CNBC "Power Lunch" - Transcript

Interview

CNBC "Power Lunch" - Transcript

MS. HERERA: Third time's a charm, maybe?

MR. GRIFFETH: Chairman Frank, can you -- can you hear us now, sir?

REP. FRANK: Yes.

MR. GRIFFETH: Good to see you and thanks for joining us. We went through an elaborate introduction but you didn't hear any of that but we're glad you're with us now.

MS. HERERA: But it was a good one.

MR. GRIFFETH: Thanks for being with us --

REP. FRANK: Don't -- there's no need to repeat it.

MR. GRIFFETH: Okay. Yeah, you know who you are. I don't know if you've heard since you've been there in Denver but a little while ago Freddie Mac had a very successful debt offering -- another billion dollars, able to raise some more capital in that auction there. Does that -- are you encouraged by that, first, and second, does it --

REP. FRANK: Well, I am and I --

MR. GRIFFETH: -- does it lessen the possibility of a market -- of a government recapitalization plan?

REP. FRANK: Well, first, I want to extend my condolences to the media because I know good news is not the substance with which you are most --

MR. GRIFFETH: We like it here, actually.

REP. FRANK: -- comfortable but yes. But the answer is this. Yeah, look -- I -- nobody knows exactly what's going to happen and we're in a psychological thing. I do believe that the basics of Fannie Mae and Freddie Mac are still okay. By the way, one of the things I want to talk about, people have said well, you know, you guys are protecting the shareholders -- (inaudible) -- the public. The shareholders in both Fannie Mae and Freddie Mac have taken a terrible beating.

MR. GRIFFETH: Right.

REP. FRANK: There is this incredible misperception that somehow they're being sheltered. They have lost a lot of money. I have sympathy with a lot of people who've worked hard at Fannie Mae and Freddie Mac and frankly, you know --

MR. GRIFFETH: If there is a government recapitalization of those two GSEs, do you think that the shareholders should be included in that?

REP. FRANK: No. I -- well, first of all, I don't think we should be talking about it to be honest because we're in one of these situations where whatever you say affects what's going to happen. I think if you look at the basics there is still some soundness there and the fundamental problem is they are entities 100 percent in the housing business. They've, frankly, done better than a lot of the people that were not only 100 percent in the housing business but 30 and 40 and 50 percent -- the Lehman Brothers, Bear Stearns, Countrywide, IndyMac. So they are suffering because the housing business is suffering.

Secondly, they continue to play an important role. There was an interesting article in The New York Times the week before last which pointed out that they've become a major prop in the multi-family market -- a very important part of the market economically and socially. I do believe that going forward a year from now we're going to have to look and see whether in the current set of market conditions, et cetera, going forward this hybrid makes sense, and I -- there's no question we will be looking at that. One other thing people --

MS. HERERA: But --

REP. FRANK: -- should not leave out, there was a group called FM Watch that was organized to push for better regulation of Fannie Mae and Freddie Mac. They went out of business when we passed the bill that we just passed because among the things that bill did was significantly increase the regulatory tightness.

MS. HERERA: But, Congressman Frank, a lot of people feel as though Fannie Mae and Freddie Mac and their business model have been suspect and been a subject of controversy for at least 10 years. They should have been reformed long ago and that there's no reason really to have them in existence as they are right now -- that the housing market itself may not need -- may need the safety net certainly, but this is not the first instance that Fannie Mae and Freddie Mac have been, you know, on the headlines as a controversial entity. Ten years ago Larry Kudlow was talking about them on Capitol Hill and the problems on their balance sheets. This is not new.

REP. FRANK: All right. No, and in fact I have been pushing for some time for better regulation. Unfortunately, it didn't get done until the Democrats took over. You know, parties matter. The Democrats took over in January of 2007. We organized our committee in February of 2007. By April of 2007, the House of Representatives passed a bill that came out of the Financial Services Committee that I chair that did all of the regulatory reform that FM Watch is now celebrating. So I agree it should have been done and it then unfortunately took another 15 months before the Senate did it. So I have agreed. I disagree, however, that when you say --

MS. HERERA: But what about those -- what about those who say that the housing --

REP. FRANK: Please let me finish. Excuse me -- excuse me. You asked me a long question.

MS. HERERA: I'm sorry.

REP. FRANK: Don't I get a chance to answer it fully?

MS. HERERA: Yes. I'm sorry.

REP. FRANK: The argument -- where I disagree with you is that the housing market doesn't need it. As a matter of fact, if it hadn't been for Fannie Mae and Freddie Mac in this past year, the housing market would have been much worse. Now, they have performed a social function to a great extent. Their shareholders have suffered. By the way, we also in that bill said that going forward when they become profitable again we're going to take some of that money and put it into affordable housing. So this has been no free ride for Fannie Mae and Freddie Mac.

I do agree going forward we have to look at the model. We have to look at a lot of things. We have to look at the whole model of investment banks. There have been substantial changes that have gone on in the markets that require us to make some institutional changes everywhere but I will still say if you look at Fannie Mae and Freddie Mac compared to -- you know, Henny Youngman had the great question -- how's your wife compared to what. What are you comparing Fannie and Freddie to? Lehman Brothers? Bear Stearns?

MR. GRIFFETH: So they're --

REP. FRANK: New Century?

MR. GRIFFETH: To this point, Chairman Frank, you have been very happy with the role that Treasury Secretary Paulson has played in all of this. You've said he's done a very responsible job here. In your view, is there something Treasury should do now? I mean, he has talked about using that bazooka that he's got available in the form of a government --

REP. FRANK: What he should do --

MR. GRIFFETH: -- bailout plan. Should he use that right now?

REP. FRANK: What he ought to do now to be honest is pretty much ignore you guys because this is a situation where the market psychology is an essential factor and it's a -- the more you talk about it the more nervous people get. I would hope people would look at the economics. I'm pleased that Freddie was able to raise some money, and again, let's just look at this. We have reformed the regulatory structure significantly including mandating that the director check the compensation that the top people get. We have increased the FHAs all going forward so that going forward Fannie Mae and Freddie Mac won't have to buy some of the loans they've had to buy to try and help the market. They'll be able to buy FHA-guaranteed loans, which are a much better buy. Going forward, I am encouraged by what we've been able to put together -- (inaudible) -- cooperates with the administration. As of now, I think you look at it and not do a lot of talking because I think the market -- we were in danger of the market being affected by this or that nuance rather than the fundamentals.

MS. HERERA: Mr. Chairman, one final question to you. What about those who say that all of these reforms simply put a floor under a housing market that needs to further correct, and that by putting the floor under the housing market you perpetuate the problem -- that the free market should rule, housing should continue to decline, and that the free market will remedy the situation itself?

REP. FRANK: Well, we are not trying to stop the decline in housing. No one has claimed that. No one has said that. In fact, one of the criticisms we get is that we haven't stopped it. And by the way, I think that housing prices were too high from a social standpoint. I'd welcome a drop in housing prices. I'm sorry it is happening so rapidly. We are not trying to stop the decline in housing prices. We are trying to control the speed with which it happens because the free market created this problem with the subprime mortgages in an unregulated situation and they caused a worldwide recession to a very great extent.

So no, I'm not ready to simply let the free market work it out. We are, on the other hand, trying to work in market-friendly ways not to stop the drop in housing prices but to put some moderation in the pace at which it happens so it doesn't continue to undercut the whole economy.

MR. GRIFFETH: Mr. Chairman, we always appreciate the time you give to us and we do appreciate good news as well. Good to see you.

REP. FRANK: Thank you.

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