Barney Frank Wanted to Focus on Affordable Housing, But the Banks Sunk His Boat
The name “Barney Frank” grits the teeth of a lot of people in banking. Many are only too eager to proclaim how much they loathe his signature piece of legislation (the Dodd-Frank Wall Street Reform and Consumer Protection Act). His name is rattled off with that of President Barack Obama, Sen. Harry Reid, former Speaker of the House Nancy Pelosi and Sen. Elizabeth Warren, as one of the names that has made their lives more difficult.
They might take it as an even greater affront if they have to sit across a conference room table from him.
One of the last places one would have expected the anti–big-bank crusader to land after he retired from Congress in 2013 was the board of directors for Signature Bank, but that’s exactly where Frank went. The bankers he’s met have largely been cordial. And he doesn’t seem bothered by the fact that many in the profession made his life difficult when he was a Democratic lawmaker. (The 76-year-old Frank doesn’t seem rattled by much, actually.) Frank, who joined the U.S. House of Representatives in 1972, sat with Commercial Observer this summer in Signature’s Midtown office to explain his thoughts on politics, finance and how he wound up in enemy territory.
Commercial Observer: What got you interested in financial regulation?
Frank: Shit hit the fan. I never cared about it. I never got involved in it. I wanted to do housing, and it looked like I was going to become chairman of the [House Financial Services] Committee, and the economy collapsed. They asked John Kennedy once [on how he became] a hero, and he would say, “The Japs sunk my boat.” Well, the banks sunk my boat.
Not to be too grandiose, but the story with both [Presidents] Woodrow Wilson and Lyndon Johnson is that they had great intentions to improve this country domestically, and then they both wound up fighting wars. Same with FDR. I never cared about derivatives. I wish I didn’t have to. It was purely self-defense for the economy. I still tried to do as much affordable housing as I could, but it was a job, and I had to do it.
As someone who now works on the board of a bank, what are some of the things that haven’t necessarily been working the way you had intended them to?
Oh, none on the whole—but one.
First of all, Signature Bank does virtually none of the things that we were concerned about in passing the bill. For example, one of the important parts of the bill was the Volcker Rule [a ban on proprietary trading by commercial banks]. Signature Bank has not, from its outset, done the kinds of dealings and derivatives that the Volcker Rule said banks shouldn’t do. Fortunately, in 2014, [member of the board of governors of the United States Federal Reserve Board] Daniel Tarullo, who was the governor of the U.S. Federal Reserve who was most in charge of regulation, called for exempting banks under $10 billion in the Volcker Rule, which I support.
The other big problem [the legislation addresses]—the biggest one—was making bad mortgage loans to individuals. Signature Bank had a very good record in that. It has been a major lender in the area that I care most about, which is multifamily. I have never been a big advocate of homeownership for low-income people. Basically, the great danger is that you’ll put people in situations that they can’t handle financially. My [advocacy] was for more multifamily rental housing. One of the things I worked on was the Low Income Housing Tax Credit for multifamily housing for low-income people, which this bank does a good chunk of. But this bank is a real leader in conventional loans for unsubsidized, but not luxury, middle-income multifamily, which is a great asset for New York. In fact, some of the regulators [complain] that [Signature does] too much of it, which I find astounding because they don’t believe housing pressures in the New York rental market are so strong.
There is one area where this bank is affected—fortunately it’s an area in which I called for changing long before anyone ever approached me about this bank. We made a mistake when we said $50 billion [in assets] with no escalator at the level of which you became subject to extra scrutiny, particularly under the jurisdiction of the Financial Stability Oversight Council. That was too low, and it should have been higher and be indexed anytime you set a number in the economy.
Is that one of the biggest misconceptions about the act—that smaller banks are being hurt more?
Yeah. Banks under $10 billion are not examined by the Consumer Financial Protection Bureau. There’s no separate examination for them. At the request of the small banks, we increased deposit insurance from $100,000 to $250,000. The Republicans fought that. The small banks wanted to have higher bank insurance. The problem is not that there are any rules—there are no rules that specifically apply to small banks. But I understand, for instance, the Volcker Rule in particular, small banks are spending too much money to show that they are in compliance. There was no problem there, so we should just exempt them from it.
