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The Era of Light Touch Is Over: Rep. Frank

Monday, 19 Apr 2010 | 11:19 AM ET

The societal benefits of obscure financial products are negligible, and regulation of the financial industry won’t hamper US competitiveness, House Banking Committee Chairman Barney Frank told CNBC Monday.

Jonathan D. Colman

“We’re seeing the need for financial reform reinforced,” Rep. Frank, D-Mass., told CNBC. “Even sophisticated investors need protection. There’s a fallacy that when you’re dealing with the rich, they don’t need protection. But you can’t just leave rich to their own devices.”

“Banks need to do more due diligence," he said. "There are a number of things in the reform bill that increase transparency.”

Democratic leaders want to bring a massive financial reform bill to the Senate floor for a vote as early as this week. To put further force behind the measure, President Barack Obama will be traveling to New York on Thursdayto discuss financial reform.

In the past few months, key parts of the reform bill have faced stiff opposition from the banking industry as the economy rebounded and memories of the financial crisis faded.

Treasury Secretary Timothy Geithner said over the weekend he’s now “very confident” of securing enough Republican votes to pass a sweeping reform bill, including a crackdown on the complex financial derivatives at the heart of the Goldman Sachs case.

But Republican leaders have said they’ll still oppose the reforms, unless Democrats agree to major concessions.

Sen. Judd Greg, R-NH, told CNBC Monday he's worried that an overreaction to bank regulation will reduce the viability of capital markets. He agreed that there is a need to restructure the financials, but said regulators should be more concerned with when a firm becomes too risky, rather than too large.

"It's an absurd concept, but it's basically this rampant pandering populism that's taken over Washington," he said. Click here to see Gregg's full interview

Frank said he doesn't think all 41 Republicans will vote 'no' on the financial reform bill, but said, "Many Republicans believed that what happened with Lehman’s bankruptcy was perfectly acceptable. They believe in free markets at any cost.”

CDSs Weren't 'Socially Useful'

Frank declined to comment on the Securities and Exchange Commission's lawsuit against Goldman Sachs "out of basic fairness," but said he doesn’t believe that the timing of SEC case is motivated by financial regulatory debate.

Barney Frank on Goldman Fallout & Financial Reform
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Cmte., discusses the fraud charges against Goldman Sachs and the financial regulation debate.

Some of the most controversial reforms in the bill include a proposal to force large banks to divest their swaps units and require derivatives to be traded on exchanges.

The case could also generate more support for the so-called Volcker Rule, which would prevent banks from engaging in proprietary trading or investing in private-equity firms and hedge funds.

Asked if he thought there way any societal benefit to synthetic credit default swaps (CDSs), Frank answered: “No. I don’t think it was socially useful. The financial sector should be means to productive activity. It should make money available for people who will put it to good use.

When they tell us the effect of bill will curb speculative activity, I think that’s good.” “Thirty years ago, loans were made to someone who was expected to pay back lender," he said.

"Now, they’re created to sell on to someone else. The system only exists to serve itself.” “The notion that we over-regulate the financial industry to the extent that there is a diminuendo in activities—any theoretical or potential decrease would be a good," he said.

"We want to see credit increased.” He also dismissed the argument that the bill would hurt Wall Street's global competitiveness. “Reform must be done internationally" he said.

"I’ve met with Europeans, Canadians, etc., and we understand the need to coordinate. The era of light touch is over.”

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