Treasury (OFF-MIKE)
FRANK:
I think that could happen, but here's -- I think what -- what I know they understand is this. Until they are successful in showing the average American that the money is being used reasonably, there's no point in asking for it, because they won't get it.
They may very well need it, but they're going to have to earn the right to it. And -- and that means showing two things. One, don't do stupid things.
I mean, part of it is we've got to be like the doctor -- you know, the man goes to a doctor and says, "Doctor, it hurts when I go like this," and the doctor says, "Don't go like this."
I mean, the banks have got to not go like this anymore because they're hurting us. They've got to stop buying airplanes.
Now -- by the way, we took it out of -- you know, if you're doing business in a community that doesn't have commercial air service, of course an airplane could be useful. But people have got to use their heads.
They're getting a lot of money. They made a lot of mistakes. They've got to lean over backwards not to offend people in terms of compensation and everything else.
Secondly, they have to show people that we're getting something from the money. That's foreclosure diminution. That's loans. That's more cars bought, more student loans picked up, et cetera.
If they are able to do that -- and I -- by the way, I'm confident that they know that they have to do it, and I think they can do it. And once they have done that, then I think they'll be in a position to come back and say, "And now we would like some more for this purpose."
Yeah.
QUESTION:
I understand the -- the National Flood Insurance Program authorization expires...
FRANK:
March.
QUESTION:
You were the one that put that in there. I understand it's going to be extended.
FRANK:
Right, in the omnibus.
QUESTION:
Right. Do you -- can you talk for how long?
FRANK:
Yeah, I think till September, and we are then going to try and go back and work together. Yeah, I'm -- I'm getting some nods here. September.
And then we plan to work with the Senate to try and make some changes in the plan.
QUESTION:
Thank you, sir.
QUESTION:
Do you expect the repeal of the online gambling regulations that were (OFF-MIKE)
FRANK:
So the question as do I expect the repeal of the on-site gambling regulations. I am hoping that that will happen. There will be some package submitted, I believe, to try and undo the last minute regulations by the Bush administration.
FRANK:
The gambling regulations are -- there's two separate questions. One, should we outlaw illegal Internet gambling? I don't think we should. But then do you, once we decide to do that, put all the burden of enforcement on the banks? And the financial institutions are overwhelmingly telling us not to do it, so I hoping that one would be undone.
QUESTION:
(OFF-MIKE)
FRANK:
That's -- that's later in the -- in the -- look, I think, if you were starting from scratch, you have an OCC, and an OTS, and an SEC, and a CFTC. And starting from scratch, you probably wouldn't have them, but we haven't started from scratch. These people have constituencies.
I -- that's why I want to break out first the systemic risk thing, because those are tougher issues. Secondly, I think the question will be, are there ways to rationalize the relationships without abolishing them?
Now, to some extent the systemic risk regulator is going to get some powers, I believe, that theoretically might adhere to all of those, but this has the advantage of the SEC isn't taking over the CFTC or vice versa. The OCC isn't taking over the OTS. Rather, there's a whole new entity that gets out of that rivalry, and I think for now that's the best way to deal with it. We will then get back to the question.
I have -- I did make a proposal to the chairman of the Agriculture Committee, but he did not accept it, and I understand that. I'm -- I'm very proud of our having diminished jurisdictional fights. We work very closely with Ways and Means, for instance, on the low-income housing tax credit.
We're fixing that up, by the way, in the stimulus. It's a problem (ph) with the low-income housing tax credit, which is the one production program we've had, but it's also to do with other (ph) tax credits. Tax credits don't work so well as a matter of policy when no one owes any taxes, because no one's going to pay for the credits.
So we are -- we are working that on. And I've worked on it. I have proposed to Collin Peterson that we do a readjustment of jurisdiction and that the Agriculture Committee and the CFTC retain jurisdiction over all commodities that are edible and that we get all the others. But he said no.
QUESTION:
Back to this idea of banks not doing -- not being too stupid and/or the disconnect between mostly Wall Street and Main Street, what reaction do you get when you talk to top banking industry officials, too? You know, do they understand...
(CROSSTALK)
QUESTION:
Do they understand...
(CROSSTALK)
FRANK:
Yes, they do. It took them a while. But they -- they understood, first of all, because we've just said to them, "This is it. And this is" -- I wish they'd understood it a while ago, but, you know, that's -- yes, I believe they do know (inaudible) I think you are going to see a very interesting hearing next week with these CEOs.
