Congressional Republicans are playing a dangerous political game with their bid to delay new derivatives rules until 2012, according to Rep. Barney Frank.
Nevertheless, with the nation's securities and commodities regulators armed with fatter budgets, the controversial new financial regulation law is strong enough to prevent the trading schemes that led to the global financial crisis, Frank says. In an exclusive interview with Advanced Trading, the co-author of the Dodd-Frank Act explains why he led the charge for finance reform, what the bill lacks, and why the GOP caved on cutting the budget for the Securities and Exchange Commission and Commodity Futures Trading Commission.
What led you to push for reform of the nation's financial markets?
U.S. Representative Barney Frank (D-Mass.): Because we came very close - according to Bush administration officials - to a situation as bad as, if not worse, than the Great Depression. During the Great Depression you had granularity. You had regionalism. Things could be terrible in one place and not so bad elsewhere. Thanks to technology, by 2008 the whole world was one developed economy. You had everything grinding to a halt. We had two things to do. First of all to deal with that crisis, but then do whatever we could to make it less likely that it would happen again.
That was both to give people the tools to deal with if the crisis hit, and even more important to prevent the things that caused the crisis. So it was very important to stave off one of the worst economic calamities we've ever had.
Is the Dodd-Frank Act as tough as it needs to be?
Frank:People have said it'll mostly be up to the regulators. But it had to be that way because if you try to be too specific (with the rules) there'd be a couple of problems. The more specific you are, the more people can get around it. Secondly, you can give general rules, but you don't know what the right percentages are right now. Things could change and evolve. But administered by people who support it, which is the current group, I believe it's as tough as it needs to be.
Is there anything you wish you could've added to the bill, but weren't able to?
Frank: I would've toughened up a little bit on derivatives. And I wouldn't have exempted the auto dealers from the consumer bureau. I would not have had the swiped fees for the credit cards. But other than that, it's mostly what I would've wanted to do.
Is the bill effective enough in preventing too big to fail?
Frank: Yes, and here's proof of it. The argument that it doesn't is, that it gives an advantage to large institutions that are deemed to be systemically significant. Because investors will think they're too big to fail and can invest in them and be protected. If that were the case, you would expect institutions to want to be designated. Some are automatically designated; they're banks, but there are insurance companies, mutual funds, money market funds. There's room for debate about whether they'd be covered or not.
We had a hearing last week and I asked all the regulators, have any companies lobbied you not to be included? All but one said yes.
The bill explicitly says if you fail - if you can't pay your own debts - the federal government may step in and pay some of the debts, but only after you're dissolved. So we do say there may be some instances of too big to fail and ignore the consequences. But the first consequence is, they're out of business. Sarah Palin was half-right, which was good for her. There are death panels in our bills of last year. But they're not for old ladies. They're for big financial companies.
Why did the GOP ultimately vote for budget increases for the SEC and CFTC?
Frank: That's because they understand that it's unpopular. A guy from the union at the SEC just left my office and said, "listen we thank you, because you helped us get our money back." A budget cut was their side attack on the rules. They couldn't deal with it head on, so they tried it this way.
How else will Republicans try to weaken the bill?
Frank:They just filed a bill - and I think they're making a great mistake politically - to put off any new regulation of derivatives until the end of 2012. I think that's going to be very unpopular when you look at the people's concerns about speculation.
As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio