C-SPAN/NEWSMAKERS

Host: Steve Scully

Guest: Spencer Bachus, Representative, Alabama

Reporters: Alison Fitzgerald, Sean Lengell

STEVE SCULLY, NEWSMAKERS, C-SPAN: Joining us on C-Span’s Newsmakers for this Sunday is Congressman Spencer Bachus, Republican from Alabama and the ranking member of the House Financial Services Committee in his eight term, and joining us for the questioning is Sean Lengell, Washington Times correspondent, and with the first question, Alison Fitzgerald of Bloomberg News.

ALISON FITZGERALD, BLOOMBERG NEWS: Thank you for coming, Congressman. Right now, the leaders of the 20 biggest economies in the world are meeting in Pittsburgh. One of the big subjects is financial regulation, which your committee obviously is grappling with at the same time. How important do you think a role is for international cooperation in setting specific things such as capital requirements or generally – more generally just ways that the nation should work together in establishing norms for the financial system?

SPENCER BACHUS, REPRESENTATIVE, ALABAMA & RANKING MEMBER, HOUSE FINANCIAL SERVICES COMMITTEE: Well, we often say that’s a great question, but that actually is a great question because it’s something we struggle with, and always I’m going to answer it as saying it’s very important. We’re in a global economy. In 1984, when I was elected to the State Senate, we were the second state in the nation that passed interstate banking. So really, financial services, you could do it all in the community. You had banks that were owned in your hometown. You got a mortgage, you went down to the local bank. That bank couldn’t even branch across state lines. Well, now you have international banking, you have the Internet. So the market is tremendously changed.

Now, what my word of cautious is we – the American economy is three times bigger than the next biggest economy, which is the Japanese economy. It’s bigger than the Japanese economy, the Chinese economy, the British economy, the French economy and the German economy put together, and we didn’t get there by doing what they do; we got there with our own free market, free enterprise system, competition, personal choice, innovation, and we don’t need to basically get – have international standards or let them dictate how we approach financial services, energy, healthcare. We need to – we need to keep what works and fix what’s broken.

SCULLY: Let me pick up on that point because the President talked about this earlier in the month in New York and last Friday in Pittsburgh. What resulted in the collapse of Lehman Brothers and AIG? Was it regulation, was it lack of oversight? Where were the holes?

BACHUS: Well, it was a combination. I would say it started with really our markets becoming evolving and outgrowing regulation. Securitization only really started in the 1990s. The widespread use of derivatives, that’s something very new. Credit default swaps – the first one was in 1994, just a few years ago. Subprime lending really didn’t catch on until about 10 years ago, and most of those bad loans were just in the past few years.

So we really had a 1930 or a 1980 regulatory structure in the 21^st Century, yet you had tremendous evolution of financial products, and I don’t the regulators kept up with them. And then the bad actors always find gaps in the regulation. The subprime lenders that failed and really brought down Wachovia, brought – caused trouble for Merrill Lynch, Bank of America. They were unregulated subprime lenders. They were making so much money that Wachovia bought one, Bank of America bought one, Merrill bought one, and they didn’t realize that underneath all those profits were a lot of mortgages that were going bad.

SCULLY: So if the chairman of your committee, Barney Frank, and the President are saying we need more regulation, you're saying we need smarter regulation, where do you come together? Where is there agreement?

BACHUS: Well, there’s an agreement that we need to modernize our system. There’s a – there’s an agreement that – say with derivatives, that the information needs to be there. I not only need to know – I know what my derivative agreements with you are, but say Alison, I don’t know what your arrangements with Alison or Sean are. I need to know what your liabilities are to other people so I can know whether you’ll fulfill your obligations to me. So with derivatives we need to do things. We need to – we need to regulate affiliates of depository institutions. We have unregulated subprime lenders who were affiliates of depository institutions. They failed, and they brought down the depository institutions, and we also have this going from regulator to regulator, and the regulators are you know they – well, if we do this to our institutions, they’ll switch their charters, and that’s why you know since really July, when we introduced our bill, we’ve gone to a single regulator or an overall regulator.

SCULLY: Sean Lengell of the Washington Times, Congressional Correspondent.

SEAN LENGELL, CONGRESSIONAL CORRESPONDENT, WASHINGTON TIMES: Congressman, Treasury Secretary Geithner came to your committee a few days ago and said that he was OK with Chairman Barney Frank’s decision to scale back some of the powers, the authority of the proposed Consumer Financial Protection Agency. Chief among the Chairman’s update was to reject the administration’s mandate on so-called vanilla products, vanilla financial products, such as you know traditional …

BACHUS: Sure. Yes, pure vanilla.

