The following is an excellent excerpt from the book “FRANK: A Life in Politics From the Great Society to Same-Sex Marriage” by Barney Frank from Chapter 10 “Reforming Wall Street” on page 296 and I quote: “Thankfully, I got to spend some relatively unharried time with Jim between the postelection dispute over mortgage relief and the first serious legislative business of the new Congress. Even so, we remained in the spotlight—with sometimes unforeseen consequences.
In December, Lesley Stahl profiled me for 60 Minutes. For the program, her crew had taped my appearance at a Christmas telethon run by a community action organization in Fall River. As we sat on the couch watching the broadcast, we saw footage of Jim, in his usual protective fashion, doing some needed last-minute repairs to my hair and tie before I went on camera. “The man helping the congressman,” Stahl noted when she reappeared, “was not a constituent. That was his boyfriend, Jim Ready.” Jim had not hidden his sexuality from the people he had been associating with for the past fifteen years, but he hadn’t had occasion to announce it to everyone he had ever known. As of that moment, he wouldn’t have to.
Jim was surprised by the reference, as were others—for example, his teammates from his hockey-playing days and some of his fellow surfers and high school classmates. In fairness to Stahl, she had asked him if it was okay if she mentioned his name, and being new to television, he had said yes without realizing how prominent the “mention” would be. That prominence was elevated by the timing of the segment. It led off a program that came on right after a New England Patriots game, generating a huge audience in our area. Jim’s instant, entirely understandable shock soon became bemused acceptance, and then, to my relief, the enjoyment of the surprised but very supportive reaction of people from his past. My only suggestion was that we immediately call his parents, so that in case they had not been watching, they wouldn’t wonder why their friends were talking about me and Jim in the coming days.
Obama’s inauguration followed soon after. As a committee chairman, I was seated prominently at the front of the platform. Jim was also onstage, seated with the spouses of the other chairs and ranking minority members. At the close of the ceremony, we went to the luncheon—as opposed to lunch—in the Capitol for all of the important people in our government, along with other prominent guests. It was not a first—my late colleague Gerry Studds had brought his partner to the Clinton inauguration when he chaired the House Merchant Marine and Fisheries Committee. But it drew the most public attention, given my post-TARP high profile, and the post-1993 role of social media.
Unleashing our inner tourist, we made sure to memorialize the day. Two photos in particular are prominently displayed in my office. Jim’s seatmate at the ceremony obligingly took a picture of him standing in the aisle during the ceremony, with the new president giving his address in the background. (“Gee, Uncle Jimmy,” his eight-year-old nephew Kyle rebuked him. “You weren’t paying attention.”) and in a reminder that partisanship in Congress is not always personal, the photographer was Congressman Paul Ryan’s wife, Janna. The other picture was taken after Jim had asked Obama for a hug. The president inscribed it, “To Jimmy—showing you love for keeping Barney under control!
When the inauguration was over, so was my recess. If I had been able to choose the two-and-a-half year stretch of my life in which I would work the hardest, with the most at stake, it would not have been as I was turning seventy. But it was what it was.
In the wake of the crisis, Chris Dodd and I agreed on the need for comprehensive regulation of the financial industry. I began the 2009 legislative session eager to get started on this momentous task. But it took a while. As Robert Kaiser correctly quotes me in his book on our bill, Act of Congress, we made slow progress because 2008 refused to end.
In March, the country learned that AIG was about to pay $165 million in employee bonuses. Just as I have sometimes found the use of metaphors unavoidable, in this case I can think of no adequate substitute for a cliché; all hell broke loose. Infuriatingly to the public, the beneficiaries of this largesse were the employees of its Financial Products unit, precisely the ones who had incurred the $170 billion debt that had precipitated the crisis. Even more infuriating, there was nothing we could legally do about it.
In his memoir Stress Test, Tim Geithner, who’d become treasury secretary by then, reports that he called Ed Liddy, the new post-bailout CEO of AIG, to remonstrate. Liddy’s response, apparently and very regrettably true, was that the company had signed binding, unshakable contracts, and that if it reneged on them, the employees would sue and win. Liddy was right on the law, but that only made the situation worse on the political side. Voters had seen the executive and legislative branches come together in the recent past to do a lot of things that had no precedent—and that some commentators said were unconstitutional. A large majority of them were wholly unprepared to accept our explanation that we had suddenly become legally impotent. The more popular view was that the political establishment was demonstrating an outrageous double standard: Take extraordinary steps to aid large financial institutions but hide behind dusty legal rules to avoid penalizing their egregious misbehavior.
