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Don't blame big banks for the crisis, say Dodd-Frank authors

Still debating Dodd-Frank

The problems that led to the 2008 financial crisis were not created by Wall Street deregulation but by the failure to regulate in the first place, the authors of the Dodd-Frank reform law told CNBC on Monday—five years after the bailout of AIG and the bankruptcy of Lehman Brothers.

In 1994, lawmakers passed the Home Ownership and Equity Protection Act, which empowered the Federal Reserve to "stop the kind of mortgages that shouldn't be given because people can't pay them," former Massachusetts Rep. Barney Frank said in a "Squawk Box" interview.

But Frank said that then-Fed Chairman Alan Greenspan didn't use the authority.

(Related video: Ex-Lehman CEO Flud five years later)

Greenspan did admit during congressional testimony in October 2008 that he had been wrong in dismissing fears that the five-year housing boom was turning into an unsustainable speculative bubble that would harm the economy when it burst.

"There was bad government policy in the late 1990s into the 2000s, but it was a failure to stop the business community from doing things they shouldn't have done," Frank said. "It wasn't deregulation as much as a failure to do the regulation."

Barney Frank, left, and Christopher Dodd in 2008
Getty Images

Fellow Democrat Chris Dodd, former senator from Connecticut, recalled that the problems in housing escalated in 2005 and 2006. "This problem could have been a lot less than it became had we acted earlier to step in, and I'll go to my grave believing that," he said.

But it's wrong to blame big banks, said Dodd, now chairman and CEO of the Motion Picture Association of America.

"Remember, these were all investment banks that caused the major problem, not the commercial banks," he said. "People keep talking about the big banks, but they were not the cause of the major crisis we went through."

(Read more: Financial crisis was a 100-year storm: Hank Paulson)

The AIG bailout came five years ago Monday, a day after Lehman filed for bankruptcy. In early October, after failing in its first attempt, Congress passed and President George W. Bush signed into law the Emergency Economic Stabilization Act of 2008, which established the $700 billion Troubled Asset Relief Program (TARP).

"In 2008 when Lehman failed, AIG was in trouble, but [then-Treasury Secretary] Hank Paulson had to force Wells Fargo and JPMorgan Chase and Goldman to take the [TARP] money," Frank said. "Most of [the big banks] were quite solvent. They said, 'We don't need help; we don't want it because it would stigmatize us.' "

(Read more: Kovacevich: Terrible TARP ruined banks)

Re-enacting Glass-Steagall (the law that had kept investment banking and commercial banking separate) would not have done anything to prevent the crisis, "because neither AIG nor Lehman Brothers would have been affected by that," Frank said. "And by the way, neither would Countrywide."

Answering critics who say the Dodd-Frank law doesn't end the problem of "too big to fail," Dodd said, "Our legislation prohibits what the federal government did in the fall of 2008 in the form of a taxpayer bailout of the financial industry."

By CNBC's Matthew J. Belvedere. Follow him on Twitter @Matt_SquawkCNBC.