Rep. Barney Frank, speaking ahead of the one-year anniversary of the landmark financial reform law that bears his name, said that risk-retention rules are the most important aspect of the more than 2,300-page legislation, and said that they are under attack.
The main cause of the 2008 economic meltdown "was loans -- loans made without any consideration or without adequate consideration of risk," the Massachusetts Democrat said during a speech at the National Press Club Monday. He called the loans "bullets."
"The guns were the derivatives," he went on. "We made a bunch of loans that shouldn't have been made and then we had sophisticated ways of ricocheting them all over the world, and people got hurt by them."
Calling out everyone from the Wall Street Journal editorial page to bankers to fellow Democrats, Frank said forcing lenders to retain a 5% stake in loans they originate and then sell to become part of mortgage-backed securities will not be the end of mortgage lending in the U.S.
"The notion that you cannot have mortgages without securitization and you can't have securitization if you have risk retention is clearly wrong," Frank said. "Before 1986, we didn't have securitization ... and we had a pretty healthy housing market in America.
"I remember again being told by some of those who made the riskiest loans, '[risk-retention rules] will drive us out of business.' Why? 'We don't have any capital.' Well, if you don't have any capital, don't lend it. Don't lend money you don't have," Frank advised.
As to complaints that risk-retention rules will disrupt the market, Frank agreed.
"Yes, it's disruptive because we had to disrupt a rotten system," he said. "We had to disrupt a system which collapsed," Frank said. "And it collapsed because risk was made to appear to disappear."
Frank said that Republicans seeking to dismantle the Dodd-Frank Act are doing so on a piecemeal, and sometimes stealthy, basis because they lack the public support to challenge it outright, especially on subjects such as derivatives regulation.
"It is interesting that my Republican colleagues, unlike on climate change and healthcare, don't want to take this one on head-on because it is still too popular," Frank contended. "Coming to the defense of unrestricted derivative trading is not a popular cause, so they are coming at it sideways."
The "sideways" is by underfunding the two agencies responsible for regulating the opaque $600 trillion-plus derivatives market, he said, accusing GOP legislators of using the deficit as a fig leaf for their efforts.
"The notion that the $80 million or $90 million more that we need for the [Commodity Futures Trading Commission] can't be done because of the deficit, when people have already sent $147 million to subsidize Brazilian cotton farmers so we can keep subsidizing American cotton farmers, is nonsense." Frank said.
"And in fact, what you have here is a Catch-22: First, deny the [Securities and Exchange Commission] and the CFTC adequate funding," he said. "They, in turn, are not able to deal with the rulemaking requirements that they have. And then, because they haven't been able to move as quickly on the rules, they announce that, clearly, the rules have to be abolished."
Frank also addressed the industry's refrain that Congress punted on the hard issues and left far too much in regulators' hands.
"One of the things that I thought, quite inappropriately, people were pointing as a criticism is [what] we knew would be a strength; and that is the fact that what the bill does in many cases is to set forth some very important principles but gives the regulators the ability to apply them in practice."
Geoffrey F. Aronow joined Sidley Austin LLP as a partner in the global securities and derivatives enforcement and regulatory practice. For other updates launch today's Movers & shakers slideshow.
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