John Hockenberry for The Takeaway: Joining us now is Rep. Barney Frank, one of the senior members of the House of Representatives and also chairman of the House Financial Services Committee, which is getting ready for a vote in the House on a bill that would cap compensation packages for bankers who participated in the federal bailout. First of all, Congressman, good morning.
Rep. Barney Frank: Good morning.
John Hockenberry: Let’s talk about your bill for a second, and then I just want to talk a little bit about the timing. You’ve got three parts of essentially a regulation of pay packages for people who participated in the bailout like we’ve seen.
Rep. Barney Frank: No. It’s for everybody.
John Hockenberry: It’s for everybody?
Rep. Barney Frank: The rules restricting people who are getting the government rescue money are already in place and they’re being administered. We actually began this before the rescue plan. This bill would apply in various ways to companies whether or not they take the bailout money. In fact, one concern people have is companies that have taken the money have benefited, have gotten back into a good position, and now are going ahead with the kind of pay we think is a problem. The second thing is, it doesn’t cap the pay. It deals with the structure of the pay. It does two things. First, for all public companies, and this is a bill we, frankly, tried to do in 2006, where we have the problem of too much money being paid, we don’t regard that as a government issue, but rather as a shareholder issue. The problem is that in corporations the pay is set by the board of directors for the CEO, they’re very closely connected, there’s no labor management relationship there, no arms-length relationship. You had a recent case in one company, 72 percent of the revenue was going to go to compensation. What we’re doing is borrowing something that has worked very well in England, it’s called “say-on-pay.” When the annual proxy form is sent out to shareholders, the company has to include the compensation packages of the top officials, and the shareholders can say whether they approve it or disapprove it. It’s not a binding vote, but…
John Hockenberry: If it’s not binding, how’s it going to do anything?
Rep. Barney Frank: If it were binding, it would prevent people from being paid at all. But boards of directors do not easily reject what shareholders say, and in fact the experience in England where they have this is, in the last year when a number of those packages have been voted down, they are adjusted downward. That’s combined with the Security Exchange Commission, making it easier for people to challenge members of the board of directors, the shareholders. What we found in England, and I think it’s about to go here, is a general inflation of, for instance, the investor advocacy groups, the shareholders defense groups. If you have that and it’s voted down, the board of directors will pay attention.
John Hockenberry: What do you say to the argument Congressman Frank, and I want to get Amy Holmes in here in a second, but what do you say to the argument that a lot of people are saying, including New York Attorney General Andrew Cuomo, the barn doors are open, the horses are gone, Congress is really lagging behind the compensation packages that continue to proliferate?
Rep. Barney Frank: In 2006, when the Democrats were still in the minority, I and my colleagues in the House Financial Services Committee, put this bill forward. Unfortunately, the Republicans controlled the House and voted not to be voted on. In 2007, before there was a TARP, we got it through the house as Democrats, the Senate was only 51-49 Democratic, Republicans opposed it, Republicans have been very much opposed to this, and it didn’t pass. So the answer is that we tried, those of us whoa re Democrats. Congress is not a unilateral, a monolithic institution, and the fact is that the Democrats have tried on this, the Republicans, it’s a party issue, have rejected it. As to the TARP, we did put some tough compensation restrictions into the TARP, but this is a philosophical difference with the Bush administration, they didn’t really believe in them and didn’t use them much. The Obama administration, has been much tougher with those and that’s, by the way, one of the reasons that several companies that received TARP money were so quick to pay it back. But the problem is that once they paid it back they’re under no restrictions, and we’re now again trying to put restrictions on them. And there’s a second piece that says, and I think this is going to be important, the problem we have is not simply that they pay large amounts, which if the shareholders want to pay out their money, they can do it, although we want to give them the tools to object. The way it happens is this, people get bonuses in many cases, the decision makers, and the bonuses work in a very interesting way. If the people who are eligible for bonuses take a gamble and it pays off, they make a lot of money. But if they take a gamble and it blows up in their faces, they don’t lose anything. So you’ve got an incentive from the compensation structure for people to take too much risk. And that’s where you get a systemic problem, because too much risk is taken and this is something that’s been observed by many people, Paul Volcker and even Ben Bernanke, and so the second part of our bill is to say to all financial companies, you’ll be subject to the Securities Exchange Commission reviewing your compensation packages, and if you have packages that work this way, heads you win and tails you break even, and therefore you’re going to take too much risk and cause problems not just for your company but for the whole economy, the SEC won’t let you do it.