LENGELL: Now, you’ve expressed some reservations from day one about this proposed Consumer Financial Protection Agency. Given Chairman Frank’s updated plans and given the administration’s similarly you know approval of the Chairman’s – the Chairman’s plans, would you – would you accept now the democrats’ proposed Consumer Financial Protection Agency, or do you still have some serious problems with it?

BACHUS: Well, basically what we have is Chairman Frank’s talking points. We still have the white paper from the administration which basically authorized a government agency to design financial products, and as I said earlier, we – America got to where we are by giving people choices, by innovation, by new products. It was the abuse of those products where you had a problem, where you abused derivatives or you abused subprime lending or you abused the securitization market or didn’t understand it.

So I believe what they're focusing on is really more government management. You saw that in healthcare, where they said they’re a problem so we’re going to have government bureaucracy that’s going to come in and make things right. You saw that recently in cap and trade, where they actually said we’re not going to have nuclear; we’re going to fix it all with green. Now, green’s good, but we need nuclear, and they came in and said we’re going to tell the utilities you know they’ve got to do this, they’ve got to do that, and if they don’t we’re going to tax them and tax their customers. All of these new ideas, behind them has to be a tax because it’s a brand new bureaucracy. But behind it all is just more government regulation. It’s the government making decision, the government managing jobs. The government – can you imagine 30 years ago, if someone had said they're going to propose that a government agency design consumer products and that they have to approve the design and the format of every product?

FITZGERALD: … took that out of the bill and proposed a bill without that, are you against the agency anyway?

BACHUS: Well, we don’t know what – he hasn’t offered legislation. So we don’t know. Now, what Republicans are for and Democrats where we have common ground, we need better consumer protection, and that is why we have said let’s have one overall bank regulator that understands the banking system, can really patrol it, has the expertise. And we think the way to do that is to draw the safety and sound regulators in, the SEC, those that are in charge today are consumer protection, and let them work for uniform rules.

FITZGERALD: That sounds a little bit like what Chairman Dodd on the Senate side has said he wants as well …

BACHUS: Chairman Dodd and Senator (Shale) make a – have basically you know just recently talked about really something that you pick up on a republican alternative. It looks very similar.

FITZGERALD: OK.

BACHUS: Yes, we’ve talked about one regulator. Now, we would have separate charters within that.

FITZGERALD: OK, for the different forms of banking?

BACHUS: Yes, I mean you would still recognize – even though – you know although they’ve said we’re going to shut down the OT you know eras, I think a thrift charter is not a bad thing, so I think that ought to be preserved. Now, you’d still have a choice between being state or federal. But the regulators, it would be one single regulator, and they would establish single rules.

LENGELL: Should that regulator – that single regulator be the Federal Reserve, as a lot of democrats have proposed?

BACHUS: No, the Federal Reserve is really – should be in charge of monetary policy. Now, the Federal Reserve is not a safety and soundness. They're not a prudential regulator. They – in fact, they do have a very important task, a monetary policy, a stable currency, and really you shouldn’t distract them by trying to make them in charge of either consumer protection, or for that matter safety and soundness. But they should, when it comes to safety and soundness, there has to be a partnership. There has to be a working relationship. There has to be some connection between the Federal Reserve and what we or what Senator Dodd has proposed as a single, and I would say umbrella of regulator. You have a lot of expertise, and those people, particularly as we become more complex in financial services, you can’t expect a small agency that has been regulating a community bank to understand a company as diverse as AIG or as diverse as Bank of America. You're just asking too much. You need to bring them together, and you need some consolidation. You don’t just keep creating regulators.

SCULLY: But aren’t we creating other companies that are too big to fail?

BACHUS: Oh, absolutely, and I think the biggest distinction, and it existed yesterday and the day before, you saw it glaringly when Secretary Geithner testified. His Republicans have said no to bailing out single companies. You know and I think there’s a misconception. We have not said that the Fed doesn’t have a role in the overall market and stabilizing the financial system. We’re stabilizing trying to add liquidity, assuring there’s enough capital. But when it comes to the Fed or the Treasury bailing out General Motors or AIG, we think there were probably justifications for some interventions last September, but we believe we ought to get out of the bailout business. We believe we ought to get out of the business of taxpayers coming in and assuming the risk. We have had a giant assumption of private debt by the public sector. You’ve seen debt. The debt is still there; it’s just been shifted from the private sector to the U.S. Government, and therefore the taxpayer.

