Barney Frank on His Role in the Banking Crisis (2023)

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From “New York Times,” I’m Michael Barbaro. This is “The Daily.”

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When he retired from Congress, Barney Frank’s legacy was a piece of legislation designed to prevent another financial crisis. Now, because of what he’s done since, many are asking if Frank helped cause another financial crisis. Today, my colleague, David Enrich, talks to Frank about the banking crisis and the unexpected role that he played in it.

It’s Wednesday, March 22.

David, as you have been sorting through the causes and the fallout of this banking crisis that we are still very much in the middle of, why is it that you wanted to talk to former Congressman Barney Frank?

Well, Barney Frank has been in the middle of so much that has been going on. So back in 2008, after the global financial crisis, he was one of the people most responsible for overhauling the system of financial regulation that was in place. And that was a real landmark achievement that he had.

And then in the years to come, he kind of switched gears a little bit. He began to support the plan to roll back some of those requirements. And then right around the same time they started doing that, he joined the board of a bank that stood to benefit from those rules being weakened.

And a few years after that, now we’re in the present day, that bank was one of the first to fail. A lot of people are concerned that it’s one of the bellwethers that is setting off this global banking panic. And so he’s gone from being the guy who created the rules to the guy who supported weakening them to the guy whose bank falls victim to this budding financial crisis.

Right. A kind of hero-to-villain, perhaps, journey in a pretty short period of time.

That’s right. So I was really hoping to get a chance to ask him whether he thinks he made some wrong decisions along the way and whether he thinks the decisions he made in some ways contributed to the mess that we’re now in.

So I arranged to speak to him last Thursday. And we originally planned to do it by video chat. It turned out he was in the Caribbean. His wi-fi wasn’t great. We had some issues with, I think, his cell phone and his iPad, his iPhone.

And ultimately, we decided to skip the fancy technology and just call him on a cell phone.

And just remind us, David. Who was Frank when he becomes involved in the post-financial crisis regulatory work that defines his career?

Well, first of all, in his telling, he is not someone who has any particular interest or experience in bank regulation. Barney Frank was someone who’d been in Congress for, I think, 27 years, all of them representing Massachusetts. And he was one of the most progressive members of the House Democratic caucus. He was also — or at least I thought, he was also the first openly gay member of Congress, although that’s something he corrected me on.

And he was a very outspoken proponent of gay rights at a time when not everyone was doing that. The reason he got into kind of the financial space in the first place is that he wanted to do more to promote fair housing and affordable housing for people. And he thought that the House Financial Services Committee, that that would be a good perch from which to push that.

Mm-hmm.

Then, of course, the banking system starts to unravel in 2007 and 2008.

And the committee that he’s on becomes instead a very powerful and important place from which he can start tackling the work of trying to stabilize the financial system and then fix it so that a crisis like that won’t happen again.

And of course, that crisis really stemmed from a downturn in the housing market, which revealed that many of the country’s biggest banks had invested a huge amount of their money in the housing market in the form of mortgages and mortgage-backed securities. And when the downturn started, these banks lost so much money that the entire financial system was suddenly at risk.

Right. Keep in mind, though, it wasn’t just about the banks making bad decisions. One of the real revelations of this crisis was that regulators were completely asleep at the wheel. And so one of the things that Barney Frank starts to look at in the immediate aftermath of this crisis is how do we empower regulators to act more swiftly, more decisively, and to not just respond to a crisis once it erupts, but to prevent it from erupting in the first place.

Mm-hmm.

And so Barney Frank teams up with Senator Chris Dodd. And the two of them set out to enact this absolutely sweeping set of financial reforms that’s going to do everything from empower regulators to require banks to hold greater financial resources. It creates a consumer protection bureau.

But one of the biggest parts of it is that for the 30 or 40 biggest banks in the country, so that’s banks with $50 billion or more of assets, there’s this much more intense system of federal regulation and other requirements those giant banks face. And so they have to undergo stress tests. They have to have much thicker capital and liquidity cushions. They need to be in a position where regulators can look at them very quickly and have zero doubts about their ability to survive a really intense economic or financial storm.

