Friday, May 29, 2009

An Evening With Barney Frank - Part One

Last night I had the task of infiltrating an octogenarian liberal rally which was disguised as a town hall meeting with Barney Frank. For a young former Wall Street trader who is a fiscal conservative, this was basically the equivalent of being thrown to the wolves - if the attendees at this meeting had an image of the person behind the fiscal crisis, he certainly looked like me. Fortunately, I figured if things got ugly, I could dodge the false teeth being thrown at me, or outrun their motorized carts. Also, it is clear from the fact that commenters on my blog are getting into arguments, that I have made it big in the blogging world, so I went undercover - dressed casual with my blue Boston Red Sox sweatshirt and yellow legal notepad in tow.

Here's the running diary of the evening - in general I will paraphrase Frank's comments and audience questions. I am confident that my summations are fair and accurate. When I use quotations the reader can assume that the actual quote was very close to what I wrote, although I do not have a transcript, so the verbiage may not be identical:

7:35pm: Welcome to Weston High School, where tonight's topic is "Global Economic Disaster Crisis"- heeeeeeere's Barney

7:36pm: Barney Frank: "This is a very important time... Partisanship is an undervalued part of a Democracy... The differences between the parties today is the deepest it's been since the Civil War." Frank went on to explain that there was some poll done of who were the most partisan and least partisan Congressmen, and he was very proud to have been the only person to show up on both lists. I found this intriguing, since I think the partisan nature of our political system is its worst feature - the way congressmen largely end up voting via party lines is utterly absurd and a condemnation of educated free thinking.

7:41pm: Frank makes a joke about Obama suffering "Post Partisan Depression," and the room full of octogenarians laughs like a Seinfeld laugh track. I am not exaggerating when I say that in the room of roughly 200 people, the median age was in the range of 68-70 years old.

7:43pm: BF: "The role of the public sector is to formulate rules to allow us to get the benefit from private sector innovation without generating harm." This was a solid point, but Frank ruined it by citing the creation of the SEC as an example of this public sector regulation in action. I'd hardly use the SEC, who is masterful at catching small time manipulators, but failed miserably in detecting Bernie Madoff's Ponzi scheme even after they'd been given a heads up by whistle blower Harry Markopolos, as the definition of public sector regulatory involvement as intended. Then there's the SEC's division of broker-dealer oversight that had to be closed because ALL of the firms it was charged with regulating ceased to become active broker dealers... but let's move on.

7:48pm: BF: "Securitization is a good thing if it's done right." Frank then explained that he was working to ban 100% securitization - because people needed to have "skin in the game." Basically, he's hoping that if mortgage lenders were not able to sell off all of the risk in the loans they were making (by selling securitized MBS products) - then the lenders would have been more prudent. He is probably correct, but that doesn't make the argument relevant. Our capital markets are all designed to transfer risk from those who are not willing to take it, to those who are. There were people willing to take the lending risks in all of these cases - for whatever reason (complete misunderstanding of the transactions, blind faith in incompetant ratings agencies, abundant capital seeking a pickup in yield). It's clear to me that securitization isn't the problem.

Frank then made the audacious claim: "People made loans they didn't expect to be paid back on." I figured he must have again been referring to the mortgage lenders who had sold off their risk via MBS. It so happens that in this case I consider the buyer of the MBS to be the lender: they are the one ultimately providing the capital to the home buyer. However, I didn't want to get too hung up on this point - it's quite clear to me that no one would ever argue that buyers of MBS didn't expect to be paid back.

However, Frank's next comment was that money was lent to people who clearly couldn't repay, and that the lenders didn't care because they would be able to foreclose on a home that was rising in value, and then sell the home to someone else for a profit! My jaw dropped and I looked around to see if anyone else was surprised at this comment. Apart from a suspicious raised eyebrow from my father, all I saw was a sea of gray hair nodding in approval. Look - this point can't even be argued. Lenders do not lend money with the intention of foreclosing on houses. Furthermore, if the homes in question were rising in value, the homeowner would have positive equity and there would be no default and no foreclosure. This statement was simply a blatant falsehood by Barney Frank.

Additionally, I wrote on my pad at this point: "For each of these villainous securities you mention (MBS, CDO, CDO squared) there was a willing buyer!"

