JZ: Looking back, whether it was consequential or not, did you learn anything from being wrong about that? Were there certain calculations you made that you learned from?
BF: Yeah, along with everybody else! Well, first of all, I was right on trying to ban subprime mortgages. No, it’s not that I learned from it in the specific. In the general sense, what I didn’t foresee was the collapse of the housing market. I was always skeptical of home ownership. But, again, frankly, I think you still don’t get it, I’ll be honest with you. You said, in regards to whether it was consequential: the Republicans controlled the Congress in 2005 and George Bush was president for four years. They did nothing. And, by the way, after complaining, they say, oh, the financial-reform bill didn’t do anything about it. Well, first of all, probably that’s because in 2008, under the Democrats, working with Paulson, and I urge you to read Paulson’s book on the subject, we fixed Fannie and Freddie in the sense of stopping the bleeding. That was done under the Democrats. They have not lost any money since 2008. Then the Republicans complained that we didn’t adopt their proposal for abolishing them in the financial reform bill. Now the Republicans have been in power in the House since January of 2011. They have not even moved to that to a full committee discussion. The Republicans talk about Fannie and Freddie when they’re out of power. When they’re in power, they have done nothing. Now in 2005 I tried to work with Mike Oxley to get some reform. It became an internal Republican fight. Oxley said the problem was that George Bush gave him the one finger salute and that’s what killed it. And that was in the Financial Times. So my record is, yes, I did not foresee the overall collapse of the housing market. I did try to stop bad subprime loans. But if you notice the quotes were all in 2003, when we were still in the minority. By 2004 and ’05 I realized that we needed to do some things; I still didn’t see the total collapse. And in 2007 as I said, and Paulson, in his book, says, in 2006, when it looked I was going to be the chairman, he started talking with me and I kept my word, those are his words, and as soon as I became the chairman, we fixed the problem in the sense of stopping the losses.
Interview with Barney Frank, by telephone, March 15, 2012
BF: Thanks for getting back to me. I don’t know why my mind kind of went blank. The biggest thing I should have said was, there’s actually one part of the bill we actually had to change in the conference committee, and that was how you paid for it. The Congressional Budget Office told us that we were going to need $20 billion to pay for the things that were in the bill, so Chris Dodd and I agreed with the Democrats, frankly, to assess the large financial institutions for that $20 billion: financial institutions with more than $50 billion in assets except for hedge funds with more than $10 billion. And we brought it up and they needed two Republicans to vote for the bill in the Senate to get to 60 votes, and three Republicans, Scott Brown, Susan Collins, and Olympia Snowe, told us that they wouldn’t vote for the bill unless we took the $20 billion assessment on the financial institutions out and instead put it onto the taxpayer. That was just crazy, but that’s what we did.
There was one other thing I forgot. We wanted to assess the large financial institutions in advance, to have a fund in case there was any need to pay the debts of some of these banks, because the bill does say the taxpayers won’t do it. And I lost that one, too. But the biggest one was, because we needed those Republicans, we took $20 billion all from the banks and now onto the taxpayers.
JZ: You had mentioned that actually when we were talking about Snowe.
BF: Oh, okay. But when you asked me, what would I change in the bill, that was the biggest. The other one was, on Fannie and Freddie, and again, here’s the deal, the lesson we learned, not just from Fannie and Freddie, it was that, there is a phrase that economists use of tail risk, t-a-i-l. What it means is something terrible that could happen that’s very unlikely. And my mistake was not to see that this could happen with Fannie and Freddie but it happened with other things. And so one of the things we do in the bill, in general, is to provide against tail risk, that is to require people to build up some safeguards against a disaster that you don’t think is going to happen but if it happens it would be so terrible that you better be ready to deal with it to reduce it. And, again, with Fannie and Freddie, the whole thrust of the bill was to reduce leverage, to reduce the extent to which people could get in debt and not have money back. And that’s true for all financial institutions. So that’s the lesson we learned, not just from Fannie and Freddie but in general, that just because you think something is highly unlikely doesn’t mean you shouldn’t deal with it if it happens. All right?