And David, what was so special about banks bigger than $50 billion?

Well, basically, these were the types of banks that had caused the 2008 crisis. And so this cutoff was meant to ensure that banks like that got especially intense supervision and had especially high levels of financial stability so that when the next crisis came around, banks like this would not be on rickety financial footing.

Mm-hmm.

And arguably, this is the crowning achievement of Congressman Frank’s career. The bill literally bears his name. It’s called Dodd-Frank.

Yeah, that’s exactly right. And about two years later, Congressman Frank, who’s 72 at the time, decides he’s going to retire from Congress.

And then in 2014, he gets invited to return to Capitol Hill.

And why is he invited back?

Well, he was invited back by his former colleagues in the House Financial Services Committee.

And at this point, Dodd-Frank has come under intense sustained assault, not just from the banking industry, but also from Republicans on Capitol Hill. The Republicans at this point control the House, and they’re doing everything in their power to make a public case against Dodd-Frank.

The Democrats on the committee are trying their best to defend the law, but are struggling, especially because they’re in the minority. And so Congressman Frank is invited to come back to Capitol Hill to testify in defense of the law that he helped write.

Most of his testimony is spent defending the law.

And kind of shooting down many of the industry’s arguments and the Republican arguments about the harm that the intense regulation has supposedly done to the banking industry and to the economy. But partway through his testimony, he makes what I regarded as a really surprising concession.

He said that the threshold at which the intense federal supervision really kicked in, so that’s at $50 billion, he acknowledged that he thought now that threshold was too low, that it was basically snaring too many banks that were not the very biggest of the big. And there’s an unnecessarily complicated and onerous system of regulation. And he said that this threshold should be a lot higher than it currently was.

Hmm. So he’s opening the door to the possibility of rolling back what seems like a pretty key element of Dodd-Frank, this law that bears his name.

That’s right. And it’s around this time that Barney Frank is invited to join the board of directors of a regional bank based in New York. And it’s called Signature Bank.

And, David, what should we know about Signature Bank at this moment that they ask Frank to join their board?

Well, like a lot of other large regional banks in the country, it was growing very quickly. And it was rapidly approaching having $50 billion in assets, which meant that as the rules were currently written, it was either going to need to really slam on the brakes and stop growing or it was about to face a whole new intense level of federal oversight and all sorts of new financial requirements that it looked upon very unfavorably.

And so at the time that this bank invited Congressman Frank to join its board of directors, Signature had a tremendous amount at stake in the debate over whether or not to raise this $50 billion threshold.

And in 2015, Frank joined the board of Signature Bank.

This, of course, is both extremely common and extremely criticized, this phenomenon of former members of Congress or former regulators, who have spent their careers championing or fighting an issue, later on getting hired by companies who want to use those lawmakers expertise to navigate that very same issue.

It’s kind of known as the great revolving door in Washington between government and business. So what does Barney Frank say about this decision to join the revolving door system by being on Signature’s board?

Well, first of all, he’s very candid about why he wanted to be on the board.

Over the seven-plus years they served on Signature’s board, he earned over $2 million. And this is someone who, as he puts it, has devoted his whole life to public service. He’s left an enormous amount of money on the table compared to what he could have made if he is in the private sector. And he pointed out to me that, look, he graduated from Harvard Law School.

You look at most graduates of Harvard Law School, they go into big corporate law firms, and they end up making millions and millions of dollars. So fair for him. This is just what he’s kind of got coming and what he deserves.

And the second thing, the broad point he makes is that he doesn’t see any particular problem with the revolving door, at least not as it applies to him. And so he doesn’t think that there is any real issue with someone who had a very important hand in shaping financial regulation and who has recently switched stances and is calling for at least a slight weakening of those regulations. He doesn’t think there’s any conflict of interest or anything wrong with him going essentially to work for that company.

So, David, what happens next?

What happens next is that Donald Trump gets elected president. And on the campaign trail and once in the White House, Trump has made a mission out of destroying Dodd-Frank. He hates it. And with the Republicans’ control of both Congress and the White House, the odds of Dodd-Frank not just being tweaked or relaxed, but being destroyed entirely go from being kind of a Republican dream into something that is a real possibility.