And the -- first of all, I don't know if you saw Wells Fargo put out a release yesterday that they've paid the federal government -- $371 million, was it? Or did they -- how much? Yes, Wells Fargo just announced their first dividend they've paid to the federal government as the holder of preferred shares that we acquired under the TARP. You know, Citicorp -- yes is the answer. I think they now understand it. The damage has been done, but I -- I believe they do.
QUESTION:
I'm just wondering, given how much Democrats relied on money from the financial industry in recent years, as you're going forward in trying to re-regulate that industry, do you think that the Democrats will have to not rely on the financial industry as much as they have?
FRANK:
Well, I don't think that's going to have a major effect. Frankly, I think -- first of all, we've been regulating them in the past. In my committee, in 2007, we passed a tough subprime bill. We passed a tough exec comp bill. I didn't notice any -- any problems or any concerns.
We passed three bills in 2007 when the Democrats took power. One, we put a tough regulation of credit cards through the House -- it didn't go through the Senate yet -- but tough regulation in subprime. Both of those the Fed picked up from us. And, third, we did the exec comp bill.
None of those -- the fact that people give us money wasn't a factor in any of them. I don't think you can show any past effects. As I said, those of three tough bills that weren't their favorites. And I don't think you'll see it going forward.
Frankly, I think people in the financial community now understand that they are better off with people in power who understand the need for rules. But one of -- with regard to executive compensation, one of the high-ranking officials said to me, "I hope you will pass rules on executive compensation, because that's subject to competitive pressures."
So I think we -- we have demonstrated a -- an understanding on the part of the financial community that they're better off with sensible regulation.
QUESTION:
Mr. Chairman, are you talking about giving the Fed more powers? Secretary Paulson had talked about taking some away, you know, like day-to-day bank supervision. Do you think that's part of...
FRANK:
Which bank supervision?
QUESTION:
Mr. Paulson's blueprint had talked about giving -- making the Fed the systemic risk regulator, but taking them out of the day-to-day bank supervision.
FRANK:
Well, I don't think that's likely. One thing Alan Greenspan always argued -- and I think a lot of other people agreed -- that monetary policy was informed in part by the regulatory, that you didn't want monetary policy made totally in the abstract.
FRANK:
In fact, by the way, I should say with systemic risk -- I should have mentioned -- one of the things, again, that everybody seems to agree with is, whoever that new regulator is, among the powers they have to get is to be able to close down any of the firms they regulate in the way that a bank can now be closed down by the FDIC.
I mean, that was part of the problem with Bear Stearns and Lehman Brothers. It was, you know, an either/or. There was no -- there was no bankruptcy-type approach for those, so the regulator will have that power to do a resolution of those.
But what the bank regulators can do at the banks, the systemic risk regulator will be able to do with others. But, no, that's not in the cards.
QUESTION:
How will you measure excessive risk? Or is that something the Federal Reserve...
FRANK:
Excessive...
QUESTION:
... risk-taking.
FRANK:
That's going to be up to the Fed. You can't do that legislatively. You have to have some -- it's cumulative to a great extent. You can -- part of it is, obviously, some people (ph) are very big.
If you have -- and, among other things, they're going to get all the information. There's going to be much more transparency. So you're cumulating them. We have the technology to do it.
If a lot of fairly small entities make exactly the same bet with regard to trading things, then that can become systemically risky, and they presumably step in before that happens. And the answer is -- but that's going to have to be some flexibility as you go.
QUESTION:
Aside from the massive (ph) foreclosure program that you mentioned, what else do you expect to be in the plan that Secretary Geithner is expected to...
FRANK:
About?
QUESTION:
... financial stability, using the next TARP money.
FRANK:
By the way, I should add that one of the things you're going to see not from the Financial Services Committee (inaudible) Judiciary, there will be bankruptcy, I believe, the right to discharge primary residence.
But I think what's important is that, when we finally pass a banking bill -- and I think that's coming, and I think, frankly, the financial institutions should understand they had a chance to kill bankruptcy if they didn't want it by voluntarily getting rid of foreclosures and they didn't do that, so it's now coming.
But bankruptcy is not a fun thing for anybody, including the person going bankrupt, so what I want to have is a series of alternatives to bankruptcy and then bankruptcy will be there.
Beyond that, in financial stability, clearly, they are now thinking about how to use the TARP money over and above the foreclosures. You know, there was clearly -- even if you did $100 billion in foreclosure, there's another $250 billion or so. I don't -- I have not asked him exactly what he's thinking about. They are thinking about it, though.