Never before or since have I seen vehement, universal public anger reach such a white-hot level. I feared that we were in danger of losing our capacity to govern—not just to enact a rational financial reform bill but also to pass any legislation that required public trust in elected officials. The depth of my concern is best illustrated by my response to the AIG flare-up, which included the single stupidest thing I have ever done in my official life.
When Paul Kanjorski, the second-ranking Democrat on our committee, learned of the bonuses, he too called Liddy and then called a hearing of the subcommittee he chaired, which had jurisdiction over AIG. I had the authority to supercede him with a full committee meeting, but he had taken the lead on this issue and was entitled to chair the session. I attended as a member, and when it was my turn to ask questions, I screwed up big time. I asked Liddy to give us the names of the bonus recipients and threatened to initiate a subpoena if he didn’t. He reacted with as much horror as a dignified CEO could exhibit in a formal hearing. He quite rightly refused, pointing out that there had already been death threats leveled against those involved.
In my concededly inadequate defense, I was motivated only partially by my own indignation. As committee chairman, I bore considerable responsibility for the difficult political position of members who had voted for a TARP bill, which included funds for AIG. Even more important, I knew I would be asking them to cast further difficult votes. Those votes would be punitive enough to anger the financial firms whose support many coveted. But they would not be sufficiently punitive to suit the mood of an electorate which, at that point, reminded me of the villagers in a Frankenstein movie who march on the laboratory with pitchforks and torches. In demanding names, I sought to reassure committee members and their constituents that I shared their fury.
Fortunately, wiser heads prevailed, especially on the committee staff. I was never better served by having aides who’d known me long enough and well enough to tell me how badly mistaken I had been. Realizing my error, I wrote to federal and state law enforcement officials telling them that I would drop my demand for names unless I could be reassured that it would not endanger anyone. As I expected—and hoped—I got no such reassurances and used this to justify withdrawing my threat of a subpoena. It was an admittedly transparent ruse, and it did not save much face, but it did give me a way to save my butt.
Chris Dodd fared less well, in a classic reaffirmation that no good deed goes unpunished. With great foresight and political judgment, he had successfully added a provision to the Economic Recovery Act capping the bonuses that could be paid out by TARP recipients. His provision also authorized the treasury to claw back bonuses that were already paid. When the Treasury Department correctly commented that this last piece would be unconstitutional and could lead to litigation that would jeopardize the entire idea, he agreed to make the restrictions prospective only.
When the AIG bonuses became public, Dodd was blamed for enabling them. In fact, his amendment was an important safeguard against future abuses. Without it, there would have been no anti-bonus language at all. But in the irrationally angry atmosphere that prevailed, the accusation stuck and became a political problem as his reelection approached. (A word here about political semantics. Most people know the Recovery Act as the “stimulus bill.” When we were considering it, our leadership consulted some public opinion research and deemed “Recovery” a more appealing tittle than “Stimulus.” I found this counterintuitive, since everyone I know prefers being stimulated to recovering, but this was not in my committee’s jurisdiction, so no one asked me.)
Feeling even more heat from fellow Democrats than I was, Pelosi acted promptly. She had the Ways and Means Committee put a bill on the floor levying a retroactive 90 percent tax on any high-level bonuses given out by TARP recipients—singling out AIG alone would have added a clearly unconstitutional bill of attainder to an already constitutionally dubious proposal. The proposed taxation of non-AIG employees made it easy for most Republicans to vote against the bill, but it did give Democrats a chance to show our constituents that our hearts (if not our minds) were in the right place. I didn’t like the idea, but I knew that my voting no would attract a great deal of attention, seriously undermine the credibility of the effort, and diminish the political capital with my Democratic colleagues that I would need to get a financial reform bill adopted. A combination of the bill’s overreach and an abatement in public fury allowed the Senate leadership to ignore the tax proposal with little outcry.
But abatement is not disappearance. AIG’s serial irresponsibility—running up enormous debts that it could not pay, then giving bonuses to the people responsible—inflicted serious political damage on our system immediately, and in the long run. I have no checked public opinion polls before and after March 2009, but I would be surprised if public confidence in government did not drop at that time. Even though most people do not recall the specifics of his fiasco today, the deep resentment it triggered remains embedded in their minds. I am convinced it is one of the reasons that TARP, which staved off total economic collapse and did not end up costing taxpayers, remains so reviled. Indeed, it is the most worldly unpopular highly successful major program in America’s history.
Compounding the problem from my standpoint, the onus of public anger fell disproportionately and unfairly on the Democrats. Everything but the announcement of the bonuses happened while Bush was in power, and it was the Bush administration that resisted our effort to put stronger compensation restrictions in the original bill. But we were in power when the public learned of AIG’s payments, and Chris Dodd was blamed for not preventing them, even though he’d tried the hardest to do just that. Additionally, and frustratingly, I came to realize that for much of the public, we are in power even when we aren’t. The fact that we are the progovernemnt party merges in some voters’ minds with the notion that we are the government—all of the time.