And while he’s no longer Congressman Frank, now he’s just Barney Frank, he endorses a compromise. And the heart of it is to increase the $50 billion threshold after which a bank is subjected to extra intense oversight for that to go from $50 billion to $250 billion. So what that means is that the number of banks that are subjected to this extra scrutiny, it goes from a few dozen to just one dozen.

Wow.

It dramatically reduces the number of banks that are coming under this intense microscope.

The fact that Barney Frank was such a well-respected member, especially on the left, and had played such a pivotal role in writing this law to the first place meant that his endorsement of increasing this threshold carried an enormous amount of weight all over Capitol Hill.

Republicans started citing this.

Democrats started citing it.

And in 2018 —

— President Trump signed it into law.

And you see almost immediately the banks start to take advantage of this. Silicon Valley Bank, for example, goes from being right under this $50 billion threshold in more than quadruples in size in the space of just a couple of years. Signature, where Barney Frank is on the board, goes from right under the threshold. It more than doubles in the space of a few years.

Wow. So with Barney Frank’s help, two of the banks that will eventually help trigger this banking crisis that we’re still living through, are allowed to become much, much bigger with a lot less regulatory oversight?

Correct.

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We’ll be right back.

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So, David, we all know what happened next. There is a run on Silicon Valley Bank based on fears that its finances are rickety. Customers pull tens of billions of dollars out of that bank. And then we start to see a run on Signature Bank. So how does Barney Frank describe what was happening inside of Signature Bank over the past two weeks or so from his vantage point as a member of its board?

Well, in his telling, the problems really did not start until the Friday afternoon when regulators seized Silicon Valley Bank.

Signature faced essentially a bank run of its own.

Customers started yanking their deposits as fast as they could.

And as I’m pushing him on the details of what happened, he got pretty testy at times. And it felt to me like he was really trying to distance himself from this whole mess.

Something like $12 to $14 billion of deposits fled the bank that afternoon, he says. And that put the bank in a very precarious financial position heading into the weekend.

That afternoon, he gets a phone call from the bank CEO, saying that regulators have decided to seize the bank and shut it down.

He claims that this is a terrible mistake, that this is overzealous regulators coming in to try and make an example out of Signature publicly for having dabbled in cryptocurrencies and on the merits the bank was unstable footing and should not have been shut down.

And remind us what was the government’s case for taking over Signature Bank.

Well, the government has not very clearly articulated the exact rationale, but what they have said with both signature and Silicon Valley Bank is that part of what the government was trying to do was protect the stability of the broader financial system. And what I and I think most people have taken that to mean is that both of these banks had grown so big so quickly that their uncontrolled collapses really posed a pretty serious threat to the stability of the entire American banking system.

Right. And I think that brings us to the heart of why it is you wanted to talk to Frank in the first place. So what does he say about the unique role he played in rolling back the original Dodd-Frank financial limits which encouraged Signature to grow so fast with less regulatory oversight than it would have had under the law’s original rules?

Does he think that any of the rules that were in place from the beginning might have stopped a bank like Signature or Silicon Valley from ending up where it did under government control failing as a bank?

The short answer is no, he does not think it would have made a whole lot of difference at all.

And to review the rules that these biggest banks are subjected to, they have to conduct these annual stress tests to make sure that they can withstand a severe financial storm. They have to hold more liquidity, they’re better positioned in the event of a bank run.

And what Barney Frank said to me, which I found kind of surprising and not very precise, is that the additional requirements that were rolled back, they basically amounted to a lot of extra paperwork. He said they didn’t really affect the underlying financial health of these banks and that they wouldn’t have prevented this current crisis.

I mean, to ask you, David, do you think he’s right?

Based on my reporting, I don’t think that he is. And the stress tests, for example, the big banks were supposed to be subjected to are meant to detect situations kind of like the one we’re in now and to basically make sure that the biggest banks are able to withstand really intense financial crises.

The extra liquidity requirements that the biggest banks face are supposed to help a bank avoid a bank run, which is exactly what just killed Signature and Silicon Valley Bank. So I think actually the Barney Frank is being a little bit dismissive about the importance of these rules that he had helped write and the potential that they could have really made a big difference.

