Frank: Lack of government regulation led to troubles plaguing Wall Street

Barney Frank, chairman of the House Financial Services Committee, says he was not asked about the $85 billion bailout of American International Group: He was told. (Jay Premack for the Boston Globe)

WASHINGTON - Amid a wave of unprecedented Wall Street failures and government bailouts, Representative Barney Frank, chairman of the House Financial Services Committee, holds a powerful post in the oversight of the nation's financial system. He is holding a number of hearings on these issues, including one today on the auction-rate securities scandal that has forced Wall Street to buy back nearly $60 billion in investments from customers.

Q.Should the government have bailed out American International Group?
A. I don't know. I was not asked about it. I was told. I don't know what the internal financials look like. I understand the argument that a total a collapse would have been a problem. [Federal Reserve chairman Ben] Bernanke and [Treasury Secretary Henry] Paulson are generally reasonable people whom I trust a great deal. But I don't know, and frankly I'm never going to be asked to vote on it.

This isn't like Fannie Mae and Freddie Mac - they came and informed us. I asked Bernanke, do you have $85 billion for a loan? He said, I have $800 billion. Ben Bernanke has $800 billion that he can lend to anybody he wants to in America, to any entities, at any terms. We're having a hearing next Wednesday in which we consider whether or not there should be some other ways to deal with this than have him walk around with $800 billion.

Q.Why not bail out Lehman Brothers?
A. What you had was a lot of conservatives saying, oh, let's let them go belly up. And as I've said, as it turns out, looking at a dead belly isn't as enjoyable as they thought it would be. I am thinking about a bill that would make Sept. 15 Free Enterprise Day in America, because it was the only day in which the Bush administration lived by it. The problem is this, their failure to regulate sensibly has so endangered the economy and so burdened it with bad stuff that it's become very vulnerable.

Q.So suddenly the government is in the business of intervening in corporate America. What does that mean?
A. The Republicans - their own philosophy blew up in their face. They were so extreme in their insistence that there be no government intervention that they have wound up provoking far more government intervention than the Democrats ever would have.

Q.Where is all the money for these bailouts going to come from?
A. Well, it's interesting. It's from the Federal Reserve. [Bernanke] says he has $800 billion. One of the things they couldn't tell me, is if the Federal Reserve, as a result of this $85 billion, pays less to the Treasury than it otherwise would have, does that become a budget problem for the federal government? Nobody really has the answer. I've got our House budget staffers working on this.

Q.There was a cost associated with taking over mortgage giants Fannie and Freddie, too, correct?
A. With Fannie and Freddie, there may be some expenditure, but it will be in the service of trying to reduce the number of foreclosures, which is very important to getting out of the economic mess.

Q.How much do you blame the leadership of these companies for the problems?
A. I blame the lack of regulation more than the leadership. If it was one company, that would be one thing. But it's Bear Stearns, it's Countrywide, it's Lehman Brothers. Now, they were all guilty of drinking the Kool-Aid and buying stuff they shouldn't have bought.

Q.Now you are proposing an agency similar to the old Resolution Trust Corp. that would oversee the sales of these distressed assets - at taxpayer expense?
A. That's in lieu of Ben Bernanke and his $800 billion. Now we have one man out there. He's going around arranging loans with his $800 billion. That's not appropriate. And he's a very good man, this is not critical of him. It ought to be done in a public way, openly, democratically, and with criteria that are set by the public.

Q.Couldn't such an agency be costly to taxpayers?
A. We would set a limit on how much it would be. We're in a choice of evils here. Given all the lack of regulations and all these bad decisions the private sector made, we can't avoid some cost to the taxpayers. The question is how do you minimize a) the cost, and b) the social consequences of these costs.

Q.Do you think this crisis is nearly over?
A. No one knows. I am hopeful that we'll begin to reduce foreclosures.

Q.Was any particular regulator asleep at the wheel, allowing these problems to escalate?
A. Alan Greenspan wasn't asleep, he was walking around saying no, no, no, no, no. He didn't forget not to regulate. He believed as a matter of fundamental ideological principle you shouldn't regulate.

Q.What about the Securities and Exchange Commission?
A. They were not as active as they should be. In fact in 2003 and 2004, when I first became the ranking Democrat on the committee, we had tried to give them some more money and the Bush administration resisted it.

Q.What about the role of the Democrats, given that they control Congress. Should they have foreseen this?
A. Well we've been in control for a year and a half. We came to power and within three months, the committee I chair passed a bill to increase the regulation of Fannie Mae and Freddie Mac. And by the summer of 2007 had passed a subprime bill.

Q.You play a key role as head of the Financial Services Committee. Do you feel that you and your colleagues understood the depth of this crisis as it was coming?
A. Not as it was coming. I don't think anybody really thought that this subprime thing would reverberate as much as it did. I don't think we realized how leveraged things were.

Q.Now there are concerns about money markets failing. Should the government insure them?
A. If people want insurance, they go to banks. There's a trade-off between return and risk. You can't have the maximum return and no risk. The way we help the money markets and the people is to stop the entities from getting into the kind of trouble that leads them to break the buck. Stop them from making bad investments and reduce the leverage.

Q.What would you say to the average investor today? Should they be worried?
A. I'd tell them don't listen to a politician because it has to do with your individual circumstance. Don't listen to anybody who is not looking at your portfolio and your needs and your future.

Beth Healy can be reached at bhealy@globe.com.