Frank Promises 'Tough Rules'
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Barney Frank was king of the Hill yesterday, holding court for several hours as the House Financial Services Committee, of which he is the chair, grilled the CEO's of 8 companies that received TARP funds.  And last night he told MSNBC's Rachel Maddow that Congress is going to be sure those executives will be held accountable. 

And, I think, by the summer, we're going to have a set of rules in place. It's going to be comparable, I think, to what FDR did with the New Deal, with the Securities and Exchange Commission and other rules. We will not depend on their goodwill. We will put some tough rules in place.

Here's the interview with Maddow. 

Obviously, Frank remains a polarizing figure.  Those of us who have dealt with directly know he suffers no fools and doesn't much care whether you agree with him or not.  But he is always prepared to give a clear point of view.  So for a moment forget whether you think he did a service to the country with yesterday's hearings.  Here's the question: If you were to choose one rule to place on big banks and other recipients of federal bailout funds, what would it be?  How would it help the overall economic climate, and why would citizens benefit?

Posted 02-12-2009 10:45 AM by Graham Griffith
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Comments

Graham Griffith wrote re: Frank Promises 'Tough Rules'
on 02-12-2009 2:10 PM

William Boyes writes: "Frank is a big part of why we are in this mess.  To consider that he is going to regulate us out of it is a strange irony.  The one rule I would impose would be that there would be no bailouts; if you take risks, you bear the losses as well as the returns."

Graham Griffith wrote re: Frank Promises 'Tough Rules'
on 02-12-2009 2:42 PM

Irvin B. Tucker, author of Economics for Today and Survey of Economics, comments: "Any new regulatory regime must in the future prevent systematic risks to the banking systems from subprime loans and toxic loans, which could not be properly rated for risks. Perhaps, the best source of such rules making and enforcement would the Fed. It is also vital that such rules are coordinated with global markets. Also, it should be noted that banks are confronted with a confusing alphabet soup set of regulators that should be streamlined and combined –such as the SEC, FDIC, Fed and OCC."

Graham Griffith wrote re: Frank Promises 'Tough Rules'
on 02-12-2009 3:14 PM

Bob Sexton of Pepperdine comments: "Commercial bank regulation is composed of many different regulatory agencies with overlapping jurisdictions. I would stream line the regulation."

Graham Griffith wrote re: Frank Promises 'Tough Rules'
on 02-13-2009 1:58 PM

Keith Brown, who teaches finance at UT's McCombs School of Business comments: "I think we will almost certainly see the re-emergence of regulations that separate the risk-taking and credit-granting functions in the financial services industry.  All of the trouble that manifested itself as a result of the indiscriminant use of the securitization process happened less than ten years after those provisions of the original Glass-Steagall Act were repealed."

Frederick Harris wrote re: Frank Promises 'Tough Rules'
on 02-21-2009 7:08 PM

Investment banking was a business model that could not have been expected to survive the asset pricing shocks we have experienced.  The more systemic problem has been the threat to commercial banking and the normal functioning of business credit markets.  Without working capital the small business and new venture engines of economic growth are unable to survive even normal business cycle fluctuations.  

    Ultimately the loss of confidence that led to deposit flight and commercial bank insolvencies arose from securitization activities of commercial banks.  Further regulation of this aspect of banking is inevitable and much needed.  

     The key insight is that derivative contracts can almost never be be set aside or excused.  Almost none of the normal breach of contract defenses available to other contract defendants (e.g., commercial impracticability and unforeseeablity) are available to derivative contract holders.  As a result, there is no way to stop bank runs that result from plaintiffs pursuing damages incurred from a breach of derivative contracts.  When you combine this inability to stop bank runs with the enormous risk exposure that highly leveraged derivative positions permit,  securitization strategies of commercial banks were a recipe for default risk disaster.  Perhaps the repeal of Glass-Steagall, forcing commercial banks to seek investment banking deals in order to produce competitive returns, was indeed a mistake.  

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