Celeste Headlee for The Takeaway: Well one of the things that they're discussing at the G-20 summit in Pittsburgh is bank reform. We heard that there is a deal to possibly limit bank salaries, but here in the United States Congressman Barney Frank is weighing all the different options for regulating the banking industry here. He's the Democrat in the fourth congressional district of Massachusetts and head of the House Financial Services Committee. The plan is to create a new commercial financial protection agency. It would overhaul the country's financial regulation. Representative Frank, good morning.
REP. BARNEY FRANK(D-Mass.): Good morning.
CELESTE HEADLEE : So, what is this Consumer Financial Protection Agency going to be responsible for? Are we going to be responsible for the nitty-gritty; overdraft fees and those kind of things? We’re talking about big sweeping reforms.
REP. BARNEY FRANK : Well, we are talking about big sweeping reforms because the consumer agency is only a part of it. We have already passed in the House a very tough bill that would lead – that would require improvement in executive compensation as we have anticipated what they are talking about at the G-20. We have passed that. We have another bill that restricts the irresponsible use of derivatives which caused so much of the problem. That was an AIG issue. We will be creating a new systemic risk regulator that will be empowered to look across the system at the kind of things that can cause problems.
CELESTE HEADLEE: But the devil is really in the details here, isn’t it? There was a commentary in The Wall Street Journal that - complaining that you are going to end up with fifty Eliot Spitzers because you’re going to give so much power to attorneys general. You’re going to have federal regulations; you're going to have state regulations; and these attorneys general are going to be able to prosecute banks not only at the state level but through federal laws as well. Are we going to end up with so much prosecution that the banks are going to be afraid to act?
REP. BARNEY FRANK: No, not at all. That’s really frankly not serious conversations when people say that. In the first place, I want to avoid confusion. The consumer agency is only a part of what we are doing. You ask me again, is it just sweeping or nitty-gritty? There are major proposals, and those, by the way, would all be national in terms of restricting derivatives. There will be uniformity there. The consumer agency is more narrowly focused, and it’s one of several pieces in this to protect consumers from credit card abuse, and we have already begun to move on that piece of legislation: from overdraft fees that are excessive. We have a lot of consumer laws on the books. And here’s the problem. The consumer laws we have on the books and the financial industry are administered today by the same agencies that are there to essentially regulate the banks overall. And the history has been that the Federal Reserve or the control of the currency – they simply don’t give consumer protection a high priority. Their focus and their basic mission is the safety and soundness of the banks, the way banks run. So, what this bill will do is to transfer enforcement to an entity for whom that will be the primary purpose. Secondly, there are a lot of institutions outside of the banks that do financial work. In fact, if you look at the community banks - the small banks, they really haven’t caused any problems. They are not the issue here as much as the non-banks that have been totally unregulated. People who made sub-prime loans are largely outside the banks.
CELESTE HEADLEE: So, are you going to be able to successfully separate the community banks from the larger banks that you’re targeting?
REP. BARNEY FRANK: Well, we’ve done that in a number of ways already.
CELESTE HEADLEE: How do you do that?
REP. BARNEY FRANK: Well, by answering your question.
CELESTE HEADLEE: (laughs)
REP. BARNEY FRANK: For instance, well, let me say the main thing here that is going to be very helpful for the community banks is to adopt a system of regulating the non-bank, non-regulating competitors who are frankly worse for both the consumer and the economy. We’ve already passed legislation in the House to restrict the non-bank mortgage lenders. And as I said, overwhelmingly, they are the ones that gave the bad loans that led to this kind of crisis. We will be dealing with people who do check-cashing and payday lenders. If you get a check cashed at a check cashing agency you’re almost certainly paying a lot more for that than if you had done that at a bank. So that’s a major thing we are going to do. We’ll have the power to regulate a number of institutions that now are not regulated very well by anybody. As far as the big bank and small bank, one of the things that we will be doing in terms of the financing there – looking at ways to protect the smaller banks; beyond that it’s the big banks that do derivatives. As I said, the consumer agency is only a part of what we are doing. We will be severely restricting what we think has been irresponsibility in the derivative market. The legitimate use of derivatives will go forward. That’s a big bank issue. Credit cards; we’ve passed tough legislation. Community banks don’t issue credit cards. So those are the ways we will be dealing with that.
CELESTE HEADLEE: So, we have this proposal that showed up in Politico from Walt Minnick of Idaho and the other Blue Dog Democrats, and they wanted to create a counsel of regulatory agencies. And they originally said that you supported this idea and you asked Politico to retract that. What was wrong with this? They said that…
REP. BARNEY FRANK: First let me correct the situation. It was not the Blue Dogs in general, it was Mr. Minnick who is a very thoughtful guy but thought that I disagreed with him on this issue. He never said that I supported it. He said that I was open to discussing it. That was wrong. He was the one who also corrected it. I didn’t ask Politico to correct it, by the way; he did because he realized that he had misrepresented my position. And the problem with that counsel is why we need to have the agency. The counsel that he proposed — and by the way, it was not a Blue Dog general proposal, it was Mr. Minnick’s — the counsel that he proposed would be exactly the administrators that now do this and don’t do this very well. The problem here is, and with regard to banks, we’re not talking about vast new regulation, we’re talking about getting enforcement about the rules that are already on the books. And the problem again is this; the Federal Reserve System has the major statutory responsibility for consumer protection. Frankly, the people on the Federal Reserve board of governors are interested in global economic issues; are interested in macro economic policy. They set interest rates. They don’t really have a lot of time or energy or incentive to do consumers. So, Mr. Minnick’s proposal would have institutionalized the current situation where the people whose primary job was bank regulation overall would continue to do the consumer protection and they do that frankly as a secondary issue to them.
CELESTE HEADLEE: One last quick question for you. When you came in as the chair of the House Financial Services Committee, you said that the goal is to provide the private sector with goals but not mandate how to meet them. Have you changed their mind? Quickly.
REP. BARNEY FRANK: Um, we’ve changed our minds in a couple of cases, yes. We have had since that time, that was 2006, the meltdown. And we have learned more about abusive practices. So, I would say this – we are not telling them how to do it. We are telling them, and this is the change, some things not to do.
CELESTE HEADLEE: OK.
REP. BARNEY FRANK: We’re not going to be ordering them to do certain things, but we are going to provide better protection against things that lead to trouble.
CELESTE HEADLEE: Congressman Barney Frank, Democrat from the fourth district of Massachusetts, and head of the House Financial Services Committee, joined us from Washington.