The other complaint is that it made it harder than it used to be to get a mortgage. I’m proud of that. People have testified that there are people who used to get mortgages who don’t get them [now]. Yeah, that’s why we have the bill.
Signature Bank has less than $50 billion in assets under management. Why do you want to raise the exemption bar?
Because they’re not a systemic threat. Here’s the deal: The size of the bank is really a proxy. What’s troubling is the size of the indebtedness, which caused problems in 2008 when institutions had debts they couldn’t pay. The bigger the bank, the bigger the capacity for indebtedness. And it is important to have special rules for the biggest institutions to keep them from getting so indebted that the inability to pay their debts threatens the system. What we look for is: At what point does a bank become so big that its indebtedness might get to the point where it could endanger the system? And I think $50 billion is clearly too low. I think $100 billion to $125 billion is probably low, but you want to err on the safe side. What happens is you subject the bank to a lot of extra regulation, extra capital charges, where there is not a corresponding danger. Again, I stress this is all based on the recognition that being designated is something that banks hate.
Many people working in commercial real estate complain that they don’t understand why they’re being regulated so heavily when they blame the crisis on the residential market.
Well, I have some objections, too. I thought the commercial side was O.K. But let me put it this way: That’s not in the statute—that’s the regulators. There’s nothing in the statute that cracks down on commercial regulation. Higher capital standards were not mandated by our bill—those come from the international agreement, Basel III. Secondly, what you have is regulators being traumatized by being so criticized for being too soft that there is [now] a tendency for them to be too hard. To the extent that they’re too tight in regulating CRE—that’s one of the things I agreed on and I’m pretty critical of. I think multifamily residential is swept in with single-family residential. It’s just an overreaction on a part of the regulators. There’s nothing in the law that mandates it. The only lending standards we tightened in the law were residential mortgages.
Another thing banks seem to be concerned about is their constraint on capital, both because of Dodd-Frank and Basel III. It seems like private lenders will start to do more of the lending.
First of all, the government is not in the business of favoring one sector over another. From the standpoint of public policy, is the demand for loans necessary to fuel economic activity being accommodated? I think it is. In fact, the economy has done very well. I do not see a great unmet demand for loans. The American economy, on the macro-level, has performed better than any other developed world economy since the crash.
Although the bill does give [regulators power over the nonbank sector], there may be some further looking into them. Some people worry about peer-to-peer lending, for example, but this is helping one sector versus another. From the standpoint of the economy, the goal is to make sure enough loans are being made and that they’re not too risky. Who makes them is less important.
What have your interactions been like with other bankers?
I talk with them all the time. I meet with them—we exchange ideas. It’s useful. When I was working on the legislation, in Bob Kaiser’s excellent book on passing the bill [Act of Congress: How America’s Essential Institution Works, and How it Doesn’t] there’s talk about a deal I made with Camden Fine who was the head of the Independent Community Bankers of America. In an actual situation, people of different viewpoints talk to each other at different times, so you can narrow the differences. There were times when I would say to them, “Look, you don’t like this. We have to do this. If you have a better way of accomplishing this goal, tell me what it is.”
Actually, the chairman of the board of this bank is for Glass-Steagall [which was enacted in 1933 after banks failed during the Great Depression], which I don’t think would help very much.
You voted against Bill Clinton’s repeal of Glass-Steagall in 1999.
Not because I thought it made sense but because I objected to simply repealing it without replacing it with new regulations. Glass-Steagall really did nothing about derivatives. It did nothing about bad mortgages. It would not have affected Lehman Brothers or AIG. It was a very good bill in 1933, but these were guys who didn’t know what it was going to be like 60 years later. We [essentially] replaced Glass-Steagall with an updated set of regulations.
We’ve had politicians like Bernie Sanders and Elizabeth Warren, a close friend of yours, talk about bringing it back.
