barney frank

Rep. Barney Frank, D-Mass., spoke to Bloomberg TV’s Stephanie Ruhle and Eric Schatzker this morning, saying that Congress “can’t write laws” to prevent technical errors like what happened with Knight Capital Group Inc. (NYSE:KCG) yesterday.  Frank also said that while he hasn’t yet followed the news of Knight Capital, he believes Dodd-Frank would have prevented JP Morgan’s Chase & Co. (NYSE:JPM) CIO unit losses.

Frank on whether investors should still have confidence in the U.S. financial system after the Knight Capital technological breakdown: 

“Absolutely [I still have faith]. On the whole, [financial markets] work very well, and America continues to be one of the safest places in the world to put your money, probably because of the stability of our political system and the great wealth that continues to exist in the country. I didn’t yet see the story about Knight.”

“One of the things we need to do and one of the things that disappoints me about my Republican colleagues is they’ve refused to provide the funding for the regulators we need to deal with this. Technology advances get more complex, and they have refused…to provide either the CFTC or the SEC the funds they need. They’ve got to hire very smart people, they’ve got to have first rate information technology, I also believe, and this is also by shown by Libor and Peregrine and some others, this notion of self-regulatory organizations is not something that we can rely on….We’re not talking about huge amounts of money, compared to what is wasted frankly, in a whole range of other places, like this infrastructure boondoggle in Afghanistan. We’re talking about fairly small amounts of money in federal budget terms and that’s part of the problem.”

On whether Dodd-Frank and the Volcker Rule would have been able to prevent issues like the JP Morgan CIO loss or Knight Capital:

“Yes and no. We can’t write a law that prevents technical errors by people, that’s why you need the funding. As far as JP Morgan Chase, yes.”

“One of the biggest things we did was to regulate derivatives, which had sadly been allowed to grow as complex, very highly leveraged activity with virtually no regulation. Under the law, derivatives will now be regulated. Part of the problem is that, for historical reasons, cultural reasons, Midwest versus the coasts – our derivatives regulation is split between two agencies, Commodities Futures Trading Commission and the Securities Exchange Commission. I would dearly love to merge them, it’s become politically impossible, because it’s the farmers versus Wall Street versus the Chicago Mercantile Exchange.”

“Now that these derivatives rules are about to be in effect, it is much less likely that JP Morgan Chase would lose that much money without realizing what they are losing. And it’s certainly the case that whoever might be doing that would be adequately capitalized. One of the things we’re fighting is a Republican bill that would say that none of the rules we are promulgating regarding derivatives would apply to an American institution that’s doing it through a subsidiary in a foreign country — that’s clearly a mistake.”

On the talk of bringing back Glass-Steagall and whether Glass-Steagall would create a competitive disadvantage for American banks:

“The first thing to be noted about Glass-Steagall is that it wouldn’t have any effect on what I’ve just been talking about. The Volcker Rule accomplishes a lot of what Glass-Steagall did. People should remember Glass-Steagall is 80 years old or it was 70 years old when it was repealed, and I voted against repealing it, not because I didn’t think it had to be updated. We didn’t replace it with something.”

“If you had just brought back Glass-Steagall, you would’ve done nothing about derivatives, which were a major cause of the problem. You would have done nothing about bad lending practices. One of the problems that Glass-Steagall didn’t know about – that’s a fairly recent one – is this notion of people making loans and then securitizing 100% of loans so they’ve got rid of all the risks. So they make lending decisions as if there was no risk, when in fact there is. No, Glass-Steagall wouldn’t have been relevant to any of the things we have just been talking about, and to the extent that we’re concerned about the deposit fund being an important risk, a tough Volcker rule would do it and I believe you’re going to see a tough Volcker rule now.”

On the threat of a shadow banking system:

“Our legislation does give regulators the power to deal with the shadow banks. For example, the Consumer Financial Protection Bureau is given, for the first time, authority over payday lenders, check cashers, other people who operate outside the banking system. Frankly, I think that’s good for small banks because it reins in some of the irresponsible competitors. What we do in this bill is to regulate activity, not institutions. If it is a financial activity of the shadow banking sort, then the regulators have the ability to go after it. And in fact, they are doing it. Some of these things, derivatives, have been done outside banks in a kind of shadow.”

On whether Frank supports restrictions SEC Chairman Mary Schapiro wants to put on money market funds:

“Some of them, not others. I don’t think we should restrict — and this is one of the things [Schapiro] talked about — the right of people to withdraw. If you put restrictions on the withdrawal, that would be a problem. But making them keep enough capital? Yes, I very much think that’s a very important thing they should be doing. The fluctuation within a very small range, less important. So, I support some of what she’s proposed, but not others. But you make my point about the bill; the bill clearly gives her the authority to do it. There’s a debate about whether or not what she’s proposing is prudent, but there’s no debate about having the right to do it under the law.”

On whether Washington and Congress were too soft on JP Morgan’s Jamie Dimon:

 

“I’m sorry, I think you watched only the Senate. If you go back and watch the House hearing…The House members, particularly the Democrats, but a couple of the Republicans, were quite critical of the practices of the bank and asked some very tough questions of Mr. Dimon about his support for being totally deregulated in London.”

“I asked [Jamie Dimon] when he talked about cutting compensation, if his own should be involved. He was unhappy about that. So, I reject the notion that we were safe about that. The take-away from his testimony is several things we’re pushing for. First of all, the Republicans put a bill through a committee I’m on which would deregulate the activities of the branches of American banks in England and elsewhere. We fought that bill,

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