Frank: A Life in Politics from the Great Society to Same-Sex Marriage (46 page)

The law makes this explicit in unusually straightforward statutory language:

SEC. 214. PROHIBITION ON TAXPAYER FUNDING.

(
a
) L
IQUIDATION
R
EQUIRED
.—All financial companies put into receivership under this title shall be liquidated. No taxpayer funds shall be used to prevent the liquidation of any financial company under this title.

(
b
) R
ECOVERY OF
F
UNDS
.—All funds expended in the liquidation of a financial company under this title shall be recovered from the disposition of assets of such financial company, or shall be the responsibility of the financial sector, through assessments.

(
c
) N
O
L
OSSES TO
T
AXPAYERS
.—Taxpayers shall bear no losses from the exercise of any authority under this title.

Despite the bill’s very clear, legally binding directives, some critics insisted that taxpayer-funded bailouts were permitted and “too big to fail” was alive and well. Some of these critics simply ignored what the law said. Others took a different, and an even less intelligent, tack. According to them, even though the law specifically prohibits the Treasury and Federal Reserve from advancing funds to keep an institution alive, if a major financial institution were to become insolvent, there would be irresistible political pressure to violate federal law and intervene. My question to those who make this case is a simple one: “On what planet have you spent your time since 2008?” Certainly no cogent—even coherent—observer of the backlash against TARP could imagine voters insisting that one more big, failing bank receive a taxpayer bailout and a new lease on life.

In fact, a more realistic critique came from a few people on the opposite side of the issue, including Geithner, who feared that we’d shut the door on even temporary bailouts too tightly. Of course, there were also some who argued that the only way to end “too big to fail” was to keep institutions from getting too big. In this view, the only true safeguard is to break up the banks. Since the collapse of Lehman Brothers precipitated the crash, this must mean that no firm should be as large as Lehman was in 2008. This is an intellectually legitimate argument, but it needs much more fleshing out by its proponents. What would be the consequences of drastically reducing the size of ten or more major institutions within a short time frame? Should the federal government mandate these reductions? By what method? Will this put American institutions at a competitive disadvantage internationally? I have no objection in principle to the argument that smaller is better, but I have not seen any practical plan for downsizing.

*

As our committees marked up the bill, the legislative process went more smoothly than I had expected in both bodies. We knew we’d have to make modifications to the Obama administration’s original draft, both for reasons of substance and to make sure we could get the legislation passed. Fortunately, the liberal organizations were unusually well organized and helpful with both the substance and the politics. A group called Americans for Financial Reform brought together a variety of experts with whom we worked closely throughout the process. On the creation of the Consumer Financial Protection Bureau, I formed a mutually trusting relationship with Elizabeth Warren, which gave us the best possible source of wisdom on the subject. Interestingly, there were large differences among the administration officials involved, and we often found one of those officials lobbying us against the administration’s view.

Our task was also made easier by the unaccommodating posture of the House Republicans. Spencer Bachus’s unhappy experience when he worked with us on subprime lending in 2007, and the House Republicans’ angry response to the Bush administration’s TARP effort, proved to be an accurate predictor of the Republican reaction to a reform bill. With very few exceptions—3 out of 178—they were against it.

This meant that the specifics of the legislation had to be hashed out entirely among Democrats. It also meant I would have to get a committee majority entirely from the same source. Fortunately for the bill, and my mental health, the 2008 elections had greatly increased the House Democratic majority. The committee now had forty-two Democrats to twenty-nine Republicans. For the next two years, I got to sleep by counting Democrats, relaxing only when I could get to thirty-six. Both sleep and passage would have come more easily if I could have substituted sheep.

*

With a large Democratic majority, the full support of the administration, and the widely perceived need to make the financial system much less risky, I was confident that we would send a very strong bill to the Senate by the end of the year. I had the benefit of a first-rate staff. Jeanne Roslanowick, whom I’d inherited from John LaFalce, had a perfect combination of substantive knowledge, political judgment, and parliamentary understanding. Recognizing the importance of people who knew me well enough to tell me when I was wrong, I added to the staff two near contemporaries: Dave Smith, an economist who’d worked for Ted Kennedy and the AFL-CIO, and Jim Segel, my old Massachusetts friend. They would both prove indispensable to the work ahead.