But here’s the thing. Even if we grant that these extra regulations wouldn’t have made a lick of difference in this current situation, nobody disputes the fact that in 2018, when the cap got lifted from $50 billion to $250 billion, that set off an arms race among big regional banks like Signature and Silicon Valley, where they doubled or quadrupled in size in the space of a few short years. And that is how you’ve got these banks that are potentially posing a risk to the stability of the overall financial system.

And what does Frank say about that, this seemingly indisputable reality that the change he endorsed to his own law allowed for, even encouraged, this rapid growth?

He acknowledges it.

He did not engage, really, when I pushed him on the fact that had these banks not grown as large as they did, as quickly as they did, they wouldn’t pose the same risk to financial stability that regulators cited when they had to shut down these two banks.

Basically where we ended up is a disagreement about the severity of the current crisis we’re in. And his prediction was that this is something — it’s kind of a blip. This is not a real financial crisis. And two weeks later, no one will even be talking or thinking about this.

Of course, this conversation takes place on a Thursday. While we’re on the phone, another big bank, First Republic, got bailed out by other banks. And then 48 hours later over the weekend, Credit Suisse, which is one of the biggest banks in the world, essentially has to be rescued by the Swiss government in this huge deal in which they get taken over by another giant bank.

So there’s a quality of Frank burying his head a little bit in the sand around just how big a deal this has all become and the role that the growth of banks that he helped happen played in this crisis.

Yeah. I don’t know if he’s burying his head in the sand. And he might turn out to be right, and it might be the case that by mid-April, no one is thinking about this as a huge crisis. And this might turn out to be a blip. It’s hard to predict the future.

But it felt to me like he was contorting himself a little bit to make an argument that the changes that he had endorsed really did not have any effect at all. And so I asked him at one point in the interview —

And Frank, really, at the end of the day, kept pointing to the political reality that he and other Democrats were facing back in 2018 when Dodd-Frank was under attack in Congress.

He says that at the time, the decision to kind of make this concession on the $50 billion threshold was actually a very savvy political move. It was basically made to save Dodd-Frank in its entirety. And his argument was that by making this concession, Democrats and Republicans would both support it and would kind of take the momentum away from some of the Republicans who were most intent upon completely gutting or destroying Dodd-Frank. And so in his view, this compromise, even if it’s imperfect, it still preserved Dodd-Frank for the most part in its entirety.

Hmm. So the story he’s telling you, the story perhaps he’s telling himself, is that in order to save Dodd-Frank, he had to weaken it. And saving Dodd-Frank was worth it because that will theoretically prevent a much larger financial crisis than whatever it is we’re now in the middle of. That’s how he’s thinking about what has happened here.

So, David, I’m curious what happens to Barney Frank’s job on the board of Signature now that Signature kind of is no more.

It was vaporized the moment regulators seized it. The board was dissolved, and Barney Frank was out of his job.

He seemed OK with that, though. He told me that he was scheduled to have a board meeting for Signature in New York the day before our interview. That meeting was canceled because Signature was done. And instead, he was able to get an earlier flight down to the Caribbean and just get back to being a private citizen.

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Well, David, thank you very much.

Thank you for having me.

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We’ll be right back.

Here’s what else you need to know today.

America’s second largest public school system ground to a halt on Tuesday, as 30,000 school workers in Los Angeles began a three-day strike over what they say is low pay in a city where the cost of living has surged.

The union representing the workers is demanding a 30 percent overall raise. City officials have countered with a 23 percent raise and say that the strike will hurt students and their families.

During the strike, classes will be canceled for more than 420,000 students. Today’s episode was produced by Will Reid, Mary Wilson, Diana Nguyen, and Rikki Novetsky. It was edited by Lisa Chow, contains original music by Marion Lozano, Dan Powell, Brad Fisher, and Elisheba Ittoop, and was engineered by Chris Wood.

Our theme music is by Jim Brunberg and Ben Landsverk of Wonderly.

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That’s it for “The Daily.” I’m Michael Barbaro. See you tomorrow.