The Day the Earth Stood Still

The House Financial Services Committee until recently was not particularly partisan. Most of it was business-versus-business or sector-versus-sector type of clashes. It seems in the last two years it has gotten hard-edged partisan—maybe due to the meltdown. Are we wrong?

No, you’re reading it absolutely right. It was one of those bipartisan committees. There were industry clashes. But when you add the political minefield to that, it makes it really destructive because some of us on the Democratic side have the same view as the Republican side. But because we’re Democrats and they’re Republicans, ultimately we can’t agree on legislation because it would be a political benefit to one side or the other, which is stupid.

I ran into it most recently when we did regulatory reform; although, I had a lot of bipartisan meetings and come-togethers. I convened a bipartisan dinner about every three weeks, and all of the members would be invited. We’d bring in outstanding presenters, particularly on the regulatory reform issue. I don’t think we ever had less than 50% of the committee in attendance. We usually had three quarters. It would be an evening meeting, starting, say, about 7 o’clock going to 11 p.m. There would be some drinks, we’d have dinner, the presenters would make their presentation, and members would ask questions. No reporters and no record. It was just an open session.

It was a great—very productive. When it started out, I formed a pretty good friendship with [former Federal Reserve chairman] Paul Volcker.

Do you have any thoughts about how well that committee is going to be able to function now and what will be different about it than in the most recent session?

Taking into consideration the friction that exists on the Republican side, this is putting poor [committee chairman] Spencer Bachus in a crossfire. He’s subject to the revolutionary zeal of this extreme conservative group. He’s no fool, by a long shot, so I think that he’s going to be able to hold his position of the leadership there. And [ranking Democrat] Barney Frank does not strike me as a guy that will engage just for the purpose of engaging. He will do politically what he has to do to satisfy the leadership of the House. If they appear too friendly, their own will cut them down. I mean, you know, it’s a tough atmosphere.

I’m glad I’m gone. Man, I went through 12 years in the minority—it’s horrible. But then I had a president, and if we couldn’t get along in the Capitol, we could call down on Pennsylvania Avenue and get things done there.

This president is not nearly as responsive as Clinton was. And I think he doesn’t really know how to do it. He’s not the same type of politician that Clinton was. So it’s going to be a lonely place to be in the House as a Democrat these next few years—it’s really going to be rough. And, you know, it’s so frustrating because, if you can’t legislate, you can’t get anything done, and you’re just sitting there waiting for the term to go by so you get to another election and get a shot. How unrewarding is that, particularly when you’re getting up in age as I am now?

Do you consider the Volcker Rule “too big to fail,” in the broader context of the legislation that you helped achieve?

When I developed the Kanjorski Amendment and the Volcker Rule—and the Volcker Rule really grows out of my amendment—and then the economic advisor to the president liked it, I thought that, without those two pieces of legislation, the reform legislation would really have accomplished very little. As a result, it would be literally embarrassing to have gone through the crisis that we went through and then put nothing in place. Now, as we engaged in that—it’s funny how that happened. It grew out of committee dinner parties. The first, in March of ’09, Paul Volcker was one of the presenters.

Volcker got there early, and we were having drinks. He and I sat down, and he said, “Well, how’s everything going?” I’m a guy that easily frustrates, and I unload my frustration. I’m always looking for a priest.

So I took the opportunity with Volcker. I said, “You know, I’m just so frustrated. If we don’t do something right here and change this whole thing about having these institutions getting larger and more systemic, why am I here? Why are we doing this, and of what value is it?”

We talked for about a half-hour, and he basically said—and he was in agreement with me—that we needed something to break up these institutions. But he was out of favor with the president and the White House and couldn’t get it done. So he said anything he could do to help me he would do. I took that as an alliance that we formed from that time on.

For the next year, we tried to home in on the two pieces of legislation and finally convinced the White House to propose his rule as one of their packages—and not to oppose mine. Now I’ll be honest with you, I never thought my amendment could carry the day simply because it’s probably the most revolutionary piece of law in the Congress in my 26 years that ever passed.

Do you understand what it does? It says that a council of regulators here in Washington, D.C., will, on a constant basis, be analyzing the financial structure of the United States. When they come to the conclusion that a private institution is either too interconnected, too large or under-funded or has some jeopardy that may, in the future, cause systemic risk, that they have the right to order that institution to take steps to remove itself from that category or circumstance. And if it fails to do so, they can break the institution up.

Well, that is an extreme—I mean, we’ve never done that in the U.S. other than with Standard Oil. It applies the Standard Oil case to the financial institutions in this country.