There was one immediate problem, however. Jurisdictional disputes between committees show Congress at its worst. Some commentators mistakenly attribute these disputes to members’ hunger for the campaign contributions that come with shepherding significant bills. In the broad scheme of things, this is a much less important factor than institutional pride, ego, and the strong desire to influence policy outcomes. Cynicism to the contrary, job satisfaction is, for most members most of the time, as significant a motivation as job retention. At any given time, no more than 20 percent of House members face any serious reelection threat, and few issues, by themselves, have a measurable impact on members’ chances of survival. Representatives who have chosen to join a committee with jurisdiction over a subject they care deeply about naturally resist moves that would substantially reduce that jurisdiction.

As we began work on our bill, the first big obstacle turned out to be the messy status of derivatives. Before the latest innovations in the financial system, they had been used to protect businesses from volatility in the prices of physical commodities like wheat or oil. They were regulated—lightly—by the Commodity Futures Trading Commission. Because many of these commodities were agricultural products, jurisdiction over the CFTC belonged to the Agriculture Committee. With the introduction of financial derivatives, the Securities and Exchange Commission, which is overseen by the Financial Services Committee, acquired an overlapping authority. The logical response to this would have been to merge the two commissions and create one combined entity to regulate all derivatives. Logic never had a chance. Agriculture is politically rooted in the Midwest, the South, and some of the mountain states. Financial activity is at its most influential in the Northeast, with an outpost in Chicago and some presence in California. Since the day of William Jennings Bryan’s “Cross of Gold” speech, the country has made progress in healing the former regions’ antagonism for the latter. But the divide remains strong. Given the greater size and scope of the SEC, joining the two commissions would have been greeted in agricultural areas with all the enthusiasm of Daniel entering the lions’ den.

And so, as we began deliberating on the bill, my first task was to reach an agreement with the Agriculture Committee, particularly its chairman, Minnesota representative Collin Peterson. He is a very good legislator, well-informed on substance and skillful in dealing with colleagues. We also shared the conviction that constraining freewheeling derivatives trading was an essential part of financial reform.

Peterson is also one of the few Democrats who vote consistently against LGBT equality. Indeed, he would become the only Democrat to oppose us who comes from a state that voted in favor of marriage in a 2012 referendum. I regretted his views and made a point of ignoring them in the hundreds of conversations we had throughout 2009 and 2010. Our successful collaboration allowed rural Democrats and those representing financial centers to pass a bill. To those who would take that collaboration for granted, I note that in 2014, Trey Gowdy, a Tea Party Republican, explained that even though he and many of his colleagues agreed with Attorney General Holder on the desirability of reducing long sentences for drug users, they could not work with him on the issue—or, based on this logic, on any other issue—because of his support for same-sex marriage.

*

As it turned out, there would be many other intraparty squabbles ahead. I soon learned that opposition to the Consumer Financial Protection Bureau from moderate and conservative Democrats was stronger than I’d anticipated. I had hoped to nullify these objections when I rejected the proposed administration requirement that any business offering a financial product must include what was informally described as a “plain vanilla” version of that product. I did not see how you could insist on a plain vanilla version of a mortgage without prescribing interest rates and other sensitive terms that I did not want the government to prescribe. I believed then and still do that we should prevent bad things from happening—and having done that, leave the working out of other arrangements to the market.

The impatience with overly complex products and fine print was well-taken, but the idea was wholly unworkable. Unless we were willing to break our rule against fixing prices in the bill, there was no way to ensure that the mandatory offering was a real choice for consumers. In addition, deciding what was and was not unnecessary complexity would require intruding too far into the affairs of the affected businesses. (It was also unwisely named. I could not resist pointing out to administration advocates that highlighting the virtue of a product by labeling it “plain vanilla” was hardly the best way to promote it to a committee that had more African American and Hispanic members than any other in the House.)