FITZGERALD: On that – on that subject, former Fed Chairman Paul Volcker was at your committee this past week discussing the problem –(INAUDIBLE) of too big to fill- many questions about it, and his recommendation – his overarching recommendation is that for banks, giant banks such as Citigroup or JP Morgan, you really should limit some of the activities that they can participate in the capital markets in order to make them less risky because they are in that position of probably needing some sort of federal assistance if they got into trouble. Are you amenable to those suggestions? I haven’t seen any legislation from either side on such a thing.

BACHUS: Well, I think you brought up an interesting point, and you know I’ve expressed concerns about what were investment banks. They weren’t commercial, they weren’t part of a payment system, they weren’t making a loan. What they were doing you know you may have a Bear Stearns, you may have had a Lehman. They were doing everything from operating hedge funds or private equity or to trading on their own account, not for customers. They were – they were trading organizations. They were taking risk, proprietary trading, which is a very risky thing. That’s very different from a commercial bank that’s lending money. And really, you’ve got now Goldman Sachs, you’ve got Morgan Stanley. They’ve come within sort of the umbrella and the protection of the Federal Government. Well, if they're going to continue to engage in proprietary lending, if they're going to continue to maybe be involved with hedge funds activity, some of these more risky activities, there actually needs to be a separation.

FITZGERALD: … Citigroup as well …

BACHUS: Exactly.

FITZGERALD: … who also has some trading activity, something like Citigroup as well …

BACHUS: Well, yes, and when you get Citigroup, Bank of America, you do get into a problem there because they're not really one or the other. But you have to – if they're going to be – have the protection, the safety net of what was designed for the posture you know the American public, and you start giving them protection from their more risky activities, that’s not what was intended, and I think that’s what Paul Volcker was saying, and from what we have said is you know if they're going to engage in this activity, if they're going to lose money, the Federal Government shouldn’t come back in there and guarantee, or they shouldn’t guarantee their losses, they shouldn’t guarantee their obligations, and we’ve done that over the last year, and that’s a big mistake. And that’s why I introduced my TARP trust that said you know any of these companies that the government has significant ownership in we’re going to put them in a trust, and we’re going to work towards divesting the government of ownership.

LENGELL: Could you talk a little bit more about that? You know certainly, you’ve mentioned that Republicans are not against reforming Wall Street regulatory system. You know at the same time, you’ve also expressed your strong distaste for bailing out companies. But where do we draw that line? Where is that line between aiding a company that if it fails could really seriously damage the economy and just letting that company die a natural death?

BACHUS: Well, Sean, you ask why did it fail. Did it fail because it engaged in risky behavior, and if it did, then it shouldn’t come under the guarantee of the safety net of the U.S. Government. I’ll give you another distinction. There’s been a lot of the talk about 13.3 of the Federal Reserve Act. Much of what the Federal Reserve did it did under that act. Now, if 13.3 is designed to simply go in and stabilize the overall market, then I certainly could say there may be justification for that. I don’t think it was ever designed to buy a part of General Motors or to buy AIG. I don’t think that was ever the intent, and Secretary – I mean Chairman Volcker said you know I have great unease over the exercise of that power. Now he has even greater at ease, I would say, and concern when you start bailing out an individual company, and that’s where we have said no.

LENGELL: But with the financial firms, you had said earlier this month that – and these are your words, “We need to create market discipline.” But is that realistic? How do you do that without regulation?

BACHUS: Oh, yes, absolutely. I think that’s what’s made the United States the country it is. We’ve had market discipline. We’ve let companies gamble, and I say gamble, that’s you know take risk. But when they – when those risks have turned out badly, we didn’t come in and socialize, you might say, their losses you know and privatize the profits, socialize the losses. I said that on the floor of the House last year. I don’t like that; I don’t think the taxpayers like that. But we are – the United States is really about people going out and creating new products, innovating, and often they fail. I mean that – you look at the – you know look at the Internet bubble. You know a lot of those companies fail. But we didn’t – the government wasn’t there bailing them out when they failed or the government wasn’t there saying you can’t take those risks.

Now, that is where, when we get back to what Alison had asked, about you know what were investment banks, the Bear Stearns and the Lehmans who have disappeared, or even the Goldman Sachs and the Morgan Stanley. It depends on what activity they're engaged in. I think the American people would say yes, we believe there’s a role in – for government, and there has been since the 1930s in ensuring our deposits in a commercial bank. But when you get beyond that, when you get to where you’re ensuring a bet on Wall Street, that’s a different animal. Now, I think what the administration has come in and said we’re not going to allow those bets, and I think what Republicans have said is no, we’re not going to intervene in the private market. But if those bets turn out badly, the taxpayers aren’t going to be there.

