FIRST ON CNBC INTERVIEW: CNBC TRANSCRIPT: CNBC'S BILL GRIFFETH AND MICHELLE CARUSO-CABRERA INTERVIEW REP. BARNEY FRANK, D-MASS., TODAY ON CNBC'S "POWER LUNCH"

FIRST ON CNBC INTERVIEW: CNBC TRANSCRIPT: CNBC'S BILL GRIFFETH AND MICHELLE CARUSO-CABRERA INTERVIEW REP. BARNEY FRANK, D-MASS., TODAY ON CNBC'S "POWER LUNCH"

WHEN: Today, September 17th at 12:35PM ET

WHERE: CNBC's "Power Lunch"

Following is the unofficial transcript of a FIRST ON CNBC interview with Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, today on CNBC's "Power Lunch."

All references must be sourced to CNBC

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GRIFFETH: HE'S GOT A PROPOSAL THAT'S BEEN ALL THE BUZZ ON WALL STREET AND IN WASHINGTON TODAY. CONGRESSMAN BARNEY FRANK IS BACK WITH US. OF COURSE, HE'S CHAIR OF THE HOUSE FINANCIAL SERVICES COMMITTEE. MR. CHAIR, ALWAYS GOOD TO SEE YOU.

WELCOME BACK, SIR.

FRANK: THANK YOU

GRIFFETH: BEFORE WE GET TO YOUR PROPOSAL ON AN RTC-LIKE AGENCY. LET ME JUST GET YOUR THOUGHTS ON WHAT'S BEEN GOING ON THE LAST TWO WEEKS HERE, FREDDIE MAC, FANNIE MAE, LEHMAN BROTHERS, AIG, IF ANOTHER INSTITUTION COMES UP THAT NEEDS AID FROM THE GOVERNMENT, DO YOU SUPPORT THAT, AND IS THERE A LINE AT WHICH YOU WOULD FINALLY SAY ENOUGH IS ENOUGH?

FRANK: WELL,ON IN THE FIRST PLACE YOU CAN'T SAY IN THE ABSTRACT OR IN ADVANCE YES OR NO. IT WOULD DEPEND ON THE INSTITUTION. I WOULD DIFFERENTIATE, FANNIE MAE AND FREDDIE MAC WERE SOMEWHAT DIFFERENT BECAUSE THERE WAS A PUBLIC ROLE AND CONGRESSIONAL INVOLVEMENT. ON THE OTHER HAND, WITH REGARD TO THE OTHER INSTITUTIONS, BEAR STEARNS, GOING BACK TO THEM, LEHMAN BROTHERS, ETC. LOOK I THINK THE FIRST THING WE HAVE TO TALK ABOUT THE CONSEQUENCES BUT LET'S NOT FORGET THE CAUSE. THE CAUSE IS AN ABSENCE OF SENSIBLE REGULATION, AND IT'S NOT AN ACCIDENT THAT THE MORE REGULATED INSTITUTIONS IN THIS PERIOD OF CRISIS ARE NOT ONLY SURVIVING RETURNING TO THEM TO HELP DEAL WITH THE PROBLEMS CREATED BY THE UNREGULATED ONES OR THE LIGHTLY REGULATED ONES. IT IS THE BANKS, THE COMMERCIAL BANKS, BANK OF AMERICA, JPMORGAN CHASE THAT ARE THE MOST HEAVILY REGULATE THAT WE'RE TURNING TO AND EVEN WITH REGARD TO AIG, IT IS THE REGULATED ENTITIES IN THAT OPERATION, THE INSURANCE COMPANIES, VERY HEAVILY REGULATE THAT ARE GOING TO BE THE SOURCE OF SOME FINANCIAL STRENGTH.

GRIFFETH: SECRETARY PAULSON HAS SUGGESTED AND, YOU KNOW, COME TO YOU IN CONGRESS SAYING THAT IN HIS VIEW THE FEDERAL RESERVE SHOULD BECOME THE CLEARING HOUSE, SHOULD BECOME THE CATCH-ALL REGULATOR FOR ALL OF THIS RIGHT NOW. I DON'T THINK YOU AGREE WITH THAT, DO YOU?