A lot of people didn’t like it.

No, they didn’t like it, and I have a great deal of respect for them because I’d fear it too if I were on the other side. It has become law. But it can sit there on the shelf and wither and nobody every pay any attention to it. Nobody has to ever convene a meeting of the council or hire any experts to determine what this inter-connectability is. It may never affect our system.

That would be horrible because why do you pass laws and create regulations and authority to accomplish something if you don’t really use it?

Then it can be misused and abused. You could get people that have a theory that’s quite opposed to capitalism, take that piece of legislation and kick the living [you know what] out of the capital structure of Wall Street and destroy it.

Or it can be so misused and abused that it could benefit one side of the competition as opposed to the other.

So I realized that, as we developed that concept and it was gaining some strength, that the question was, “What can we do in the Senate?” Well, lo and behold, we were fortunate enough to convince then-Senator Chris Dodd, D-Conn., to encapsulate it in his Senate bill.

Well, that was a great victory, but it didn’t accomplish anything. If you remember the time sequence, that was right about December 2008 and January ’09. At that point, I hadn’t decided whether to file for re-election or just cut and run.

You knew what the re-election environment was.

Yeah, but I quickly realized that if I became a lame duck at that time that amendment would have died. I wouldn’t have been on the conference committee, and you can’t blame anybody. A lot of people we didn’t put on the conference committee were retiring members. They weren’t going to be here. I decided that, if I wanted to defend the two pieces of legislation that I felt were the hallmark of the bill, I had to run for re-election.

And the federal insurance office was the third layer of that story.

I’m convinced you can’t move radically in changing from state control to federal control. It’s so complicated. But what a great gap this will be in terms of familiarizing everybody with the unique field of insurance, looking at some of the weak points and some of the strengths.

We’re running into the same problem with real estate right now. We are having a tough time restructuring Fannie Mae and Freddie Mac and getting a solution to predatory lending and subprime lending because of the real estate laws of this country. You’re dealing with 50 different jurisdictions and 50 different laws. The law that applies in Pennsylvania to a mortgage is that you sign a judgment note when you make a mortgage. When you buy a piece of property in Pennsylvania, you give them everything: Your first born, your wife and everything else is pledged on the line. If you don’t pay on that mortgage, you’re a dead mackerel. You’re going to work like hell to keep it because the penalty for not keeping your word is extraordinary.

In California, why do they have the problem they have? Because, in California, you hand the keys in, you’re exonerated. You buy your $2 million home and you have an annual income of $100,000, and it strikes you—you can’t pay $200,000 a year in mortgage payments. Just walk down to the bank and turn in your keys. You walk away.

Because each of the 50 states has different real estate laws, we’ve now come to the point that, if you’re going to use security financing of real estate, not only national in scope but global—investors don’t understand. You go to Europe, and they sort of look at you like you’re some kind of a whacko that they have to contend with. “You mean you have 50 subparts to this thing that we don’t understand, and we’ve been buying your securitizations?”

When you take a securitization in a pool that has not only different pieces of real estate in different markets in the country, but all of them are subject to different laws in the country, I don’t know how they sell it. It astounds me how anybody in Rome or Paris would buy one of these securities. And the only reason they do is somebody gives it a triple-A rating and says, “It’s as good as Fort Knox.”

Do you have any sort of vision of where the federal insurance office goes?

I would recommend it be structured in such a way that it can be non-political. You would need to find somebody that’s exhausted their political ambition and they’d like to do something creative in leadership and government—and appoint them to a lengthy term (Michael McRaith, commissioner in Illinois, will take the office in June). He’ll need to do a real deep, penetrating analysis of where some of the pressure points in the system are and which ones of them allow a change for experimentation as to how we could go to a national system.

That brings us to AIG. The argument that prevailed in the financial modernization legislation was that the insurance subsidiaries of AIG were well regulated for insolvency. Some of that we now know wasn’t necessarily true. Some argue credit default swaps should have been regulated as insurance products. Nobody understood them in that way. It was that triple-A rating that allowed them to take us to the precipice. Were you surprised that reform legislation ultimately was modest and didn’t cause a broader federal intervention in insurance regulation?

Not really because insurance has crapped, if I can use the word, into a political structure. You will not believe it. I would actually get calls from fire companies: “What are you doing with the insurance?” Why? Because in Pennsylvania they have a special reservation of the premium that goes to fire companies, so the tentacles are out there in the community.

Some rather burly volunteer fireman is giving you hell about affecting subsidies he’ll be getting from the state. They don’t really realize their risk until they see it from the other side. And, of course, we saw it on the other side with their pension funds invested in these triple-A securities. New York state, for example, is almost decimated with the losses that they were suckered into.

