House Financial Services Committee Chairman Barney Frank Shares His Take on Blackstone
Thursday, June 21, 2007SUSIE GHARIB: That Blackstone deal and hedge fund woes are high on the agenda in Washington these days. House Financial Services Committee Chairman Barney Frank is closely following the unwinding of those Bear Stearns hedge funds and their sub-prime portfolios. Washington bureau chief Darren Gersh talked with Frank today and began by asking if he's concerned by the news from Wall Street.
BARNEY FRANK, CHAIRMAN, FINANCIAL SERVICES COMMITTEE: I think frankly it strengthens the argument that many of us on our side have been making, some Republicans too, for legislating going forward to give some liability to the secondary market. If I can originate this loan and then sell it, I'm less worried about its long-term sustainability. On the other hand, the people who bought the loans have been saying I didn't make that loan. It's not my fault if there's a problem. And we've been saying that we wanted some liability to be attached. It had to be clearly defined so you don't kill the market to the purchase of this.
Now I think the Bear Stearns thing strengthens the argument that people said, well, if you put any liability on the purchases, you might kill that market. But that market's dying of its own right now. What I think strengthens this is an argument that if we set some reasonable rules for what has to be done before you can sell that stuff, that we may be strengthening the market, that we may be able to give the potential purchasers of these securities a degree of confidence that the Bear Stearns debacle was going to undermine.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: But the main concern you have is liability for predatory loans correct and how would you define that? So in other words if somebody sold a predatory loan to somebody and then a Wall Street bank or firm packaged it and sold it off, the Wall Street firm could be liable for that loan, correct?
FRANK: With much more specificity than your question implies, but that's exactly what I'm talking about. We are I hope we're going to be able to say that some liability will attached to the purchase of those loans. Not as much as the originator. We will be much more stringent in the rules we apply to the originator. But I do think it's important for us to say to the people who are going to be buying those loans, please don't think that you can buy anything that comes down the pike without any regard to how it was done and escape liability because that diminishes responsibility throughout the system.
GERSH: This gets to a different issue, which I've been told about, which is that when these pools of sub-prime loans are put together, packaged and sold off in financial market, that the people who buy them don't have a lot of transparency in terms of what's in the pool that they're buying, that they rely on credit rating agencies. They rely on investment bankers who tell them this is what's going on. Two questions, do you think there needs to be more transparency in that market when people buy these things and also are the credit rating agencies and investment bankers doing their job?
FRANK: We looked at the credit rating agencies and there's some concern that they may not have been aggressive enough. As to transparency, we're not talking here about poor widows and uneducated workers buying these things. They're bought by sophisticated people. I'm not on the whole (ph) in the business of trying to protect sophisticated people from other sophisticated people. I don't think we have the resources to do that. I think, as I said, that this strengthens our argument, the Bear Stearns situation, for putting some safeguards into this. That is, I would like it to be that when you buy a package of sub-prime loans or a package including some sub-prime loans a year from now, you will have some assurance that the packager of those loans did some things to make sure that those were not bad loans and that's what we want to do is to get them some obligation to vet those loans.
GERSH: Also today the Blackstone IPO priced. Some of your colleagues want to change the way that kind of partnership in the future would be taxed and the way that kind of a deal would be taxed. People argue that would really wreck the market for these kinds of IPOs and would send a chilling signal out into the IPO market. What do you think of that argument?
FRANK: That it's nonsense, it's self-serving nonsense. I'm all for changing the tax code. In the first place, the notion that they are doing society some great favor by taking private equity public, it's up to them, if they want to do it, fine. If they don't want to do it, also fine. The notion that there would be some great public benefit loss is quite minimal. Secondly, if you look at the enormous amount of money that people are making here, I do not think the additional taxation would deter it. They would still be making very large amounts of money and if diminishes some, well, maybe then the deals weren't so valuable.
GERSH: Congressman Frank, thank you for your time.
FRANK: You're welcome.