SCULLY: Alison Fitzgerald.

FITZGERALD: The taxpayers weren’t there obviously when Lehman Brothers failed last year, but soon after that you did have, including Citigroup, which it’s mostly a commercial bank, but also has these investment and trading arms and has in the past sponsored hedge funds, et cetera, is there a role in seeing – is there a commercial bank you know mostly commercial banking should not be able to sponsor hedge funds that – because there’s some assumption that you’re – you know your deposits are protected by the Federal Government?

BACHUS: Well you know I think if you are a commercial bank and you engage – let’s say you have a private equity fund or you have a hedge fund …

FITZGERALD: Right.

BACHUS: … or you're doing proprietary trading, then that shouldn’t be guaranteed. You either need to wall that out, there needs to be a wall of separation you know and I have great unease over allowing a company that’s under the – as I say, the safety net, and really I think part of the answer to that is just pull back that safety net. But I do believe this – and Steve, as we started this discussion you know what costs what we witnessed last year. Well, it was the overextension of credit and leverage, and to a certain extent that was a failure of safety and soundness regulator. Well, I don’t think you create another regulator on top of that, that solves anything. But when you look at those activities, if those banks are going to come out of the protection of the FDIC, then you have to see how much risks they're assuming, how much leverage.

LENGELL: The $700 billion so-called Wall Street bailout that the Troubled Asset Relief Program, TARP, is set to expire at the end of this year unless Congress decides to extend it through October 2010. You still have a few months left for you to make your decision, but would you be willing to extend it?

BACHUS: Well, Sean, first of all you know the administration’s proposal is basically making permanent, in my mind. That’s what they're doing. They're just proposing that we’re going to operate this TARP program ad infinitum. We’re going to discontinue it and you know 10 years from now. In fact, Secretary Geithner said in a response to Brad Sherman, “I wouldn’t take off the table a trillion-dollar bailout.” You know he said would you – would you bail somebody out if cost $1 trillion? And Secretary Geithner said, “I wouldn’t take that off the table.” Well, let me tell you, we’re going to take it off the table. We’re not – you know we’re not – you know any legislation we pass that I’m a party to and the Republicans in the House are a party to won’t have the bailout of the individual companies.

LENGELL: But do you have the votes for that?

BACHUS: I think we do because we have a lot of our colleagues who agree with us, I think more everyday, more everyday that say you know the Fed, for instance, has become – they have become the chief purchaser of Fannie and Freddie Securities. I mean you have – they purchase about 50 percent of the treasuries that were offered in the second quarter. So we now have government agencies bailing out or financing other government agencies, and you’ve got to ask yourself the question who bails out the government?, and you know if the government keeps bailing out the government, other government agencies are bailing out the private market, where does it end? I mean who – and that’s why you – of anything we’ve discussed, if we don’t get a handle on Social Security, if we don’t get our handle on our entitlement programs, Medicaid and Medicare, you're talking about a government that is – everyday it becomes more and more difficult to finance these bailouts, and they're only doing it by buying – you have you know the housing, the GSEs (ph). Well, now the Treasury and the Fed are beginning to – they're the purchasers of those obligations. You have the FDIC that’s recently set our reserves – they’ve at least declined. I don’t think they're – they still have reserve because they’ve made some loss provisions. But they’ve set aside for losses, and now the losses may be twice what they're saying.

You now have – you know Chairman Frank a year ago said if I can get with President Obama and 60 members of the Senate, I can get the government back in the housing market. He’s done it, and they're back in it. When you talk about the housing market today, you’re talking about the government. And what worries me about that is where do housing prices go? If they continue to go down, it could bring – you know it could bring many of these government agencies down, and with them the debt that Treasury and the Fed has purchased.

LENGELL: So based on everything that you’ve been saying, some conservatives have said that we are becoming a socialistic country. Would you apply that moniker?

BACHUS: And yes, every time you say that, they say, well, we’re talking about a Scandinavian model. Well, I don’t care what kind of model it is. I don’t think anybody has accused anybody of a Soviet model. But yes, I mean we all are becoming more – any time you step in, the government, and you begin – when – and you begin to – if you can’t make the payment, we’ll make it for you or if you can’t make it, we’ll forgive part of it for you, we’ll finance this for you, and with this Consumer Protection Agency, we’re going to design one product, and that’s the product you're going to buy, I would certainly say we’re getting away from what made this country great.

