By Michael Kranish, Globe Staff
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 tonight 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 would 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. Following the meeting, Frank sent a letter to Gensler and Mary Schapiro, the chairman of 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 tonight.
Heather Booth, director of Americans for Financial Reform, 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. Booth said she left the meeting encouraged. Booth stressed, however, that her group still has concerns about whether all of the loopholes will be closed.
"It's not over," she said.
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.
About Political Intelligence
Glen Johnson is Politics Editor at boston.com and lead blogger for "Political Intelligence." He moved to Massachusetts in the fourth grade, and has covered local, state, and national politics for over 25 years. E-mail him at firstname.lastname@example.org. Follow him on Twitter @globeglen.