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 304 and I quote: “Third, we would attempt to limit those “financial weapons of mass destruction” known as derivatives. We directed the regulation, particularly the Commodity Futures Trading Commission, to promulgate rules that would transform the $400 trillion derivatives market from one dominated by opaque individual deals between parties with prices known only to the participants into a much more open and transparent system.
The loud objections to our proposal reminded me that for many businesspeople in America, competition is a great spectator sport. They like to watch others engage in it, but they can readily produce reasons why it would be harmful in their own lines of work. When I met with two insurance company representatives, the younger of the two complained that if we made his company publish the price they planned to charge for a given deal, some other company could offer their counterparty a lower price. His older colleague quickly intervened to assure me that this explicitly anticompetitive argument was not their basis for opposing the rule. Further discussion made it clear that he objected to voicing the argument so openly, not its substance.
The reform bill also contained a Consumer Financial Protection Bureau—an idea that had been supported most prominently by Elizabeth Warren. The CFPB would take all the consumer protection functions away from all the various financial regulatory agencies and consolidate them into one independent bureau whose sole function would be to protect consumers in financial transactions. It would be lodged in the Federal Reserve for organizational purposes but granted complete independence from any Fed interference with its policies, its personnel, or its funding. Senator Dodd was the one who decided on this arrangement, and Elizabeth Warren and I agreed that it fully protected the CFPB’s mission.
I am especially proud of one other provision—one I freely acknowledge had no connection to the crisis. It gratified me immensely when Bono, the U2 singer who has done so much to combat poverty, disease, and deprivation in the poorer parts of the world, publicly thanked me for including the section known as “publish what you pay.” This part of the law requires any American company that is engaged in resource extraction in any country to make public all the money it has paid to any source, official or unofficial, in the country where the extraction takes place. The scandal of corrupt rulers profiting handsomely from such activities while their people get no benefit seemed to me an entirely legitimate subject for our attention.
Adopting a new framework for the operation of financial markets was one of the major tasks we faced in 2009. But what if the worst happened, and even under the new rules a major firm was in peril? Our other task was to find a better way of coping with financial institutions that could no longer operate. Federal officials should not have to choose between letting a major institution go bankrupt or propping it up—both terrible options. Bankruptcy meant letting the insolvent firm’s unpaid debts course through the economy, leaving further financial damage in their wake. But bailouts also had serious defects. They created moral hazard, effectively protecting the institution’s leaders and business partners from the consequences of its irresponsibility. The other problem with this approach was that it required using public—that is, taxpayer—money to protect the economy from reckless private sector behavior. This was rightly a very unpopular thing to do. Neither the abrupt, unbuffered bankruptcy of Lehman nor the $160 billion taxpayer lifeline to AIG was an acceptable precedent for the future.
And so the bill provided a third way, which was called the Orderly Liquidation Authority. Under its terms, if an institution’s imminent failure threatens to establish the entire financial system, the institution is put into receivership, under the direction of the FDIC. The officers and directors are dismissed, and any funds available to the entity are used to reduce its indebtedness. If the institution’s debts remain dangerous, the receiver can advance funds—the minimum required to prevent a crisis. The secretary of the treasury is then mandated to recover those funds by assessing a special tax on financial institutions with $50 billion or more in assets.
To be explicit, we were not offering anyone a bailout. In a case like this, the institution fails. Unlike AIG, it is no longer a functioning private entity: Its officers are dismissed, its board is dissolved, and the shareholders’ equity is wiped out. Unlike Lehman, however, the government could pay off some of the firm’s debts to prevent its failure from precipitating a chain reaction of other failures. Other large financial institutions would then foot the bill for paying off those debts. The rationale for his was clear. These institutions benefit from the increased assurances of a stable system and should bear the cost of sustaining it.
The law makes this explicit in unusually straightforward statutory language:
“SEC. 214. PROHIBITION ON TAXPAYER FUNDING.
(a) Liquidation Required.–All financial companies put
into receivership under this title shall be liquidated. No tax
payer funds shall be used to prevent the liquidation of any
financial company under this title.