The Chamber of Commerce and other opponents used their dislike of the plain vanilla proposal to camouflage their opposition to any significant improvement in consumer protection. Making clear that it would not be included was a prerequisite for holding on to the votes I needed to keep an independent CFPB in the bill. And I had to do this quickly. A simplistic view of the legislative process suggests that it’s wise to load up an early version of a measure with provisions you are ready to bargain away. This ignores the dilemmas of legislating in the era of instant communication. On contentious high-profile issues, public pressure forms quickly, and representatives must take a stand soon. Even if a controversial provision is removed from a bill, members rightly worry that those to whom they’ve promised a no vote won’t grasp the change.

My first step was to approach Elizabeth Warren to explain my position. I did so a little nervously, because I did not yet know her well, and I had encountered what seemed to me knee-jerk support for the idea from some other consumer advocates. Happily, I learned right away that her brain works much more quickly than her knee. She told me that she agreed with my reading, which meant that it would be hard for anyone else to accuse me of selling out the cause.

With this obstacle to creating the CFPB eliminated, another roadblock remained. Many community banks were complaining to their representatives that the new consumer bureau would add to administrative burdens that were already excessive. Here I believed a compromise was possible.

I asked Camden Fine, CEO of the Independent Community Bankers of America, to meet. It seemed to me that his membership’s real concern was not with the substance of any new rules the consumer bureau might promulgate but with the need to submit to the bureau’s regular examinations. “Examination” is a term of art in the banking world. It refers to regulators coming to a bank on a periodic basis and thoroughly inspecting all its activities. For small banks, with few executives, setting aside the time for this has real costs, reducing the attention they can give to their basic duties. The prospect of another set of these meetings every year was disturbing to small banks. But given the nature of their business, they had much less to fear from the new regulations themselves, which would almost certainly have more impact on large institutions engaging in complex transactions.

And so I suggested a compromise to Fine: We would write the laws so that the bureau’s rules applied to all banks, but we would also exempt institutions with less than $10 billion in assets from its examination powers. Instead, the local banks would remain under the scrutiny of their regular examiners. Fine agreed that this made sense, and he persuaded his board to remain neutral in the fight over the agency.

An editorial note is in order here. This was not the only compromise—deal, to be less euphemistic—that I made to win the necessary votes. My general view is that the private conversations that enable such compromises are legitimately kept private. It is impossible to conduct serious negotiations between parties who are not independent actors but are representative of others in an open forum. I have long been a believer in half of Woodrow Wilson’s doctrine—responsible, democratic governance consists of open covenants, worked out in private. I have discussed my negotiations with Fine here only because the ICBA has already disclosed the deal to Robert Kaiser, who included it in his book.

Even with the ICBA’s neutrality, and the support of one big bank CEO (Brian Moynihan of Bank of America), the consumer bureau still faced opposition from some of the more conservative Democrats. Walt Minnick, an able, thoughtful member from a very conservative district of Idaho, was their leader. He agreed to delay his efforts to eliminate the bureau until we reached the floor with our bill. In return, I insisted that the Rules Committee give him the right to offer his antibureau amendment. He did, and the amendment failed 208 to 223, with a loss of only 33 Democrats.

I had less success when it came to the ever-complicated question of derivatives. The issue was relatively unfamiliar to me. It was also the most complicated, and the hardest to dramatize for the public, which gave Democratic opponents of strong regulation greater leverage. Reflecting this, my initial draft of the bill was weaker than it should have been, and the Treasury Department did not push us to strengthen it. But then Gary Gensler, the bold chair of the Commodity Futures Trading Commission, testified before the committee and argued that our derivative sections were too weak. I was persuaded. He has since noted that when I called him after that session, he anticipated that I would complain about his criticisms. Instead, as he recalled, I told him that he had convinced me and that we would be adopting some of his proposed amendments.