Barney Frank on Detroit, Housing, and Executive Pay
As BusinessWeek went to press on Dec. 10, the House passed a plan to provide the U.S. auto industry with a $14 billion bridge loan (to the Obama Administration, a wag might say). On Capitol Hill resistance was mounting from some Republican senators who said they were prepared to filibuster. But if you talk to Barney Frank of Massachusetts, the powerful chairman of the House Financial Services Committee—as I did on Dec. 9—the only question is whether Detroit will be bailed out while President Bush is still in office or whether the rescue must wait for Barack Obama.
The proposed auto bailout calls for the appointment of an auto czar. Doesn't that smack of nationalization?
No, because the czar will be monitoring what [car companies] do rather than taking the lead. They've got to submit a plan, and the czar can modify the plan. There's obviously greater national intervention…but the other point I would make is this: The purpose of this is to be able to get the federal government the hell out of it. They need us for now. But the federal government is there to try to make the federal role unnecessary within a few years.
How do you make sure the government doesn't meddle too deeply in day-to-day operations and bring politics—like a push for green cars—into the equation?
Oh, well, a push for green cars is very much a part of what we're involved in. We don't think that's politics.
Does Congress realize how few hybrids have been sold, as it pushes, Detroit to make them, and will Congress give consumers greater incentives to buy these cars?
That's a very fair point. And one of the things I've been saying is that some of my colleagues and the commentators who have been blaming the auto companies forget to blame somebody else—the consumers. In the recorded history of America, no one was ever forced at gunpoint to buy a Hummer. But we do believe that the combination of genuine concern about global warming and energy efficiency means people are now ready to buy these cars.
If several waves of car guys haven't been able to fix Detroit, why would an outsider do any better?
Of the three companies right now, the one that appears to be doing the best is being run by an outsider. Alan Mulally came to Ford (F) from Boeing (BA). Sometimes a fresher look can be helpful. But we're not talking about running the companies. You know, Harry Truman said once that being President meant getting people to do what they would've done in the first place if they were smart enough. This [car czar] is going to ensure that a lot of people do things that are in everybody's interest. That bondholders take less, that the auto workers make concessions, that dealers and suppliers accept some reductions. Nobody wants to be the only sucker in the game.
Who would be on your short list for czar?
I don't have a list because nobody's asking me to appoint a czar, and I have this rule: I don't think about things where nobody cares what I think.
If the economy weren't in such awful shape, would there be more political will to let these guys go bankrupt?
Yes. But we've lost 533,000 jobs. And the thing about bankruptcy is that you can break your agreement to pay people. The suppliers would be hurt. Yes, the union workers would be hurt. And there's another thing the car companies have been arguing: If you are going to buy a car, you want some assurance the company is going to be around.
Fair point. But if they don't buy cars from those companies, so what? An entrepreneurial company will take their place and build cars.
Well, in the first place, it's hardly the American way to just let people go bankrupt. You know, people tell me, "Oh, let's just let the market do it." We have American agricultural policy, for example, in which tens of billions of dollars are spent on helping farmers. Second, we are in the worst economic situation since the Great Depression. We are losing jobs at a fearful rate. People are frightened. People are not spending. It would be one thing to have a company collapse at a time of great prosperity when the people who lost their jobs could find other jobs, when the [suppliers] who couldn't sell to Chrysler could sell to somebody else. At this point, you are talking about a very weakened patient, and slapping that weakened patient around in the interest of proving some economic theory would cause even more damage. The CEOs of these companies are not likely to show up in any soup kitchens for many, many years no matter what happens to the companies. But there are workers. There are retirees. There are small companies that have sold [the automakers] things. There are auto dealers with their salespeople. It's having them thrown out of work through a bankruptcy and not getting paid that would be the problem.
Getting bondholders to take a haircut and accept equity for half their debt is said to be critical to restructuring the automakers. But these bondholders have credit default swaps to protect them if the companies go Chapter 11. What leverage will you have over bondholders?
In the first place, credit default swaps ain't what they were made out to be. People were issuing those swaps like they were life insurance policies on vampires, and an awful lot of people thought they had protection. It turns out the people who issued the credit default swaps don't have the money to pay them. Second, that's the purpose of the czar or collection of czars or whatever the President decides to appoint. He's going to say to everybody: "You're going to have to take a reduction or else the whole thing goes bankrupt."