FITZGERALD: So how do you get back to it? What’s one proposal that you would you say is the first thing to get back to it?

BACHUS: Oh, you mean if I had to go over today?

FITZGERALD: Yes, if you were in the Chairman’s seat.

BACHUS: Well, we’re working on the credit rating agencies, and I think we’re going to have – we have had one proposal; we’re going to have another. You know we could have avoided most of what we witnessed last year if the credit rating agencies had done their job. With securitizations, I think you're going to have to have more disclosure and I think consolidating some of the regulations and protecting consumers. You know I advocated in 2005 a subprime bill. What I advocated basically the Fed adopted two years later. If they had adopted it two years earlier, there would have been a lot of people that could have avoided a lot of horror.

LENGELL: Do you think we’ll see any meaningful legislation this year?

BACHUS: Yes, I think we will because I think there’s – there is consensus between the American people and I think a growing majority of Congress that we’re not going to bail out individual companies. I think there’s – we’re going to try to get the taxpayer off the hook, and I think there is – there’s an agreement in Congress that we have to do a better job of protecting consumers, and we can’t do it by having eight or nine different agencies trying to do the job because you know when everybody’s in charge, no one’s in charge. But you can’t just go out and create a new agency without any expertise without any understanding of safety and soundness and tell them to go protect the consumer.

SCULLY: Congressman Bachus, Ranking Republican on the House Financial Services Committee, Republican from Alabama, thanks for joining us.

BACHUS: Thank you.

SCULLY: We continue the conversation with Alison Fitzgerald of Bloomberg News and Sean Lengell, Washington Times Correspondent. Let me begin with you on this – on the bailout fatigue that we’ve been hearing so often from Democrats and Republicans. Based on what you heard this morning from Congressman Bachus, how much is that prevalent among Democrats, and how would that shape anything that comes out of that committee and Capitol Hill?

LENGELL: Certainly this is a universal – there is considerable bipartisan support for against bailouts, against continuing this practice. This week – this past week, there was a group of 28 House members bipartisan that sent a letter to Secretary – Treasury Secretary Geithner saying that they thought that the bailout program should expire in December instead of being renewed for another year. So – and this is – this is an issue that plays well at home. I mean it’s – the whole bailout program has not been terribly popular in you know in home districts, and the lawmakers know that, and so I think that there is general – very considerable bipartisan support to end any future – anymore bailouts.

SCULLY: You're shaking your head. You agree with that?

FITZGERALD: I agree that there’s very little support publicly and in the Congress for passing legislation that would allow more – well, that would put taxpayer money forth from (INAUDIBLE). However, in President Obama’s reg reform plan, they have a line or two in their white paper that says essentially if another catastrophe like last fall happens again and we have to come in and deal with a failing bank, that we’re afraid it’s going to take down the whole financial system, they have a little line in there that says among the things the Treasury should use, it should have at its as a disposal as the ability to inject money into the bank, use taxpayer funds or give the banks loans, which is very unpopular among a lot of legislators on the hill which showed up in hearings this past week, where Congressman Sherman was essentially trying to get Secretary Geithner to say he would limit any such activity to $1 trillion, and Secretary Geithner would agree to that, such a limit. So there’s a fatigue out there, and there’s a lot of resistance to it, but I think the people who were in the room last fall dealing with the actual meltdown of the financial system want to have everything still available to them if something happens again.

SCULLY: We have about a minute left, but what did you learn today?

FITZGERALD: I’m surprised only that Mr. Bachus thinks that some legislation is going to pass by the end of this year. I thought there was a lot of fatigue in terms of after healthcare and everything else to get a new major proposal …

SCULLY: Legislation that will result in more regulation or a different type of regulation?

LENGELL: Well, that’s a good question. I – more regulation, but not as much as the administration would like. This proposed Consumer Financial Protection Agency that would basically be a new agency to safeguard against shady mortgages and things like that. I – that would be a new agency. That would be another layer of bureaucracy, but I think that there’s enough Republican support for it as long as it sort of gets a little down, and the administration’s already expressed some – it’s said that they were willing to allow that, to maybe not to be as big as a scale as they originally wanted it to be.

SCULLY: Sean Lengell, your beat is Capitol Hill for the Washington Times. Thanks for being with us. Economics Reporter for Bloomberg news, Alison Fitzgerald, thank you for joining us on Newsmakers.

FITZGERALD: Thank you. Nice to be here.

END.