I disagree with [Warren] on that. By the way, she does not say that it would have stopped the crisis. I think it’s the wrong way to go about it. The Volcker Rule does some of this. The notion that banks are too influential—I think this is a mistake on part of some of my friends on the left, and maybe in general. The big banks do not have the political influence that people think they do. Much greater political influence is in the community banks. We have a lot of bank regulators, the Office of the Comptroller of the Currency and Federal Reserve. They differ in who they regulate. There was a lot of talk about saying, “O.K., let’s put all the regulation into the Federal Reserve.” The smaller banks came to me and said, “You can’t do that.” We’re the only country, I believe, that has what we call the dual-banking system—federally chartered banks and state-chartered banks. [Signature Bank] is state chartered. The smaller, independent community bankers came to us and said, “You cannot abolish the comptroller of the currency and have only have one bank regulatory because we object to being under the same regulator as the big banks because then it would be a one-size-fits-all situation, and we can’t have that.”
I think we did end “too big to fail.” If a large institution can’t pay its debts, it’s out of business. The federal government then takes it over, fires all the people who are running it, wipes out the shareholders’ equity and, if it has to, will pay some of the debts to keep it from being a spiraling situation. But any penny that is paid up by the federal government is recovered by an assessment on the other large institutions. If AIG showed up tomorrow in the same situation, they would be put out of business. We would pay some of their debts, but we would recover all that.
Then why would people want to bring it back?
You have to ask them.
It seems like the GOP is just grandstanding then.
Totally. First of all, they say they’re going to institute Glass-Steagall—Glass-Steagall was repealed by a Republican Congress. Virtually unanimously on the Republican side, some of us on the Democratic side. Ninety percent of the anti-Glass-Steagall repeal were Democrats. During the deliberations on the financial reform bill, the House Republicans never moved on Glass-Steagall. There was an amendment offered in the Senate to reinstate Glass-Steagall. It lost heavily. I don’t think five Republicans voted for it. This is a total sham—a favor to the larger financial institutions and financial entities. They say they would repeal the Financial Reform Bill, but they were afraid to just say that so pretending to be for Glass-Steagall as cover. If you repeal what we have and go to Glass-Steagall, you’d have no regulation of derivatives. You’d have no rules about who could get a mortgage. You’d have—and they’d love this—no Consumer Financial Protection Bureau.
Why did you decide to leave politics?
I had said years ago that I was going to quit when I was 75. I have seen too many very-abled people stay too long. I left two years earlier than I expected for two reasons. First of all, the four years in which I was chairman I had thought I’d do affordable and rental housing. Instead, I wound up coping with the financial crisis. My district was cut in half [after Gov. Deval Patrick’s redistricting plan]. I then faced the situation where I would be running for one more term [where] I would have to go introduce myself as a Congressman to 350,000 new people and say, “By the way, I’m only going to be with you for one more term.” Now I believe that constituent services is a large part of it, and you don’t get to know and work on these things in two years.
And it’s a very good thing. I’m very tired. I’m tired emotionally and physically. And now I’m 76, I don’t have the energy I had when I was 70.
So you don’t miss it at all?
I miss seeing some of my friends, but the notion of having once again to resolve these problems is too stressful. And by the way, it would be easier to be in Congress today than it was when I was there because trying to resolve things and work things out constructively and trying to get 36 out of 71 members to agree on a complicated piece of legislation is a lot harder than yelling at each other.
Looking forward, if Hillary Clinton wins and we end up with a Democratic House and Senate, what issues should they be focusing on?
What Gary Gensler, who is [Hillary Clinton’s] chief adviser and a very tough regulator, has said is they will use the parts of the bill that allow them to look at some of the largest institutions and order them to get a little smaller. The bill has already gone through a major divestiture, namely General Electric getting out of the business of financial activity back into physical manufacturing. I think you would see the bill used fully in that regard, making some of the institutions not just smaller but less complex and more manageable.
The other big thing is this: The Republicans underfunded the two agencies. The biggest addition in regulatory power in the bill was over financial derivatives, which had been unregulated and had caused the downfall of AIG and were a serious part of the problem. The bad loans were like the bullets, but financial derivatives were the guns that sent those bullets all over the place. The two agencies that got the most new power under this bill were the Securities and Exchange Commission and the Commodities Future Trading Commission, which regulate derivatives. The Republicans have starved them ever since.
Do you foresee yourself staying on the board of a bank for a while? What’s the next move?
I’m 76. What kind of next move are you expecting?
Banks are a good thing. This bank is a very good bank. It has a good CRE rating. The criticism we get from some of the regulators is we’re doing too much lending for multifamily in New York. That’s one of the most socially useful things you can do.