Should GM (GM) acquire Chrysler?
I'm not competent to say. I try to resist the temptation that too many of us in politics and the media fall into, which is telling people a good deal more than we know.
We just saw bonuses denied to John Mack of Morgan Stanley (MS) and John Thain of Merrill (MER). Will the terms of an auto bailout deny golden handshakes to departing executives? And will the next Congress act to rein in what some see as excessive executive compensation?
I hope so. But you know what? In 2006 when the Democrats were in the minority, I had a bill to try to [curb executive pay]. I didn't get much attention from the media. In 2007 the House passed a bill that I sponsored in the Financial Services Committee called "say on pay," which required a referendum by shareholders on any executive compensation. Once again, we were kind of ignored. So, frankly, the House and the committee I chair have been ahead of a lot of other people on this. I welcome the fact that people now are joining us, and yes, in 2009 we will pass, at the very least I believe, legislation that says you have to have a referendum on all forms of compensation: bonuses, golden parachutes, stock incentives, as well as salaries.
People are outraged out there. They want to know how the heck we got into this position in the first place. The next worry is that credit-card lines of credit are going to be cut. How are you going to ensure this doesn't get worse? How are you going to put money in people's pockets so that they actually have some confidence when the banks withdraw their credit?
I do think people should be unhappy. But this is not something that was visited on Americans by Martians. What we plan is a threefold approach: First, we need to take much more aggressive action to reduce mortgage foreclosures. Second, we need to do a much better job of insisting that banks that receive capital infusions from the Treasury Secretary re-lend that money rather than simply sit on it, and Treasury has not done a good enough job of forcing them to do that. Finally, once President-elect Obama is in office, Congress will pass a program for recovery worth hundreds of billions of dollars providing money to states and cities to do a variety of very necessary physical projects, and that's the single biggest thing that will get money back in people's pockets.
With all due respect, congressman, I saw videotapes of you saying in the past: "Oh, let's open up the lending. The housing market is fine."
No, you didn't see any such tapes.
I did. I saw them on TV.
Yeah, well, I never said open up the housing market, the market is fine. In 2005 a group of us in Congress were trying to pass a bill to restrict subprime lending, and we were opposed by right-wing Republicans led by [former House Majority Leader] Tom DeLay, and I don't remember us being able to get any media attention. No, I have been on the record as saying repeatedly that pushing people into homeownership when they can't afford it is a bad idea for them and the economy. In 1994, in fact, Democrats in Congress passed a bill giving the Fed the authority to restrict subprime lending. Alan Greenspan, as he later admitted, refused to use it.
So whose fault is this?
The right-wing Republicans who took the position that regulation was always bad, the market was self-correcting, and you should not have any restrictions on the free flow of capital. If you look at the loans made by banks, which are regulated entities, they didn't make many bad subprime loans in percentage terms. The bad loans were made by the unregulated entities. What you're going to see next year is a rediscovery of the importance of regulation. We've had a period of a philosophy that said: "Let capital do whatever it wants. Don't regulate it. Don't tax it. Don't restrict its international movement, and it will reward you." And yes, it does do some good because it creates wealth, but it creates wealth in a maldistributed way. More important, it creates excessive risk. What we will do next year is put rules in place that constrain those risks.
Why is so much money going to AIG (AIG)? Here we are wrangling over $14 billion for two auto companies, and we've given $140 billion to AIG.
I agree with you. But you should ask the Bush Administration because they're the ones who gave the money to AIG. Congress was not involved. The Treasury Secretary and Fed chairman came to us and said: "We're giving $85 billion to AIG." There's a great inconsistency, and some people who said O.K. to AIG are being hypocritical when they object to a much smaller amount going to Chrysler and GM. I believe to some extent there's a white-collar/blue-collar bias.
Is Obama going to raise taxes on the highest earners?
Not in the first year, I believe, because the economic situation is what it is. I do think it is appropriate: Bill Clinton raised taxes on higher-income people, and we went on to have a very prosperous economy.