In July 2007, when Congress and many people on Wall Street were getting increasingly nervous about goings-on in the financial markets, Citigroup’s then CEO Chuck Prince was on Capitol Hill taking questions about the state of his firm.
At the time, Citi was close to becoming a basket case, its bloated balance sheet threatening to overwhelm it. On the other side of the table was Congressman Barney Frank. During the hearing, Frank asked why Prince was keeping things on his books that looked like liabilities, including loans made to private equity for leveraged buyouts. Notoriously Prince told Frank: “As long as the music is playing, you’ve gotta get up and dance. We’re still dancing.” Soon after the exchange, the dancing stopped abruptly.
It’s been a heady seven years since the collapse of Lehman Brothers helped spark the global financial crisis that dragged the world to the brink of financial catastrophe. During the aftermath, Barney Frank and his fellow Democrat Chris Dodd, in a bid to minimise the risk of a future repeat, designed the most significant financial reform bill in the United States since Glass-Steagall in 1933: the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Both men have now retired after 30-year careers in the Congress. But as far as Representative Frank is concerned, the world of finance and how it can be kept in check is still a preoccupying subject.
In January 2015, he came to New York to speak to circa 600 private equity professionals at PEI’s CFOs & COOs Forum about the world-changing events that took place before, during and after Lehman’s collapse, and also to issue a warning: let’s not allow a gradual dismantling of the safety provisions that Dodd-Frank has built into the system.
As lion’s dens go, Frank will have seen worse. During the speech, the CFOs were quietly attentive and asked some polite questions afterwards. Still, when we asked him afterwards if he thought the audience had been receptive to his views, he replied skeptically: “My guess is there was a lot of disagreement that people didn’t want to articulate, but there’s no way to tell.”
Frank knows of course that while popular on Main Street, his bill is less of a hit on Wall Street. Dodd-Frank has meant that the financial services industry is now faced with myriad reporting requirements and a significant compliance cost overhead.
Politically, there is resistance, too. In the 2014 mid-term elections, Republicans swept to victory in both the Senate and the House of Representatives. And already, three months into the new Congress, those pushing to rework some if not all of Dodd-Frank’s provisions have seen some success, advancing their agenda by authoring small and highly technical changes, and attaching them to opposition-proof bills like the omnibus budget bill last December.
Needless to say Frank thinks this a mistake. As far as he is concerned, the job of safeguarding America’s financial system has not been completed, and while Dodd-Frank needs further improvement, any knee-jerk approach would be ill-advised.
He says: “There are changes to be made, but they need to happen within the context of conversations about objectives. You can’t say we want to repeal the whole thing and then say ‘work with us on whatever change’. There are places where we could roll back, but there are also places where we need to do more.”
“I believe that the [Republican Party] thought they could do this piece by piece, but the reaction to the piece that was in the omnibus was I think stronger than they expected. And I believe you now have a very unified Democratic party that’s going to fight the changes, and the President is going to veto if it makes it past them. On the Republicans – if I were they, I would reconsider. I would not want this to be a major issue in the upcoming election of 2016. I guarantee you that the financial reform bill is very popular. People who don’t understand the Volcker rule like it. The GOP doesn’t want to go to the country as the advocates for the banks and against reform.”
THE BILL’S A SUCCESS
According to Frank, current Republican efforts to rethink registration requirements for private equity firms are a case in point. President Obama has already threatened a veto on the issue, and while Frank doesn’t think private equity firms should be considered systemically important financial institutions, he does stand by the market results so far, and urges strong disclosure for financial firms of all stripes and colours.