You know, there are some difficult decisions we make. You know, look, again, you have conflicting things. If you're buying up bad assets, do you buy -- if you're buying them up as cheaply as possible, then you're not achieving the goal of getting the banks back in the credit business. If you pay too much, then you hurt the taxpayers. I mean, there's -- you know, there are a lot of conflicting things. And we'll -- I'm not demanding he tell us right away.
QUESTION:
(OFF-MIKE) fairly low interest rate mortgages to all (OFF-MIKE)
FRANK:
Well, we're probably going to talk about it. It's very expensive. I mean, I -- I -- we read the proposal there. We asked CBO, and you get very expensive numbers. So it depends on what you get.
Now, Marty Feldstein has talked about doing this in a way in which the homeowner trades recourse. Feldstein's point is that America, unlike most other parts of the world, have non-recourse mortgages in most places and that if you were to -- that the financial institution in return for recourse might voluntarily write things down.
But if you don't do that, if the federal government is writing it down, it becomes very, very expensive, you know, including for a lot of wealthy people. So I think that idea has to be refined before you go forward.
But the argument for it, of course, too, is that, if you just bring down mortgage rates in general, then people who are below water and have equity below their debt level can't take advantage of that.
But there are also, you know, large numbers of Americans who don't own. And if you're going to be spending that kind of money -- Dean Baker made a reasonable comment. You know, what about renters and people who are unemployed and people who've already lost their homes?
I think spending an enormous amount of money to help homeowners who make $180,000 a year -- that's a hard thing to justify when you've got people losing their health care making $30,000 a year.
QUESTION:
Today, Charles Schumer said he had some concerns with a bad bank idea. Do you have any views on a bad bank idea versus guaranteeing assets?
FRANK:
I am not enough of an expert there. I'll tell you this, with the Bush administration, there was a tension because I did not share enough of their philosophical views to be ready to defer. And, look, that was always a dilemma for us. We couldn't just say no to them (inaudible) disaster, but I didn't want to just say yes to them either.
I believe I'm more in sync with the Obama administration philosophically. And whether or not it's good bank, bad bank, ring, fence the assets or not, I'm ready -- I am ready to listen to both sets of arguments. The answer is not automatically clear to me in one case or another.
FRANK:
And I think we have, I think, very able people in the administration. Where there are philosophical issues, I will assert them, but, beyond that, I mean, well, you do have this dilemma that you don't want to drive out private capital altogether, because there is not enough public money, and shouldn't be, to do the whole thing.
On the other hand, you've got to protect taxpayers. You've got to disincentivize bad behavior. How you achieve that, I -- I'm ready to listen to them.
QUESTION:
(OFF-MIKE) on how much more money they might need? Did they...
FRANK:
No.
QUESTION:
... give you any indication in this regard?
QUESTION:
Can you comment a little about -- little about the...
FRANK:
(inaudible) I have thoughts. They are inarticulate, incoherent and un-ready for public discussion.
Yes.
QUESTION:
Could you talk a little bit about the hedge fund transparency legislation and what your thoughts are on that?
FRANK:
Well, it's got to be subsumed into everything else. I mean, it's not enough by itself. I will confess error here.
When Bill Donaldson, back when he was the head of the SEC, moved to get the hedge funds to register, and he was overturned by the court -- and I think the court was right. What Bill was doing was good public policy, but not great law, given the way it was.
I then filed a bill to give him that power, and I allowed myself to get backed away because the consensus at the time was so overwhelmingly antiregulatory that I didn't think the -- the bill was not going to go anywhere. So I deferred to the Presidential Working Group. I should have pushed it then.
But at this point, we're beyond that. Complete transparency for hedge funds has to be part of the systemic risk operation. I mean, when you get to, you know, how -- how much -- is there a systemic risk, you begin with the information to know that.
QUESTION:
(OFF-MIKE) securitizers?
FRANK:
Well -- oh, I -- we're going to re-pass our subprime bill fairly early in the year. We -- we're going to pass -- I think you came in a little late.
QUESTION:
Yes.
FRANK:
We're going to pass a tougher version of the subprime bill, I believe, that we passed in 2007 some time this spring.
QUESTION:
(OFF-MIKE)
FRANK:
At this point, yes, as to all mortgages, that's part of systemic risk. Yeah. I mean, the special problem was subprime mortgages.
