Frank on whether investors should still have confidence in the U.S. financial system after the Knight Capital technological breakdown:
'Absolutely (I still have faith). On the whole, (financial markets) work very well, and America continues to be one of the safest places in the world to put your money, probably because of the stability of our political system and the great wealth that continues to exist in the country. I didn't yet see the story about Knight'.
'One of the things we need to do and one of the things that disappoints me about my Republican colleagues is they've refused to provide the funding for the regulators we need to deal with this. Technology advances get more complex, and they have refused…to provide either the CFTC or the SEC the funds they need. They've got to hire very smart people, they've got to have first rate information technology, I also believe, and this is also by shown by Libor and Peregrine and some others, this notion of self-regulatory organizations is not something that we can rely on….We're not talking about huge amounts of money, compared to what is wasted frankly, in a whole range of other places, like this infrastructure boondoggle in Afghanistan. We're talking about fairly small amounts of money in federal budget terms and that's part of the problem'.
On whether Dodd-Frank and the Volcker Rule would have been able to prevent issues like the JP Morgan CIO loss or Knight Capital
'Yes and no. We can't write a law that prevents technical errors by people, that's why you need the funding. As far as JP Morgan Chase, yes'.
'One of the biggest things we did was to regulate derivatives, which had sadly been allowed to grow as complex, very highly leveraged activity with virtually no regulation. Under the law, derivatives will now be regulated. Part of the problem is that, for historical reasons, cultural reasons, Midwest versus the coasts - our derivatives regulation is split between two agencies, Commodities Futures Trading Commission and the Securities Exchange Commission. I would dearly love to merge them, it's become politically impossible, because it's the farmers versus Wall Street versus the Chicago Mercantile Exchange'.
'Now that these derivatives rules are about to be in effect, it is much less likely that JP Morgan Chase would lose that much money without realizing what they are losing. And it's certainly the case that whoever might be doing that would be adequately capitalized. One of the things we're fighting is a Republican bill that would say that none of the rules we are promulgating regarding derivatives would apply to an American institution that's doing it through a subsidiary in a foreign country - that's clearly a mistake'.
On the talk of bringing back Glass-Steagall and whether Glass-Steagall would create a competitive disadvantage for American banks
'The first thing to be noted about Glass-Steagall is that it wouldn't have any effect on what I've just been talking about. The Volcker Rule accomplishes a lot of what Glass-Steagall did. People should remember Glass-Steagall is 80 years old or it was 70 years old when it was repealed, and I voted against repealing it, not because I didn't think it had to be updated. We didn't replace it with something'.
'If you had just brought back Glass-Steagall, you would've done nothing about derivatives, which were a major cause of the problem. You would have done nothing about bad lending practices. One of the problems that Glass-Steagall didn't know about - that's a fairly recent one - is this notion of people making loans and then securitizing 100% of loans so they've got rid of all the risks. So they make lending decisions as if there was no risk, when in fact there is. No, Glass-Steagall wouldn't have been relevant to any of the things we have just been talking about, and to the extent that we're concerned about the deposit fund being an important risk, a tough Volcker rule would do it and I believe you're going to see a tough Volcker rule now'.
On the threat of a shadow banking system
'Our legislation does give regulators the power to deal with the shadow banks. For example, the Consumer Financial Protection Bureau is given, for the first time, authority over payday lenders, check cashers, other people who operate outside the banking system. Frankly, I think that's good for small banks because it reins in some of the irresponsible competitors. What we do in this bill is to regulate activity, not institutions. If it is a financial activity of the shadow banking sort, then the regulators have the ability to go after it. And in fact, they are doing it. Some of these things, derivatives, have been done outside banks in a kind of shadow'.
On whether Frank supports restrictions SEC Chairman Mary Schapiro wants to put on money market funds
'Some of them, not others. I don't think we should restrict -- and this is one of the things [Schapiro] talked about -- the right of people to withdraw. If you put restrictions on the withdrawal, that would be a problem. But making them keep enough capital ? Yes, I very much think that's a very important thing they should be doing. The fluctuation within a very small range, less important. So, I support some of what she's proposed, but not others. But you make my point about the bill; the bill clearly gives her the authority to do it. There's a debate about whether or not what she's proposing is prudent, but there's no debate about having the right to do it under the law'.
On whether Washington and Congress were too soft on JP Morgan's Jamie Dimon
'I'm sorry, I think you watched only the Senate. If you go back and watch the House hearing…The House members, particularly the Democrats, but a couple of the Republicans, were quite critical of the practices of the bank and asked some very tough questions of Mr. Dimon about his support for being totally deregulated in London'.
