Representative Barney Frank (D-MA) may be the most powerful man in Congress.  As Chairman of the House Financial Services Committee, he will control key legislation that will determine the scope of regulation in the financial services industry.  His remarks at a luncheon for business leaders in Boston on November 10 indicated that he favors an approach that will balance the needs of industry with the protection of consumers.

However, Representative Frank is a sharp-tongued politician, and his record suggests that he may not have the leadership skills to carry forward his agenda.  In particular, his legislative record does not indicate a history of practical regulatory oversight, and his remarks during the credit crisis reveal that he did not fully grasp the severity or complexity of dangers posed by the GSEs.

At the luncheon, Frank summarized the current state of the capital markets when he said, “Banks invested in things they shouldn’t have, and now they won’t invest in things they should.”   Despite his recognition of the paralyzed credit markets, most of Frank’s comments were directed to changes he foresees in the regulatory environment.

Frank placed a high priority on halting foreclosures, and said his principles would be guided “not by compassion, but by practicality.” He said the government should not be bailing out lenders or businesses, and that bailouts should not cost the government any money.  Frank voiced support for allowing distressed homeowners to rent their homes for a period of five years, after which they would have an option to purchase the remaining balance. He is skeptical of this plan, however, because it implies that taxpayers would ultimately bear the cost of the foreclosed mortgage. 

Remarks such as this were certainly directed to appeal to the pro-business crowd at the luncheon, as was Frank’s acknowledgement of his role, along with that of other Democrats, in pushing unqualified borrowers into home ownership.  But he said “that would not have been a problem by itself.”  Rather, he pointed to securitization, which Frank called a form of “diversification to spread poison,” undertaken by largely unregulated entities, as the underlying catalyst causing the credit crisis.

Subprime loans were analogous to bullets, spread by the “guns” of securitization, according to Frank.  He claims the lending practices that led to subprime borrowing has been stopped, but says “we still have to deal with the guns.”

“We need to find regulatory substitutions to constrain the risks that were taken in the era of securitization,” Frank said, calling for regulation that does not “snuff out the benefits” of financial innovation.  Activities – like securitization ­ should be regulated, not institutions. 

At the luncheon, Frank called securitization a “good thing” and denied that new regulation would be too overreaching, saying that “if you look at our record, you won’t see any overreaching.” 

Viewing Frank’s record, overreaching regulation may not be the biggest concern.  Frank’s record does not demonstrate a penchant for tight oversight of the GSEs. 

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