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CNBC Interview - Transcript


Location: Washington, DC


MR. GRIFFETH: And we welcome you back to the special edition of "CNBC Reports" as we spend this day commemorating Martin Luther King Day. The markets are closed, just a reminder there.

I'm Bill Griffeth with the whole gang here, including -- he has been kind enough to stick around with us today, Nobel --

MS. HERERA: We just wouldn't let him off the set. (Laughs.)

MR. GRIFFETH: Nobel Laureate Joseph Stiglitz of Columbia University is still with us today as well. And we add now to the mix, from Capitol Hill, Barney Frank, the chairman of the House Financial Services Committee, who is still conducting hearings on the TARP program.

And Chairman Frank, first of all, I want to make sure you're with us and can hear us today.


MR. GRIFFETH: Good. Thank you for being with us. We appreciate it very much.

How will the administration of TARP change in an Obama administration compared to the Bush administration, in your view?

REP. FRANK: We're about to have what you can rarely get in public policy, a laboratory experiment. Both President Bush and President Obama will have gotten to deploy 350 billion (dollars). And I think, frankly, it's going to be greatly to the advantage of President Obama.

The biggest single change will be that President Obama will be using up to 100 billion (dollars) of that for foreclosure diminution. I'm an admirer of Hank Paulson. We worked closely together on a lot of things, but he made, in my judgment, one grave error at the end when he refused to use any of the TARP money to diminish foreclosures. We have several good approaches to that from a wide range of people -- from Sheila Bair at the FDIC --


REP. FRANK: -- one that the House has worked on; Secretary of HUD Preston, the outgoing secretary of HUD has another; Marty Feldstein, who was chief adviser to Ronald Reagan has one. And we have commitments from the Obama administration. A substantial amount will be used for that.

Secondly, as there are capital infusions to banks, which can be a very legitimate use for this, they will only come after there are agreements with those banks that will tell us how they're going to spend the money. You will not have the situation where they will get the money and there will be a lot of uncertainty.

And we are going to be particularly tough on saying that no bank that receives this money should be using it for an acquisition, unless there's a very clear showing that that's something that the regulators thought would be in the taxpayers' interest.


REP. FRANK: There'll be some other advantages as well, but the two big ones are that we will see money used for foreclosure diminution, and we will see that money advanced to banks will come with some safeguards as to how it will be used.

MS. HERERA: Mr. Chairman, is there one particular method or system that you would favor in terms of reworking mortgages? Because the numbers on the mortgages that have been reworked so far show a large percentage of default after six to eight months. Is there one method that you think might work better than what is being employed right now?

And would you agree to a write-down on principal for some of these loans?

REP. FRANK: Well, that -- you've just answered the question. The bill the House passed last summer, we called the Help for Homeowners, does call for a write-down of principal. Now, interestingly, at the time we were being criticized for being too liberal, for spending too much money. So we tightened it up some. The Bush administration insisted on more tightening, and then the Senate tightened it further.

We tightened it so much, now nobody can use it. We need to loosen it up a little bit. But that does ask for mortgage reduction in principal, which is, of course, the best way to guarantee against redefault because people get some -- get some equity. Marty Feldstein is also talking about trying to do that by a reduction which is accompanied by an agreement from the borrower that there will be recourse going forward.

On the other hand, you can't have one-size-fits-all, and Sheila Bair's had a great deal of success -- it -- the IndyMac model, where she was in control, with doing some interest-rate reduction.

So what we want is the full menu there. To the extent that you can get principal reduction, yes, that gives you the best insurance against re-default.

MR. : Okay.

MS. CARUSO-CABRERA: Are you willing to accept the costs, though, that come with that, which is that every American in this country who has actually paid their bills on time is going to face higher interest rates in the future? Because now banks are going to calculate in the fact that they could actually lose that principal, and in fact, with this -- changes going on, perhaps at the -- with judges being able to change payments in bankruptcy court --

REP. FRANK: No, you made -- you made -- I'm sorry. I'm sorry. You brought something in that I wasn't talking about.


REP. FRANK: The question of bankruptcy is a different one. The bill that we passed already has nothing to do with bankruptcy. It's an inducement to the lender to reduce -- what we say to the lender is, "If you will reduce principal, we will guarantee that that's the last loss you'll have to take" -- that we will then guarantee that going forward. That is separate from bankruptcy. I support the bankruptcy issue, but that has not yet been done.

Secondly, the notion that that's going to raise interest rates, I think, is simply not economically (relevant ?). You can now declare bankruptcy on your second, third and fourth home. Ironically, it's only on your principal residence where you -- where you can't go -- have that discharged in bankruptcy. And we see no sign that interest rates in these other areas have gone up.