(b) Recovery of Funds.–All funds expended in the liquidation
of a financial company under this title shall be recovered
from the disposition of assets of such financial company,
or shall be the responsibility of the financial sector, through
© No Losses to Taxpayers.–Taxpayers shall bear no
losses from the exercise of any authority under this title.”
Despite the bill’s very clear, legally binding directives, some critics insisted that taxpayer-funded bailouts were permitted and “too big to fail” was alive and well. Some of these critics simply ignored what the law said. Others took a different, and an even less intelligent, tack. According to them, even though the law specifically prohibits the Treasury and Federal Reserve from advancing funds to keep an institution alive, if a major financial institution were to become insolvent, there would be irresistible political pressure to violate federal law and intervene. My question to those who make this case is a simple one: “On what planet have you spent your time since 2008?” Certainly no cogent—even coherent—observer of the backlash against TARP could imagine voters insisting that one more big, failing bank receive a taxpayer bailout and a new lease on life.
In fact, a more realistic critique came from a few people on the opposite side of the issue, including Geithner, who feared that we’d shut the door on even temporary bailouts too tightly. Of course, there were also some who argued that the only way to end “too big to fail” was to keep institutions from getting too big. In this view, the only true safeguard is to break up the banks. Since the collapse of Lehman Brothers precipitated the crash, this must mean that no firm should be as large as Lehman was in 2008. This is an intellectually legitimate argument, but it needs much more fleshing out by its proponents. What would be the consequences of drastically reducing the size of ten or more major institutions within a short time frame? Should the federal government mandate these reductions? By what method? Will this put American institutions at a competitive disadvantage internationally? I have no objection in principle to the argument that smaller is better, but I have not seen any practical plan for downsizing.
As our committees marked up the bill, the legislative process went more smoothly than I had expected in both bodies. We knew we’d have to make modifications to the Obama administration’s original draft, both for reasons of substance and to make sure we could get the legislation passed. Fortunately, the liberal organizations were unusually well organized and helpful with both the substance and the politics. A group called Americans for Financial Reform brought together a variety of experts with whom we worked closely throughout the process. On the creation of the Consumer Financial Protection Bureau, I formed a mutually trusting relationship with Elizabeth Warren, which gave us the best possible source of wisdom on the subject. Interestingly, there were large differences among the administration officials involved, an we often found one of those officials lobbying us against the administration’s view.
Our task was also made easier by the unaccommodating posture of the House Republicans. Spencer Bachus’s unhappy experience when he worked with us on subprime lending in 2007, and the House Republicans’ angry response to the Bush administration’s TARP effort, proved to be an accurate predictor of the Republican reaction to a reform bill. With very few exceptions—3 out of 178—they were against it.
This meant that the specifics of the legislation had to be hashed out entirely among Democrats. It also meant I would have to get a committee majority entirely from the same source. Fortunately for the bill, and my mental health, the 2008 elections had greatly increased the House Democratic majority. The committee now had forty-two Democrats to twenty-nine Republicans. For the next two years, I got to sleep by counting Democrats, relaxing only when I could get to thirty-six. Both sleep and passage would have come more easily if I could have substituted sheep.
With a large Democratic majority, the full support of the administration, and the widely perceived need to make the financial system much less risky, I was confident that we would send a very strong bill to the Senate by the end of the year. I had the benefit of a first-rate staff. Jeanne Roslanowick, whom I’d inherited from John LaFalce, had a perfect combination of substantive knowledge, political judgment, and parliamentary understanding. Recognizing the importance of people who knew me well enough to tell me when I was wrong, I added to the staff two near contemporaries: Dave Smith, an economist who’d worked for Ted Kennedy and the AFL-CIO, and Jim Segel, my old Massachusetts friend. They would both prove indispensable to the work ahead.
