Congressman Barney Frank Wants to Knock Banks Down to Size
Friday, June 19, 2009SUSIE GHARIB: A key architect of financial regulatory reform tells NIGHTLY BUSINESS REPORT he plans to make it very tough for a bank to get too big to fail. House Financial Services Committee Chairman Barney Frank wants to raise capital requirements for the largest banks to limit their growth. He says those standards may go up on a sliding scale rising faster as banks get bigger. That could mean dramatic changes for the banking industry and the U.S. economy. Washington bureau chief Darren Gersh talked with Frank. They began by discussing how reform will reduce risks from outside the traditional banking system.
FRANK: With this current situation now, with the technology and the great pools of money that are available outside the banking system, that's the deal. Until fairly recently, if you wanted to lend a lot of money, you had to get it from bank deposits. We have whole new sources of liquidity from the Middle East or from China or from various other places. We have a lending system now, securitization whereby years ago if I lent you money, I waited for to you pay me back, I was very careful about who I lent it to. If I'm going to lend money to a lot of people and sell that loan to a lot of other people, surprise, surprise, I'm less careful.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: One of the people we had on our program recently said this proposal didn't do enough on that, didn't do enough on the securitization pools and the things that are outside the banking system. Do you agree with that?
FRANK: No. In fact, one thing we are doing that we hadn't done before, we are requiring for the first time legally in American economics history -- if it goes through and it's an idea we pushed here in the House -- that you can no longer securitize 100 percent of everything, that you have to hold back some part of it.
GERSH: So as long as they sell out, they'll keep --
FRANK: They'll have to keep. Now we, in the sub-prime legislation, we put 5 percent in that. That may be too low, but it may be enough -- securitization is a good thing. If I lend money and I can then sell the right to be repaid, I can re-lend the money. I can lend more money if the loans are good. The problem is, when I don't have any penalty if the loans were bad, I'm not going to be as careful. So we are requiring risk retention. The metaphor is skin in the game and this bill does do that. In some cases, by the way, we will say it's only a 5 percent hold back, but it's the first 5 percent. In other words, if those loans lose 5 percent, you're the one who loses all of it and because we know this, once we set up a set of rules that say everybody is now regulated, some very smart people will come up with something that doesn't fit these rules and the regulatory body will then have the power to say, welcome to the world. That was very creative. You're now regulated by this one or that one. GERSH: Where else do you want to go further than the administration went?
FRANK: I did want to go further than they did. By the way we're not going further now because they accepted our initiative on securtization. This was not in the original plan, but there will be a risk-retention requirement. Secondly, executive compensation -- there are two aspects of this. One, some of these people get way more money than is rationale. But if it's not my money, I'm not going to have a say in it. We do want to give the shareholders the say. In turns out that boards of directors and CEOs who work very closely together, you can't have this kind of an intimate working relationship where they picked each other and they work together and then one day you're the labor and management and at arm's length. It doesn't work. So we want the shareholders once a year to be able to vote and say, too much, not enough.
GERSH: I understand the proposal goes further and says the regulators are going to put principles in and that they're going to actually go in there --
FRANK: That's the part that we have, that we take credit for. The initial plan on compensation was that they would strengthen the compensation committees of boards of directors. I don't think that's possible. I think the boards of directors will never be able to take that relationship at arm's length. So we argued for and the administration has now picked up our proposal -- exactly what you said. The Security and Exchange Commission will be mandated to say, you cannot have a compensation system in which if people take big risks and they pay off they make a lot of money, but if they take big risks and they blow up they don't lose anything. That's the problem, not the dollar amount here but the incentive to take risks. If I told you that if you took a lot of risk and every time the risk paid off, you'd get richer but when the risk just absolutely dismally failed, you would suffer no penalty, you would have to be pretty stupid not to take a lot more risk than was rational.
GERSH: It seems like this proposal by creating these large institutions that are considered so big they warrant special regulatory attention. There's a penalty for getting too big.
FRANK: Yes and that's very important. I'm glad you said that. People have said, oh, you're going to get into this thing where they'll be too big to fail. We're going to make it very tough to be that big because we don't want this situation where you have these very large institutions, the failure of which causes a cataclysm. And in fact, I spoke to the secretary of the Treasury early this morning and said among the things we want is to say that if you are one of these very large institutions, first of all, you have to have more capital. You will be more tightly restrained. But beyond that, if you are going to collapse, if it happens, there are going to be some severe penalties. I want to say that if that does happen with one of these large institutions that we make sure the shareholders there have no equity left, that the CEO is fired. There have to be disincentives. Some people will say, well, they'll be an advantage. You'll be seen as quote, too big to fail, end quote and then and other people will think well I'll put my money there because it will always be safe and we have to counter that. We have to put a lot of disincentives into size.
GERSH: Chairman Frank, thank you for your time.
FRANK: You're welcome.
GHARIB: You can see more of Darren's interview with Congressman Frank on our website, NBR on pbs.org.