Amy Holmes: Congressman, this is Amy Holmes, here. I think people can understand the idea of taking too much risk. But you said earlier they’re making too much money. Just a simple question, what number is too much?
Rep. Barney Frank: Whatever the shareholders say. As I tried to distinguish, the federal regulation will not go to amounts. This bill has two major parts. What we are saying is it’s up to the shareholders to decide, because it’s their money, and that’s why we have the say-on-pay. We do believe that there’s a lack of resistance by the board of directors to CEOs wanting more and more money. What we would say, if I were a shareholder, I would say that 72 percent of revenue going to compensation set by the people who are getting it is a mistake. But we don’t have a government law here. Our goal is to empower the shareholders, and what we’ve seen in England is they voted to say no. And that, again, we’ve worked closely with the advocates of investor groups.
Amy Holmes: Let me ask you this, are shareholders actually asking for this legislation? Is this a constituent group that is lobbying you for this?
Rep. Barney Frank: Yes. Shareholders, and this goes back, as I said, to 2006, it’s not so much individual shareholders, there are groups, Nell Minnow of the Corporate Library and people at the AFL-CIO pension fund, there are institutional investors, people who represent investor interest, and they have been strong supporters of this, and we have been working with them…
John Hockenberry: Pension funds and the like. Let’s shift gears here for a moment. The vote is going to take place today. You talked about the bill being a response to a Democratic majority suddenly in the House and Senate and you have the chance to take action on this bill. But it seems to me that the Obama strategy in dealing with health care this week is actually to shift toward the center, to appease the Blue Dog Democrats and the conservatives, not to push a progressive agenda in the first years of the Obama administration with a majority in both houses.
Rep. Barney Frank: I guess I don’t understand the relevance of the question, to what the committee I chair is trying to do. We are going a little beyond the Obama administration, but in fact what the Obama administration is trying to do, and I don’t work as much in health care as elsewhere, I’m a strong supporter of strong public option.
John Hockenberry: I’m just talking generally politically, it seems like it’s shaping out to be…
Rep. Barney Frank: In the first place, it’s not just one strategy. There are areas where, and it depends on where you get the votes. What’s happening in health care, and I have not been directly involved, I’m a little surprised that, I do think the compensation issue was a very important issue, and from what I understood I thought we were going to be talking more about that. There seems to be some confusion about what piece of it does what. The answer on health care is, I think those who think bipartisanship is an end in itself are wrong. I think it should be a means to passing a bill. Where you can get broad agreement, I think that’s a good thing, but I would not allow something you could otherwise pass to be diluted. One difference is, there does appear to be more political support for these restrictions on excessive risk-taking and giving the shareholders power than there is on health care. The answer is just a practical one. There are Democratic dissenters on what I would like to see done on health care that we don’t have in the area of compensation.
Amy Holmes: Congressman, let’s get to that, this idea of strategy with health care. I’m sure you’re aware there’s a YouTube video of you getting a lot of attention this week, where you say that if we get a good public option, it could lead to a single payer system, and that’s the best way to reach single payer. What do you say about that?
Rep. Barney Frank: Yes that’s true, because the argument is this, the argument from conservatives is a very contradictory one. One, if you have a public option, that will be a terrible thing for the society, it will be bad, it will undermine health care. And two, that it could lead to single payer. It could only lead to single payer if it’s very successful. I think a public option is a legitimate test of single payer, if I’m right. Single payer, by the way, is Medicare, and I think Medicare works much better than the alternatives that proceeded it. But the answer is, yes, if in fact the public option proves to be so popular, that will lead to a single payer system because more people will gravitate to it. If it turns out to be the problem the conservatives think, it won’t be. I think it’s a good way to test it.
John Hockenberry: Alright, Congressman, although it’s at odds with the political dynamics typically in Washington, start small and get bigger, it’s harder to do big things in the second half of the first term. Representative Barney Frank, thanks so much for joining us.