'I asked (Jamie Dimon) when he talked about cutting compensation, if his own should be involved. He was unhappy about that. So, I reject the notion that we were safe about that. The take-away from his testimony is several things we're pushing for. First of all, the Republicans put a bill through a committee I'm on which would deregulate the activities of the branches of American banks in England and elsewhere. We fought that bill, and I think frankly the fiasco with JP Morgan Chase over there, under-regulated by the British authorities, as they sort of acknowledged, that we've killed that bill'.
'So one, you get tough regulations of American institutions, even if it's overseas. Secondly, we made the case for better funding for these entities. Finally, it's an argument for a strong Volcker rule, because if the Volcker Rule were put in as it should be JP Morgan Chase wouldn't be doing it. Again, as I said, the reception for Mr. Dimon-- he was unhappy, and there was no soft-balling when he spoke in front of the House'.
On whether Congress made Jamie Dimon feel his job is too safe
'Members of Congress cannot fire CEOs of financial institutions, I'm sure you agree that wouldn't be a good idea, but I made it clear that for Mr. Dimon to blame others and not think about himself is a mistake. One of the specific questions I asked him that made him unhappy was when he talked about cutting back compensation, was his own compensation going to be involved ? So no, we're not in favor of exempting him. But it's not the case that we have the ability, nor should we, to fire CEOs'.
On whether the Washington hearing should have focused more on what happened inside JP Morgan
'Yes, but we also talked about the importance of regulation in general. No, I disagree that it's the function of the Congress to talk about how the banks should run itself. Our job is to have in place public policy entities, regulations that deal with that and set the rules. There are several that I specifically mentioned. One is whether or not the regulations that we're now getting about derivatives should apply extraterritorially when it's an American bank and it's an American branch'.
'It's not our job, I believe, to try to deal with the internal management practices of the institution. We do want to have regulators who set the rules. For example, that there has to be margin, there has to be transparency. One of the things that's clear about JP Morgan Chase, and was true about AIG, they didn't know what their losses were. If the rules that we had talked about had been in place, and they will be shortly, then they would not have been surprised by losses that were first 10% in a teapot, and then $2 billion, and then $5 to 6 billion - that's our job is to put rules in place that govern the way things work'.
On whether regulators have the expertise to understand the kind of financial engineering that firms like JP Morgan are engaging in
'The answer is partly no, because they have underfunded them. You can't hire people off the street and send them in to regulate these things. That's one of the reasons why I want those entities that have derivative regulation now.
'Part of the problem was the regulators you're talking about were from the office of the comptroller of the currency, bank regulators, not people specializing in derivatives. One of the things we did in the bill was to say derivatives will be much more carefully regulated, no matter who does them. It goes back to this question of shadow banking. We want much tougher regulation of derivatives, which we are now about to get….Secondly, though, we're talking about is having rules in place so that when they engage in these kinds of derivatives, when they sell or buy credit default swaps, they know what they are doing, they know what the prices are. Again, AIG had no idea how much they were indebted, and it turned out, neither did JP Morgan Chase. The internals in the bank weren't there because derivatives trading had been so opaque and our rules make it clearer'.
On FHFA head DeMarco's decision earlier this week on principal reduction
'I am very critical of Mr. DeMarco's refusal to do it, because he left out a very important thing -- namely, the foreclosure prices. The mortgage situation is a major problem in the larger economy. It was interesting, Mr. DeMarco seemed to be acknowledging that Fannie Mae and Freddie Mac might benefit, but he was worried about what he said would be the effect on the taxpayer. But one of the things that's negatively affecting the taxpayer is the slowdown in growth. We're still growing; we're doing very well compared to the developed nations of Europe, but not according to what we'd like us to be. Getting some principal forgiveness would be a very important step in helping deal with the economic sluggishness we have, and his refusal to do that disappoints me. Look, Mr. Demarco is a holdover. President Obama tried to replace him with a very good guy, a bipartisan former Bank commissioner, at the time was the Bank commissioner of North Carolina, and the Senate Republicans just blocked it'.
On DeMarco's comments that it would be a bad deal for taxpayers to offer principle reduction
'I think he is wrong about this because, first of all, he greatly exaggerates the extent to which this would lead other people to default. It turns out people like their homes and aren't ready to try and default and take that risk. Secondly, and I meant to address that, he said it would be ok for Fannie Mae and Freddie Mac and bad for the taxpayers, but what's worse for taxpayers is this slow growth. That hurts taxpayers in many ways. If he looks beyond the specifics of the institutions he runs and into broader issues, it's a mistake to look only at the short term of the taxpayer outlay without looking at the effect on the broader economy, because stimulating economic growth beyond the relatively sluggish pace we now have would be good for the taxpayer. I believe that it is in the taxpayer's interest for us to be able to stimulate growth, and this is a major thing that could've helped with growth'.
Source: Bloomberg TV