With regard to all mortgages -- and one of the things I said again -- and you may not have been here -- is that one of the things we'd be talking about is do you say that any securitizer has to keep a certain percentage of the loan before securitizing.
That will all be -- that's all in the context of the systemic risk regulation.
QUESTION:
Can you be more specific about what kind of additional power the Fed gets if it's putting...
FRANK:
No, there's no point in being more specific now. It's the power that they need to diminish the likelihood of people taking such risks that they get us all in trouble and have to be bailed out.
You know, we're early in the process. There's no point in trying to guess where we'll wind up.
QUESTION:
Can you talk more about how you're thinking about preemption? Does the law itself need to be changed, or are you concerned about how it's being applied?
FRANK:
No, I think the -- it's how it could be applied. I don't think you need a statutory change if the controller is willing to do that.
Remember, as I understand the statute -- (inaudible) can check me -- I think we're talking about areas where the statute probably allows preemption but does not mandate it, and -- and in fact, if you -- you know, that -- with regard to federal-state, there are -- yeah -- and if you look at the opinion that upheld the most recent one, essentially what they said was we are deferring to the controller.
It was not a clear-cut decision. I forget the one that it was, but they -- they basically said the court in dealing with that one -- and it may have been a circuit court -- that this was in the discretion of the controller.
But you know, there were some -- there were some things that the courts have said are automatically federal and we can't share. There are some where the feds can't come in.
Here, the great bulk, I think, are -- it's permissive preemption, so that if a controller backed off that would be OK.
QUESTION:
Let me ask you about -- you talked in fairly general terms about executive compensation changes.
FRANK:
Right.
QUESTION:
The Congressional Oversight Panel recommended that the -- the TARP -- the prohibitions in the TARP legislation be extended to the entire -- all Wall Street (OFF-MIKE). How does that -- how does that suit you?
FRANK:
Oh, I (inaudible). They may not be enough. I -- I did think I -- I thought I said -- we're talking about executive compensation (inaudible) that are not only related to TARP.
When -- as part of the systemic risk regulation, you have to include executive compensation, because executive compensation as it now exists gives these incentives to take excessive risk.
So things like the -- which we put into it -- the claw-back and the -- the ban on golden parachutes, et cetera -- those are incentive issues, and we intend to address those as we do the systemic risk regulation.
So yes, we will be getting -- we're talking about all -- at least financial institutions where you -- where you've had this, but obviously, anywhere. And -- and that's what I said before.
Part of systemic risk is to set rules that diminish perverse incentives in compensation.
QUESTION:
(OFF-MIKE) legislation. Are those the ones you have in mind? Not just the (OFF-MIKE)
FRANK:
Well, we're going to -- I -- I will tell you this in general. Please don't expect me to tell you now what the bill's going to say after it's written, when we're going to go through hearings and markups and everything else.
I will tell you what the goals are. Obviously, we had a major say -- those were not Hank Paulson's ideas. Those came from the Congress. So those are indications of what we think.
But whether they're enough, whether they should be modified -- why would I want to lock in now when we're about to go through the whole legislative process?
FRANK:
Yeah.
QUESTION:
(OFF-MIKE) in the original TARP package, like a ban on bonuses?
FRANK:
Well, we can't ban all bonuses. Look, I mean, there are people who work at the basic level -- I mean, there may even be secretaries who get bonuses, who get Christmas bonuses. You cannot overdo this thing.
But, yes, they should have been...
QUESTION:
(OFF-MIKE)
FRANK:
What?
QUESTION:
(OFF-MIKE)
FRANK:
The secretary (inaudible) working $50,000 a year, they're not getting all this taxpayer money, and I am not ready to crack down on them. It's not their fault in these cases.
Plus, part of the problem was you need time to change it. The original notion of the salary was so much would be salary, so much is bonus. What you then have to say is then they get a higher salary. I mean, some of this is extra compensation for people who shouldn't be getting it.
Some (inaudible) it's like for some of these people the bonuses are like a commission. You wouldn't ban a commission or tips. Now, again, we're talking about people at the basic level. These things are not so easy that you can just use one word. They has to be more specificity.
But I do regret -- I mean, I expected Paulson to be tougher. I should have (inaudible) because he fought us every step of the way on executive compensation. And, yes, we should have been tougher.
Well, the best answer to give you is, look at what we wrote into the bill that passed the House in the second TARP. We've learned, and we would have put that into the first TARP if we'd have known what was going to happen.
