Now that former House Financial Services Committee Chairman Barney Frank has announced that he will retire from Congress at the end of next year, policy analysts can begin to access the legacy of one of the most significant lawmakers of the past generation. His legacy will be forever linked to both his strident defense of Fannie Mae and Freddie Mac and the 2,000 page Wall Street Reform and Consumer Protection Act, which is also known as the Dodd-Frank Act.
In the early 2000s, there were Congressional hearings before Mr. Frank’s committee on why it was important to reform the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. For example, Clinton Administration Undersecretary Gary Gensler (now CFTC Chairman) testified in favor of cutting government ties with the GSEs in 2000. In 2003, Bush Treasury Secretary John Snow went before the committee asking for wholesale reform of the enterprises and mortgage finance system. But, like many of his colleagues, Mr. Frank didn’t see that big problems were on the horizon. Instead, he questioned why the committee was even debating the issue: “These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
In two sentences, Frank outlined the inherent tension and fundamental flaw behind the government’s cozy relationship with Fannie Mae and Freddie Mac. Back then, the GSEs were private businesses with shareholders and Mr. Frank’s comments implied that the enterprises could receive special exemptions or regulatory forbearance if they could plausibly claim to deliver tangible public benefits – in this case, more affordable housing.
Mr. Frank was right though too, Fannie and Freddie were not facing any kind of financial crisis in 2003. However, their low levels of capital, lack of market discipline, and feeble regulatory oversight meant an eventual crisis was all but assured. When shareholder-owned firms can issue debt that’s assumed to be the equivalent of U.S. Treasury securities, the management of those firms will inevitably be tempted to take impudent risks. While there were many lawmakers -- Republicans and Democrats -- who didn’t see the train wreck coming, it will certainly not help Mr. Frank’s legacy that history will include him in this group.
Now, Mr. Frank did help Congress pass a version of GSE reform in July 2008 – two months before the government was forced to put the firms into conservatorship because they had failed. Importantly, the July 2008 bill created the legal authority to take the GSEs into conservatorship and prevent their insolvency from bringing down the financial system. It is also worth noting that the first version of this law – that he first introduced in 2007 – was much tougher than anything the committee’s former Republican Chairman was able to advance. But, unfortunately the history of the GSEs – and Mr. Frank’s legislative record – doesn’t start in the fall of 2007. On this topic, the history book is more likely to conclude that Mr. Frank would have really distinguished himself if he had prioritized financial stability over affordable housing much sooner. Then again, this chapter can’t truly be finished until we know the final price tag for the taxpayer bailout of the GSEs, which today stands at $182 billion – and counting.
The other central piece of Mr. Frank’s legacy occurred two years later with the enactment of the Dodd-Frank Act. The bill’s ultimate impact is still to be determined, as more than 240 rulemakings are underway – and they will ultimately determine how the law is applied to financial institutions and markets. Still, two of the bill’s major flaws are already apparent.
First, it failed to address or end “too big to fail.” Rather than reform the bankruptcy system to allow for the resolution of a large, complex institution, Dodd-Frank responded to the ad hoc bailouts of 2008 by creating a more formal bailout mechanism. The government now has the legal authority to act sooner to take control of an insolvent, “systemically significant” institution. But because the law does not fundamentally address the financial system’s vulnerability to the failure of these institutions, future regulators will be left with the same unpleasant choice as before: use taxpayer money to pay the claims of liability holders, or let the system suffer a potentially calamitous shock.
Secondly, the Dodd-Frank Act chose to reform elements of the financial system (e.g. debit card rules) that had little to nothing to do with the crisis, while at the same time ignoring the epicenter of the earthquake. How is it that the main law enacted in response to a financial crisis with origins in the residential mortgage market did nothing to address the housing finance duopoly?
In the end, Mr. Frank’s legacy will likely be defined by missed opportunities. He missed the opportunity to reform housing finance regulation in the early 2000s, when such reforms might have meaningfully altered the course of mortgage finance history. Then in 2009-10, he missed the opportunity to end “too big to fail” and to begin the wind down of the GSEs.