I don’t think most members of Congress recognize that derivatives were really insurance products.

What went on behind the scenes when the economic meltdown was taking place?

It was about six weeks before the general election of 2008, somewhere between September 15 and 19, when Speaker Pelosi called a few of us back to the Hill and told us to really lighten up on our campaign schedules and get involved in what we could do to rescue this. After a couple of days of discussions, I came to the conclusion that, in fact, we were really at the outer edge, and depending on the decisions made within that week or two, it was the question whether or not the Republic would survive.

If the economy failed in the United States and then the world, the American government would fail. Although I think of myself sometimes as an idealist, I’m also very pragmatic, and I recognized that we were going to have to make pragmatic decisions.

That must have been frightening.

In some of those telephone conference calls, we would have 15, 20 of the finest economists in the world. And the one unique thing about it was every one of them said we had to get involved and pledge the full faith and credit of the United States government if we had any chance and that we only had a 50/50 chance of saving the American economy or the world economy and there was a real likelihood that it wouldn’t be able to be done. So that was the risk—and knowing full well that, if we did it and we saved it, nobody would ever know and nobody would ever believe you did it. It was going to be a highly politically risky thing to do.

But we had a uniform understanding, certainly among the Democrats, that we were going to dive in and prove we could swim. And we did. And boy, they were a tough two weeks. I mean, I’d sometimes be in arguments and discussions, you know, because [former treasury secretary] Paulson sent up a four-page bill that ultimately became a 400-page bill and we probably didn’t, even then, have enough time to think about all of the additions that should have been on it.

The e-mails and telephone calls were running 1,000 to 1 against us. They called me names that I—and I’d been in the Army—that I didn’t know. People were just vicious. And this was six weeks before the election. I got messages like: “Guaranteeing, man, you’re going down,” and “We’re going to kill you if you vote for…” They were bad. So we knew we were driving over the cliff.

But, you know, I look at it as that’s what we trained for. That’s what we got elected for—not thinking that we’d ever be called upon to do this. Just like when you go into the Army you go through basic training, but you don’t assume you’re going to go into a battle or into an invasion. It’s training that, if by some chance, you are called upon, you’ll be prepared. Well, 24 years in the Congress was the basic training. It took me to the point where, for these two years, I was now faced with the reality—the worst reality that we’d ever thought could happen. And everything we turned around, it just got worse. We were in New York the day Bear Stearns collapsed.

We met with the masters of the universe. And they are. There’s no question about it. [JP Morgan Chase chairman and CEO] Jamie Dimon is a powerful son of a gun. No question about it. And here I am, just a little lawyer from northeastern Pennsylvania. And we didn’t have much of a backup team and no coaches, so we were there on our own. But, quite frankly, I have to say we held tight, and the House leadership supported us.

And it was a tough call when Republicans went scampering.

Very disappointing, very disappointing. And when they turned it into a political issue, it was quite apparent that it was a win-win for them. If the country had collapsed, we would have been blamed for what we’d done. And if it had succeeded, nobody would ever believe we had done anything.

If you walked down Pennsylvania Avenue today and asked people, “Was the country ever in jeopardy?” They would respond, “Are you crazy? It’s not in jeopardy. These guys are all lying. They’re politicians.”

Now, you know, in truth, maybe it wasn’t in jeopardy. Maybe these 40 Nobel Prize winners were lying to us. I have a tendency to believe them. And I have known them for a long enough time that, when they would walk in and be ashen white, you knew they were scared. I didn’t meet anybody in those several weeks that wasn’t scared. The day we lost it on the floor, I mean, your heart just fell out of your throat. I think we lost 900 points in a half-hour on the New York Stock Exchange.

I got very angry. To tell you what kind of a poor politician I am, I had misread the damage that had been done with George W. Bush—his presidency—because we needed those extra shore-up of the votes, and Bush hadn’t been out there. It was Paulson and [Federal Reserve chairman] Ben Bernanke that were talking. The president was practically silent. So, when we lost that first vote, they asked me how we could put together the dozen votes to turn it over. When we had to get the additional people, they asked me, “What do we need?”

I told Kevin Furman of Treasury, “If you don’t get the president on the TV in a fireside chat, lay it on to the American people, you’re not going to get anybody else to get out there. And you may lose some Democrats.”

So obviously they convinced Bush. But he did not have the effect I thought he would have. Few people listened to his speech. It was a great speech, but he had lost so much influence and respect that, by that time, people considered him useless.