QUESTION:
(OFF-MIKE) do you expect that that will come back in some other form?
FRANK:
Well, I think that can be done without legislation. And I hope credit unions should be -- they've been -- they were a good source of loans. I would hope that the secretary of the treasury would take care of those things without the need for legislation. He has the power.
Most of what we did in our TARP bill he could do on his own, not entirely, but we wanted to make sure that he did.
And I would say this: The bill hasn't passed in the Senate. People ask me, "Is he going to come back?" He's coming back. And I think the secretary -- I know the secretary understands that, if the bill that the House passed by a large margin is totally -- isn't fully complied with, not 100 percent, but -- but substantially, that the chances of getting more money when he comes back are going to be substantially diminished.
QUESTION:
Will credit rating firms be part of the legislation or is that...
(CROSSTALK)
FRANK:
What's that?
QUESTION:
Will credit rating firms be part of the new legislation?
FRANK:
You'll (ph) have to look at that in the risk -- in the risk -- systemic risk issue, yes, their role (ph).
I'm going to have to ask everybody who wasn't taken one before I go to anybody twice. Yes?
QUESTION:
You described the oversight measures in the TARP legislation as some of the problems you've had getting them through, but right now people don't know what the banks have done with their money...
(CROSSTALK)
FRANK:
... inspector general is asking. I don't know how -- I did answer that question.
QUESTION:
What I wanted to ask you was, public confidence in the TARP is inevitably undermined when right now people have no idea what the banks have done with their money.
FRANK:
Well, I just said that the inspector general is in the process demanding they do that. What answer could I possibly give to your question that would answer that? Or is that...
(CROSSTALK)
QUESTION:
... that right now people don't know what's happened to their money and whether that's...
(CROSSTALK)
FRANK:
Well, I thought I sort of made that clear. I said people are very angry.
I am lobbying the Office of Management and Budget to make sure that the inspector general can get that information. Does that suggest to you that I'm indifferent to the question?
I mean, I don't know. Do each of you have to ask your own question even if somebody else asked it? I mean, yes, there was a lot of oversight in there. The inspector general -- by the way, it was the Government Accountability Office which we asked to get in on the first day that earlier was the one -- the first confirmation we got that the Treasury wasn't even trying to find out who they were spending the money came from the oversight we wrote in from the Government Accountability Office and we insisted that they be there. And then we have been working on that since.
And the inspector general is now demanding that they give that information that they don't have. So if you're asking me, am I happy that he's doing it? I thought I said that I was, yes. And I think it's very important, and I talked to both the head of the Office of Management and Budget and the secretary of the treasury to say that no obstacles should be put in his way.
QUESTION:
What about bank regulation and restructuring the agencies (OFF-MIKE)
FRANK:
I said that'll come later.
QUESTION:
Oh, that comes later?
FRANK:
OCC, OTS...
(CROSSTALK)
FRANK:
I'm sorry. I must be unusually inarticulate today. We are doing systemic risk first. We will then get into, as I said, the questions of the interrelationship to the SEC and the CFTC, those things.
Now, to the extent that you're talking about systemic risk, they come earlier. But I think, you know, the bank -- the systemic risks have not come from sort of day-to-day banking activities, but from banks doing things like off-balance sheets that they (inaudible) and non-bank activity.
We're going to deal first with that. But, yes, the whole question of how you -- SEC, CFTC, OCC, OTS, we will get to those in the second shot, yes.
QUESTION:
Are you going to do CRA expansion? And does the credit crisis make it -- your job easier...
FRANK:
We will look at that, yeah. One of the things I -- I want to do is -- I think we have people on the right-wing who are trying desperately to avoid blaming deregulation, so they have argued that it's excessive regulation, including blaming the CRA.
One of the things for which I am grateful to the Bush administration is the unanimity with which every Bush bank regulator has said that's nonsense -- I mean, the notion that it was the CRA -- just absolute nonsense. John Dugan has said it, and Sheila Bair, and the Fed has said it, and Larry Lindsey has said it.
It just -- you know, especially since it's only the banks that are involved, and I think at this point we need to have a hearing just to lay -- lay that out.
Well, everybody asked one? Then we are going to -- no, I'm sorry, no -- no doubles on this one.
Anybody who hasn't asked a question?
We've gone an hour. Thank you all.
QUESTION:
Can I ask a question?
FRANK:
No, but you can announce a clarification (inaudible).
QUESTION:
I've got to try.
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