7:50pm Frank discusses CDS: "Sellers of CDS thought they were selling life insurance on vampires," with the point being that they thought they'd never have to pay out on the policy, because vampires never die.

7:59pm: Frank summarizes the partisan views: from the liberals: "The problem was a lack of regulation." From the conservatives: "Liberals forced lending to poor people." Frank then went on to address the Community Reinvestment Act, which is often cited by conservatives as a leading cause of the sub prime crisis. Frank explained that the CRA was a qualitative (subjective) rule that merely required that banks be active within their local community, and that furthermore, if banks did not comply, there was nothing that the legislation could do to punish them. I don't want to get into a debate about the CRA, but there was a paper published today by the Minnesota Fed on the topic that is a good summary. One of Frank's other points on the CRA was that it only applied to banks - and that a key problem in the crisis was that while banks used to make the vast majority of home loans, that morphed into the majority of loans being made by non banks (via securitized products).

This is a sticky point, because Frank wants to say "hey - we couldn't regulate these non-banks," but my point is "hey - you don't have to - you let the non banks fail." The problem isn't making bad loans - if investors bought bad products and lost money, that doesn't cause systematic risk to our financial system. The problem was that banks were allowed to lever up massively, and own these same securitized products where the risk was completely mis-estimated and misunderstood.

8:05pm: We enter the bizarro world. Frank blames G.W. Bush for pushing home ownership for the masses. In the early part of the 21st century, he says, the percentage of FNM/FRE loans used for lower income housing was raised from 42% to 56%. Barney Frank claims he objected to this. The thought of Big Bad Bush scheming behind his Wizard of Oz curtain "I have an idea - we'll try to get all these poor people into houses - the Democrats will HATE that," while the Barney Frank screamed in the streets: "You Nazi!!! How could you suggest something so outrageous! We certainly do NOT want more people to own homes! That's a terrible idea!" Is so absolutely insane that it wouldn't even be funny if it was a story in The Onion.

Again, I looked around to see if anyone else was shocked at this claim that the liberals were fighting against home ownership while the conservatives were promoting it - but all I saw was a sea of heads nodding in response to the word they'd been conditioned to associate with evil: "Bush."

This morning, it took me all of 90 seconds on the internet to find this video of Frank speaking on the floor of Congress in 2005:

I took the liberty of transcribing the key portion: "Obviously, speculation is never a good thing, but those who argue that housing prices are now at the point of a bubble seem to me to be missing a very important point. Unlike previous examples where you've had where substantial excessive inflation of prices later caused some problems, we are talking here about an entity- home ownership - homes- where there is not the degree of leverage that we have seen elsewhere. This is not the dotcom situation - we had problems with people investing in business plans for which there was no reality...Homes that are occupied may see an ebb and flow in the price at a certain percentage level but you're not going to see the collapse that you see when people talk about a bubble and so those of us on our committee in particular will continue to push for homeownership."

I am quite certain this is exactly what readers were talking about when they called Barney Frank a hypocrite and a lier. His statement that he was against home ownership and that promoting home ownership was a tool of the evil Republican administration is the most shameful type of partisan politics.

Frank than explained that preventing foreclosures was a goal of enlightened self interest - to keep prices of neighboring homes from declining. Clearly, I disagree with this point - as manipulating home prices to keep them higher makes them less affordable, not more affordable.

8:10pm Frank outlines his 5 point plan for preventing a repeat of the financial crisis

1) Protect financial products at the retail level - ban products such as negative amortization loans. Somehow, during this point, Frank made a point of saying that he was in favor of gambling, and uttered, "I'll bet 1000 flowers bloom as long as I don't have to be in the garden." anway... I agree with this point, and I think that if we want to protect people from themselves we should require them to get educated and earn a "mortgage license" just like a drivers license - that way no one can claim after the fact that they were taken advantage of during the borrowing process.

2) Executive comp: "Say on pay" where shareholders have a vote on executive pay. Frank segued again into the perverse incentives he accused Wall Street Traders of having, where it was a case of "heads I win, tails you lose." Again - I don't think the issue is compensation and perverse incentive (although there is SOME of that) - the problem was a complete failure to accurately account for risk - not a willingness to ignore the downside risk. If banks are regulated by limiting leverage, the banks cannot blow themselves up. Cutting compensation doesn't reduce risk - cutting leverage DOES.

