Congressman Barney Frank this morning called for stricterregulations of investment banks and took direct aim at the “excessive”compensation of executives, particularly those who have left top posts atfinancial services companies with million-plus severance packages while lossesare being counted in the billions.
The chair of the House Financial Services Committee andlongtime representative of the 4th District of Massachusetts, speakingbefore the Boston Chamber of Commerce, said “there are really few issues thatare as important this” in reference to the credit crisis.
In an interview on WBUR-FM before the breakfast where he wasexpected to outline his investment bank plan, Frank said nothing should be done“right away…We should make it clear. We are in a crisis and the absence ofsensible regulations and the consequent irresponsible actions has given us adilemma.”
Comparing this dilemma to treating a sick patient, Franksaid, “there are some thing you can do later on that you can’t do immediately.”
Part of the proscription may be requiring investmentbanks—like their commercial counterparts—to keep reserves to back up unpaidloans. “The investment banks have not had to do that. But now it turns out thatthey think the federal government does stand behind them and to some extentwe’re coerced into doing that because of the damage to the economy when theyunravel.”
Frank also took aim at what motivates investment bankers totake big risks. “If they take big risks and invest in very, very exoticstructured investments and those bets pay off, they get a big pay off fromthat. The problem is if the debts don’t pay off, they don’t lose. It’s what theeconomists call a free option: heads: I win. Tails: we’re even. I don’t likehaving to put taxpayer money at risk…there needs to be more disincentive andthey should not be compensated for failure.”