“I was expecting the William Tell overture as my introduction music,” former congressman Barney Frank said to laughter at the TD Ameritrade 2013 Elite Summit in Palm Beach, Fla., on Wednesday morning.
The legendary curmudgeon and bane of political opponents was well-received by the advisors in attendance as he described the reasoning behind the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as his views on the fiduciary standard.
The 16-term congressman and former chairman of the House Financial Services Committee began by noting the “two important systems” on which the country runs, the private and the public.
“The private system creates wealth and innovation,” he noted as a way to introduce his explanation of Dodd-Frank. “The public system sets the rules by which the private sector conducts itself, as well as doing the things the private sector can’t, but which citizens still demand.”
Frank said that during congressional hearings into the causes of the 2008 financial crisis, “I kept hearing over and over again how financial services firms had to do what they did because of competition.” He specifically noted former Citigroup CEO Chuck Prince’s explanation for using structured debt because “not to would put Citigroup at a competitive disadvantage to Goldman Sachs.”
“At some point innovation in society reaches critical mass, and a sea change occurs,” Frank said. “Because it’s all completely new there are no rules to govern it.”
Such was the case with innovation coming from Wall Street, he argued.
“In 1850, there were no large, national enterprises in this country. By 1890, there was coal, railroads and manufacturing, among others. But it wasn’t until the Sherman Antitrust Act and really the Roosevelt administration that rules were established.”
The same can be said of what happened more recently with securitization, according to Frank.
“It used to be that there was a strict lender-borrower relationship; the person who lent the money expected to get paid back. With securitization, loans were made by institutions with no expectation of being paid back. It actually encouraged bad loans because they could collect transaction fees before the loans were sold.”
Calling rating agencies the “worst” performers of the crisis, he noted “they didn’t even sample the loans they were rating, they just had an equation they’d use.”
With Dodd-Frank, he said, “we did not fix prices, like some people wanted me to do with limiting credit card interest rates. We wanted to put risk back on the lender.”