FRANK: NO, I DO. WE HAVEN'T MADE A DEFINITE DECISION BUT I VERY MUCH AGREE THAT WE SHOULD HAVE INCREASED REGULATION. WHEN SECRETARY PAULSON -- I'M SORRY, I'M TRYING TO ANSWER THE QUESTION. THESE ARE NOT TEN-SECOND ANSWERS.

GRIFFETH: I UNDERSTAND.

FRANK: WHEN THE SECRETARY CAME IN, BY THE WAY, HE AND OTHERS, AND WE NEED TO MAKE THIS CLEAR, THEY WERE FOR DEREGULATION. HE COMMISSIONED A REPORT, THE HOUSE REPORT CUT BACK, DON'T REGULATE SO MUCH. I THINK THERE'S NOW AN UNDERSTANDING THAT IT'S BEEN THE LACK OF REGULATION OF THESE NEW SOPHISTICATED FINANCIAL ENTITIES THAT HAVE GOTTEN TOO MUCH RISK-TAKING WITH TOO MUCH LEVERAGE. WE HAVEN'T MADE A FINAL DECISION. NEXT YEAR WE'LL HAVE TO DO SOME LEGISLATION TO EXTEND THAT FINANCIAL ARCHITECTURE. WE AGREE WITH THE SECRETARY THAT THERE NEEDS TO BE A REGULATOR NOW FOR THE INVESTMENT BANKS THAT HAS THE POWER TO REGULATE THE AMOUNT OF LEVERAGE AND IMPOSE CAPITAL REQUIREMENTS. AT THIS POINT, THE FED IS A VERY STRONG CONTENDER, BUT WE'RE GOING TO HAVE HEARINGS AND LOOK AT IT. MAYBE YOU CREATE SOMEBODY BRAND NEW, THERE ARE CONSTRAINTS AGAINST THAT. LOOK, ONE OF THE ADVANTAGES THE FEDERAL RESERVE HAS FRANKLY IS THE EXISTENCE OF THE NEW YORK FEDERAL RESERVE. YOU'RE LOOKING FOR A DEGREE OF EXPERTISE, OF FAMILIARITY WITH THE MARKETS, FRANKLY ABILITY TO PAY SALARIES ABOVE WHAT THE GOVERNMENT CAN USUALLY PAY THAT MAKE THE NEW YORK FED AN ATTRACTIVE POSSIBILITY.

CARUSO-CABRERA: MR. FRANK, DO YOU SUPPORT THE TREASURY'S PLANS TO REDUCE FANNIE AND FREDDIE'S PORTFOLIOS STARTING IN 2010?

FRANK: I DON'T THINK ANYBODY CAN SENSIBLY SAY TODAY THAT WE ARE GOING TO KNOW IN 2010 WHAT THOSE PORTFOLIOS OUGHT TO BE. WE'RE TALKING ABOUT A SITUATION IN WHICH PEOPLE HAVE BEEN HAVING A HARD TIME PREDICTING WHAT'S GOING TO BE GOING ON IN THE MARKET WEEK TO WEEK. HOW CAN ANYBODY SAY THAT 17, 18 MONTHS FROM NOW WE'RE GOING TO KNOW WHETHER THERE'S ENOUGH PRIVATE MARKET ACTIVITY TO BE ABLE TO REDUCE PORTFOLIO. REDUCING THE PORTFOLIO MEANS MORE SECURITIZATION. AS OF NOW IF WE DIDN'T HAVE THE PORTFOLIO, WE'D BE IN TERRIBLE TROUBLE. THE OTHER THING I WOULD SAY IS THIS. IT'S VERY UNLIKELY BY 2010 FANNIE AND FREDDIE WILL EXIST IN THE FORM THEY NOW EXIST. I THINK THERE'S A GENERAL RECOGNITION THAT THE HYBRID FORM WORKED FOR A WHILE WHEN EVERYTHING WAS GOING WELL BUT THE TROUBLES HAVE EXPOSED SOME TENSIONS, SO ONE OF THE THINGS WE WILL BE DOING NEXT YEAR IS FIGURING OUT HOW TO RESTRUCTURE THEM.

CARUSO-CABRERA: THE OTHER SIDE OF THE PRO REGULATION ARGUMENT, A LOT OF FOLKS WOULD ARGUE, SOME OF THE REGULATIONS THAT WERE PUT IN PLACE HELPED GET US HERE, FOR EXAMPLE, THE COMMUNITY REDEVELOPMENT ACT WHICH SAID THAT BANKS HAD TO GIVE LOANS TO PEOPLE WITH POOR CREDIT AND WITH LESS MONEY AND THEY WOULDN'T GET APPROVAL FOR OTHER THINGS IF THEY DIDN'T DO THOSE THINGS.