3) Regulators require some risk retention: this is back to the bank on 100% securitization - requiring people to keep some "skin in the game."

4) Give some federal regulators the power to takeover non-banks (like the FDIC has the power to takeover banks). By takeover, I mean "intervene and wind down if the shit really hits the fan."

5) Give federal regulators the power to regulate systematic risk: regulate CDS, have hedge funds register with the SEC. This is probably actually the most ambitious goal - it's easier said than done, but it's certainly a good goal.

8:26pm: Frank: "Because of technology, capital is mobile - we need coordinated international regulation," so that capital won't flow to nations with lax regulatory environments.

At this point, Frank opened the floor for questions, where I quickly got in line to ask mine. You'll have to tune in for Part Two for all the Q/A details.


Full Disclosure: short partisan politics, short pandering lies, short mis-education of ignorant constituents


jjok said...

I really look forward to part 2.

MCW said...

can't wait for part deux.

SirFWALGMan said...

You suck and I hate you. ;).

It is not surprising that most of the people at a Weston rally are older.. since that city is like one of the top 3 richest in MA and young folk probably are a minority.

Besides I read somewhere if you listen to Barny Frank too long you become ghey.

Anonymous said...

actually kiddyno, you hit it spot on. i always was astounded by this dopes willingness to lie even when he knows full well it merely takes seconds to provide a clip or a quote to prove his blatent disregard for truth. however, when writing that "liar" comment all that was going through my head was this guy on bill maher 2 weeks ago bringing up bush's evil push for homeownership to a raucous applause from the maher crowd. it is absolutely insane. thanks for letting me know im not crazy because up until now i had my doubts abt whether i imagined it or this ahole actually had the balls to make such a ridiculous claim. whats more tragic are the crowds appauding blatent lies as long as the sentence ends with "bush bad". how people respect this decietful this lib swine truly baffles me...

Anonymous said...

I'm surprised how well you transcribed what he said...Half the time his mouth is moving I can't understand a word he says. Looking forward to the next part!

Anonymous said...

Short ignorant fiscal conservatives that think pus are fiscal conservatives. They spent the last 8 years spending money like drunken sailors. Are you stoned or just stupid?

Kid Dynamite said...

it would be nearly IMPOSSIBLE to for any administration to match the current spending plan.

no, i am not stoned. and no, I'm certainly not stupid.

but you can continue to try to place the blame on the Republican control of the PRIOR 8 years - i'm sure that will help solve this crisis. Typical liberal politics - BLAME. solves nothing.

Anonymous said...

Typical conservative politics: blame liberals ie fags/environmentalists/woman/immigrants/blacks and the poor for everything that's wrong. Decry the current spending even though its an attempt to fix what the previous administration created and not once, NOT ONCE decry the spending that was going on during the prior 8 years. I hope the tax cuts for you were worth it. At least you benefited. And that's all that matters right?

Kid Dynamite said...

i'll respond one more time - although i don't get into internet comment thread wars with anonymous commenters:

the key is that it's not that the PREVIOUS administration created these problems - BARNEY FRANK'S POLICIES created these problems - that was the whole point of the video I went so far as to embed in the post so that no liberal could ignore the truth..

then, i even took the time to TRANSCRIBE the video, so it would be IMPOSSIBLE for you to ignore the truth... go watch it again.

Anonymous said...

Look, you voted for him twice. In the first 6 months, with the steel tariffs, you should have realized what an idiot bush was. That he didn't even get the basics. As soon as I see a shred of criticism from you with respect to bush/cheney et al then I will pay attention to what you have to say about Barney Frank. Until that time I consider you to be just another dishonest pub covering up the real reasons you are part of that party.

Kid Dynamite said...

1) you have no idea who i voted for
2) again, you're missing the point. when bush or cheney come to my alma mater to do a town hall meeting, i'll do a writeup on them. this is about barney frank - please try to focus on the point.
3) seriously - if you don't care what i have to say, then stop coming back to leave inane comments

Anonymous said...

Hi KD,

Can you please explain the below mentioned comment in somewhat more detail?

"The role of the public sector is to formulate rules to allow us to get the benefit from private sector innovation without generating harm."


Kid Dynamite said...

Sumit - i think he's just saying that he's in favor of enough regulation to make sure that "Capitalism" doesn't get out of hand - and by that I mean, you need some limits sometimes.