There was one immediate problem, however. Jurisdictional disputes between committees show Congress at its worst. Some commentators mistakenly attribute these disputes to members’ hunger for the campaign contributions that come with shepherding significant bills. In the broad scheme of things, this is a much less important factor than institutional pride, ego, and the strong desire to influence policy outcomes. Cynicism to the contrary, job satisfaction is, for most members most of the time, as significant a motivation as job retention. At any given time, no more than 20 percent of House members face any serious reelection threat, and few issues, by themselves, have a measurable impact on members’ chances of survival. Representatives who have chosen to join a committee with jurisdiction over a subject they care deeply about naturally resist moves that would substantially reduce that jurisdiction.
As we began to work on our bill, the first big obstacle turned out to be the messy status of derivatives. Before the latest innovations in the financial system, they had been used to protect businesses from volatility in the prices of physical commodities like wheat or oil. They were regulated—lightly–by the Commodity Futures Trading Commission. Because many of these commodities were agricultural products, jurisdiction over the CFTC belonged to the Agriculture Committee. With the introduction of financial derivatives, the Securities and Exchange Commission, which is overseen by the Financial Services Committee, acquired an overlapping authority. The logical response to this would have been to merge the two commissions and create one combined entity to regulate all derivatives. Logic never had a chance. Agriculture is politically rooted in the Midwest, the South, and some of the mountain states. Financial activity is at its most influential in the Northeast, with an outpost in Chicago and some presence in California. Since the days of William Jennings Bryan’s “Cross of Gold” speech, the country has made progress in healing the former regions’ antagonism for the latter. But the divide remains strong. Given the greater size and scope of the SEC, joining the two commissions would have been greeted in agricultural areas with all the enthusiasm of Daniel entering the lions’ den.
And so, as we began deliberating on the bill, my first task was to reach an agreement with the Agriculture Committee, particularly its chairman, Minnesota representative Collin Peterson. He is a very good legislator, well-informed on substance and skillful in dealing with colleagues. We also shared the conviction that constraining freewheeling derivatives trading was an essential part of financial reform.
Peterson is also one of the few Democrats who vote consistently against LGBT equality. Indeed, he would become the only Democrat to oppose us who comes from a state that voted in favor of marriage in a 2012 referendum. I regretted his views and made a point of ignoring them in the hundreds of conversations we had throughout 2009 and 2010. Our successful collaboration allowed rural Democrats and those representing financial centers to pass a bill. To those who would take that collaboration for granted, I note that in 2014, Trey Gowdy, a Tea Party Republican, explained that even though he and many of his colleagues agreed with Attorney General Holder on the desirability of reducing long sentences for drug users, they could not work with him on the issue—or, based on this logic, on any other issue—because of his support for same-sex marriage.
As it turned out, there would be many other intraparty squabbles ahead. I soon learned that opposition to the Consumer Financial Protection Bureau from moderate and conservative Democrats was stronger than I’d anticipated. I had hoped to nullify these objections when I rejected the proposed administration requirement that any business offering a financial product must include what was informally described as a “plain vanilla” version of that product. I did not see how you could insist on a plain vanilla version of a mortgage without prescribing interest rates and other sensitive terms that I did not want the government to prescribe. I believed then and still do that we should prevent bad things from happening—and having done that, leave the working out of other arrangements to the market.
The impatience with overly complex products and fine print was well-taken, but the idea was wholly unworkable. Unless we were willing to break our rule against fixing prices in the bill, there was no way to ensure that the mandatory offering was a real choice for consumers. In addition, deciding what was and was not unnecessary complexity would require intruding too far into the affairs of the affected businesses. (It was also unwisely named. I could not resist pointing out to administration advocates that highlighting the virtue of a product by labeling it “plain vanilla” was hardly the best way to promote it to a committee that had more African American and Hispanic members than any other in the House.)”
(PROBABLY THE BEST PART OF THE DODD-FRANK BILL WAS THE CONSUMER FINANCIAL PROTECTION BUREAU, SET-UP BY ELIZABETH WARREN AND GETTING REGULATIONS OF DERIVATIVES BEING PROMOTED BY GARY GENSLER OF THE COMMODITY FUTURES TRADING COMMISSION. ALSO THE VOLCKER RULE WAS DEBATED.
LaVern Isely, Progressive, Independent, Overtaxed Middle Class Taxpayer and Public Citizen and AARP Members