The congressman vs. the (banking) world.

Sunday, September 27, 2009

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.

Ezra Klein blogs about economics and domestic policy at www.washingtonpost.com/ezraklein.