FRANK: FIRST OF ALL, IT'S THE COMMUNITY REINVESTMENT ACT AND THAT SIMPLY ISN'T TRUE. THAT ACT WAS PASSED IN 1977. IT'S BEEN IN EXISTENCE FOR 31 YEARS. FOR MOST OF THAT TIME IT CAUSED NO PROBLEMS AND IT DOESN'T REQUIRE ANYBODY TO MAKE LOANS TO PEOPLE WITH BAD CREDIT. IT SAYS YOU SHOULDN'T IGNORE NEIGHBORHOODS. IN FACT, IF YOU LOOK AT THE ENTITIES THAT ARE COVERED BY THE COMMUNITY REINVESTMENT ACT THEY ARE THE BANKS. THEY HAVEN'T BEEN THE ONES THAT HAVE GOTTEN IN TROUBLE. THE BAD MORTGAGE LOANS WEREN'T MADE BY THE REGULATED ENTITIES, THE BANKS. THEY WERE MADE BY THE MORTGAGE BROKERS AND THEN SECURITIZED. THOSE NOT COVERED BY CRA. IF YOU LOOK AT WHERE CRA WOULD COVER, THE THRIFTS AND COMMUNITY BANKS, THEY DIDN'T MAKE THESE BAD LOANS.

GRIFFETH: LET ME ASK YOU ABOUT YOUR PROPOSAL TO CREATE AN AGENCY, SOMETHING LIKE THE RTC DURING THE SAVINGS AND LOAN CRISIS. YOU KNOW, HOW WOULD THAT WORK, I REALIZE YOU'LL HAVE TO DEFER IT TO THE NEXT ADMINISTRATION NEXT TERM BUT WOULD YOU SEE A SUNSET PROVISION MUCH LIKE WITH RTC?

FRANK: I THINK THE MEDIA HAS OVERWRITTEN THAT. I NEVER SAID WE HAD A PROPOSAL. WHAT I SAID IS WE NOW HAVE A SITUATION WHERE THE BUSH ADMINISTRATION, HAVE NOW BEGUN THIS PATTERN OF AD HOC INTERVENTIONS AND I DON'T THINK THAT'S APPROPRIATE IN A DEMOCRACY. I DON'T THINK THAT THE FEDERAL RESERVE, AND THIS IS NOT A CRITICISM OF BERNANKE, HE'S DOING BECAUSE NOBODY ELSE THERE WHAT HE HAS TO DO, I THINK WE HAVE TO CONSIDER WHETHER OR NOT WE NEED TO CREATE A NEW ENTITY. IT WILL BE VERY DIFFERENT THAN THE RTC WHICH WAS BUYING REAL PROPERTY FOR FAILED INSTITUTIONS BUT WE HAVEN'T GOT A PROPOSAL. WE HAVE A HEARING NEXT WEEK WHICH WE DECIDED ON SOME TIME AGO BUT IT'S NOW BEEN REINFORCED. IF THERE'S GOING -- HERE'S THE QUESTION AND, YES, THERE WOULD BE SOME KIND OF LIMITATION IN TERMS OF TIME BECAUSE IT WOULD SAY IN RESPONSE TO THE SPECIFIC SITUATION THE ISSUE IS ARE WE NOW IN A SITUATION WHERE THERE'S SO MUCH BAD PAPER OUT THERE, AT LEAST TEMPORARILY DEVALUED, THAT IT'S CLOGGING THE SYSTEM AND SOMEBODY HAS TO STEP IN AND TAKE IT OFF. I THINK THE GOOD BANK/BAD BANK ANALOGY IS THE BETTER ONE THAN THE RTC AND IF THAT'S THE CASE IS THERE ANYBODY OTHER THAN THE FEDERAL GOVERNMENT THAT CAN DO IT? THOSE ARE THE QUESTIONS WE'RE POSING AND NO ONE THAT I KNOW OF HAS COMING UP WITH THE ANSWER YET.

GRIFFETH: WE WISH YOU WELL WITH YOUR HEARINGS NEXT WEEK AND THANK YOU.



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