Once the AIG firestorm subsided, I was at last able to turn to comprehensive financial reform. The events of 2008 had made the need for a new system abundantly clear. It is true that the flood of imprudently granted mortgages was a major reason for the crisis, but our problems went far beyond that. The failure of Bear Stearns and the messy ad hoc response to it demonstrated that we needed rules to keep large banks and investment firms from incurring obligations they couldn’t meet. If such firms failed nonetheless, we would also need a legal framework to keep that failure from destabilizing the entire system.
As I understood it, the financial industry’s dramatically changed business model required equally far-reaching revisions in the way that industry was regulated. This recognition brought out my inner amateur economic historian. What we were experiencing, I concluded, was a third iteration of the need to reinvent regulation to fit a transformed private sector. In 1850, there were no large economic enterprises in the United States; our economy was essentially regional. By 1890, large nationwide businesses had been formed—steel, coal, oil, and railroad corporations became immensely powerful, and often colluded with each other. New regulation followed, first with the Sherman Antitrust Act of 1890, then after a lag during the conservative administrations of Grover Cleveland and William McKinley, in greater volume under Theodore Roosevelt, William Howard Taft, and Woodrow Wilson. By the end of that period, we had the Federal Trade Commission, the Interstate Commerce Commission, a national food and drug law, the Clayton antitrust Act, the Federal Reserve System, and more. A new set of rules was created to govern the new national economy.
One set of innovations usually calls forth another. With large enterprises now dominating the economy, the stock market took on a new, greatly enhanced role. But there were no new rules for new forms of financing. Thus the New Deal set about establishing institutions to contain finance capitalism within reasonable bounds. Federal Deposit Insurance, administered by the new Federal Deposit Insurance Commission, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Investment Company Act governing mutual funds were Franklin Delano Roosevelt’s response.
This set of rules worked very well for fifty years. Then came the great changes that I described earlier: securitization, shadow banking, derivatives, the proliferation of financial engineering. This time, the ideology of deregulation had taken so strong a grip on our politics that the appropriate updated regulations were delayed for more than twenty-five years. Our great mistake was not deregulation but non-regulation. We waited too long to put new rules in place. In some cases, we even took pains to prevent new rules from being established. The Commodity Futures Modernization Act of 2000 exempted many derivatives from scrutiny.
My view of how to create a new regulatory framework had one central theme. The transformative innovations that began in the 1980s had weakened the linkage between risk and responsibility. Our job was to reestablish it. With very few exceptions, it was neither our intention, nor the effect of the legislation, to forbid the private sector from conducting transactions that had become part of the financial system. We did not want to inhibit institutions from making investments, placing bets, or engaging in speculation. We did want to ensure that when they carried out these activities they would remain responsible for at least a part of any losses and have the financial resources to meet that responsibility.
As we embarked on our effort, the Obama administration drew up an initial draft, reflecting the broad consensus that existed among those of us who had worked together since the financial crisis exploded. Given the concentration of expertise in the executive branch, and the existence of that consensus, we were happy to take it as a starting point. Dodd’s Banking committee and the Financial Services Committee I chaired would each mark it up, make changes, and proceed from there.
There were several major components of the bill. First, in tandem with the actions of international regulators who worked through the Basel Accords, it would raise capital requirements for banks and nonbanks alike. This additional capital would serve as a cushion against losses resulting from misjudgments or adverse economic conditions.
Second, and most important in my mind, we could require entities that packaged loans made by others and sold them as securities to retain some of the risk. They would keep “skin in the game.” If the original loans defaulted, they would pay a price. This measure, we hoped, would correct the practices most directly responsible for the crisis.”
(THE BIG BONUSES THAT THE CEOs GOT, ALONG WITH THE TARP BAILOUT, JUST SHOWED HOW GREEDY THE BIG INVESTMENT BANKERS WERE. BANKS SHOULD HAVE LOBBIED TO STRENGTHEN THE DODD-FRANK BILL.
THE FOLLOWING IS SOMETHING ABOUT THE AUTHOR AND I QUOTE:
BARNEY FRANK represented the Fourth Congressional District of Massachusetts for more than three decades and chaired the House Financial Services Committee from 2007 to 2011. He is a regular commentator on MSNBC and divides his time between a home with his husband near Portland, Maine, and his apartment in Newton, Massachusetts.”
LaVern Isely, Progressive, Independent, Overtaxed Middle Class Taxpayer and Public Citizen and AARP Members