Frank reconsiders legislation after worry raised on loopholes
Effort to prevent another financial collapse revisited
WASHINGTON - House Financial Services Committee chairman Barney Frank, under fire from some fellow Democrats and consumer groups for carving out what they call loopholes in legislation designed to prevent another economic meltdown, said in a letter released last night that “there may be a problem here’’ and that he wants to reconsider.
The Globe reported on Saturday that an array of Democrats, consumer groups, and the chairman of the Commodities Futures Trading Commission were concerned that legislation pushed through the committee by Frank was not strict enough on the trading of derivatives.
Senator Maria Cantwell, a Washington Democrat, said in the article that loopholes played a major role in last year’s meltdown and would continue under the bill backed by Frank. Gary Gensler, the CFTC chairman, called for tightening the oversight of derivatives trading to lower the risk of financial problems. A consumer group representative charged that Frank had “walked away’’ from concerns of unions and other organizations.
On Tuesday, Frank met with representatives of one of the consumer groups that had complained it was not allowed to present its concerns. After the meeting, Frank sent a letter to Gensler and Mary Schapiro, the chair of the Securities and Exchange Commission, telling them he heard concerns about the bill and wanted “to further clarify the exception’’ allowing certain types of derivatives trading. The letter was released last night.
The derivatives measure has already passed through Frank’s committee. Frank said in his letter that he would try to amend the legislation when it reaches the House floor.
The trading of derivatives is one of the most controversial elements of financial reform. Derivatives are financial instruments whose value is based on underlying assets, such as real estate. They are used to bet or hedge on how those assets will change in value. The collapse of one type of derivative, an insurance product for subprime mortgages called credit-default swaps, played a major role in last year’s financial crisis.
Frank has long said that he wanted to crack down on financial institutions that engage in derivatives trading, but he was concerned that he didn’t want to hurt “end users’’ such as corporations that use the financial product to hedge against day-to-day business risks, such as currency fluctuations. As a result, certain end users were exempted from some of the oversight.
But critics of the legislation said they were concerned that the exemptions were so large that they could lead to risky trading that could put the economy at risk. Concerns were also raised that financial institutions could take advantage of the loopholes to avoid scrutiny.
Consumer groups had expressed anger that they were not given the same chance to testify about their concerns about the derivatives legislation as industry groups. While several industry representatives testified before Frank’s committee about the matter, a single consumer representative was given less than a day to prepare testimony and then was allowed to speak for only a few minutes.
Frank, who could not be reached for comment last night, said in an interview last week that “we made a mistake that we did not have broad enough testimony’’ from consumer groups. He said he thought their concerns had been aired by government officials.
Frank and his staff met on Tuesday with representatives of Americans for Financial Reform at which the consumer group got a chance to fully air its concerns. Heather Booth, the group’s director, said in an interview that she raised concerns about loopholes in the legislation and she said Frank responded that he would try to tighten such exemptions.