Finally, the bankruptcy bill that I do support is very limited. And in particular, it is retroactive only. It says bankruptcy would be allowed for mortgages already done but not, not, going forward. So the argument that it's going to hurt going forward I think we (meet ?) by saying that we are going to restrict what its application is.

We also are going to hope to use the TARP, frankly -- and Secretary Paulson talked about this, but wasn't able to follow through -- to bring down mortgage rates generally for everybody.

MR. KNEALE: Mr. Chairman, how do you stop foreclosures from going up in anticipation that, "I'm going to be getting some extra help from Washington, thanks to the new bill they're looking at"?

REP. FRANK: You mean -- I don't understand that.

MS. CARUSO-CABRERA: Well, do you induce them, if you encourage people? Let's say, if you're two months behind and you get to qualify for the program, well, doesn't that encourage people to become two months behind to qualify for the program?

REP. FRANK: Yes, it does. That's why these programs should not have a requirement that you be in default. If you can show that you're going to be in default, we should do some anticipation.

Of course the argument you're giving me is also the conservative argument that says if you have unemployment compensation, people quit their jobs; you know, if you have welfare, people won't work. In general, if you design programs to help people in distress sensibly, you have a minimal inducement effect. But in this case in particular, yes, it would be a mistake to say you can't do that till you're six months behind.

On the other hand, if you think about all the things -- and I agree, there is no perfect program, but until and unless we begin to reduce the number of foreclosures, we cannot get out of the economic problem we're in, because it was central to that problem and it's an ongoing and continuing drag on the economy.

MR. KNEALE: Mr. Chairman -- do you have another question?

MS. CARUSO-CABRERA: I just wanted to ask him how he felt about the fact that Ken Lewis at Bank of America spent $7 billion on a Chinese bank in December, and now you saw what happened over the last week.

REP. FRANK: Well, what happened in the last week to the Bank of America is, of course, that the federal government asked the Bank of America to buy Merrill Lynch. They got badly burned when they let Lehman go under; although many of those attacking them for letting Lehman go under now weren't demanding that they bail out Lehman, and in fact some of them are the ones who criticized them when they bailed out the creditors of Bear Stearns.

But what the Bank of America, in fairness to them, is saying now is, "If you, the federal government, want me to go ahead with the acquisition of Merrill Lynch, since it's in worse shape than we thought, then I need some more -- I need additional funds."

As to what they did in the past, let me reiterate: We are not happy with the way in which the Bush administration administered the TARP and we believe there should be safeguards that the Obama administration has agreed to, going forward.

MR. GRIFFETH: Mr. Chairman, let me ask you about the automotive bailout for a second. We've learned today that perhaps Chrysler is in talks with Fiat to form sort of partnership. If in fact there is something that comes out of these talks here, your view of if that changes the game and whether they should qualify for any further aid from the government if, in fact, they're able to go out and set up these partnerships that might provide them more capital down the road anyway?

REP. FRANK: Not only would that meet, I think -- depending how big a role Fiat had -- for there not to be any further funds, it might well trigger a repayment. We put into this and we put it into our bill. And while the bill was defeated by a Senate filibuster, the Bush administration has carried this out. We're very high on the repayment list. So depending on the deal they make, it could very well trigger Chrysler having to repay the 4 billion (dollars), I think, that they got.

MR. KNEALE: Well, Mr. Chairman, the Nobel Prize laureate, Joseph Stiglitz, just said moments ago on our air that the tax rebates from February '08 didn't work to help the economy and he doubts the thousand-dollar rebates will work this time around and the Obama administration should look at delaying it.

Politically, can you guys dare even consider doing that?

REP. FRANK: Well, you're asking me. Frankly, I can consider just about everything, and at one point or another in my career, I have. (Laughter.) So I'm not too worried personally.

There is this need to get the bill through. And while we're at 59 in the Senate, there's still the filibuster.

I would say this. There's a particular argument that the rebates were of less impact. I think they had some impact because they were just rebates, and people who got them knew they were one-shot deals. If you were to be able, for people in the lower brackets, to give them a more permanent reduction, I think that could lead to more -- more.

But I do believe strongly, both from the standpoint of not having further deficit problems and from the standpoint of a better impact right now, that more of it should be spending. I think a smaller part should be tax cuts. Interesting, Marty Feldstein joins, you know, segments, people from opposite ends of the ideological spectrum, in pushing for more spending.

And there's another advantage to spending, if we spend this right; it does improve the quality of our kinds of lives. We are talking about improving -- environmental improvements and public transportation and other things that make it better. So if you are doing some tax relief, I think if it's just a one-shot rebate, that's a mistake. But I would also favor the maximum amount that we could, frankly, get through the Congress in sensible spending.

MR. GRIFFETH: All right. Mr. Chairman, I know you have to run. We always love having you on the program. And thank you so much for your time today, sir.

REP. FRANK: You're welcome.

MR. GRIFFETH: Chairman Barney Frank.


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