Frank Says U.S. May Consider Agency to Buy Bad Debt
The ``next question'' for lawmakers and the Bush administration will be whether Congress should create an agency like the Resolution Trust Corp., which took over the assets of failed savings and loan associations almost two decades ago, Frank, a Massachusetts Democrat, told reporters in Washington.
Some investors, including Bill Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., are calling for the government to play a bigger role in resolving the credit crunch. Worldwide, financial institutions have reported more than $500 billion in losses and writedowns stemming from the collapse of the subprime-mortgage market.
``The question is what are the consequences of the federal government taking the risk of holding those assets,'' Frank said between a series of votes yesterday at the U.S. House of Representatives.
House Republican leader John Boehner today said creating an agency to buy distressed debt is ``probably not the answer.''
`Responsible Actions'
``I think that the Treasury Department and the Federal Reserve have taken responsible actions over the last several months,'' Boehner told reporters in Washington. ``Unfortunate, but necessary. I think that going beyond that could in fact be a mistake. We don't need more federal involvement in our markets.''
``We need this issue to resolve itself, and having more federal involvement or having a new Resolution Trust Corp. is probably not the answer,'' Boehner said.
Barack Obama, an Illinois senator who is the Democratic presidential nominee, said in an interview with Bloomberg Television last night that a move to set up an agency to buy bad debt was ``premature'' and likely wouldn't pass Congress this year.
``I think it's a little premature for us to move forward on that, and frankly something like that probably could not get through Congress until we have a new Congress and a new president.''
Douglas Holtz-Eakin, an economic adviser to Republican presidential nominee John McCain, said that Fannie Mae and Freddie Mac essentially buy bad debt. The government takeover of them means that a Resolution Trust-type operation is already an existing federal function, he said.
``Whether we wanted one or not, we've got one on the government books,'' Holtz-Eakin said.
Turmoil
Frank said that financial turmoil was not quelled by the Federal Reserve's intervention to force the sale of Bear Stearns Cos., once the fifth-largest U.S. securities firm, to JPMorgan Chase & Co. and the Bush administration's seizure of mortgage giants Fannie Mae and Freddie Mac.
Still, before the government intervenes, there must be ``a realization that the market not only got into this fix but can't get itself out,'' Frank said.
Frank said it is ``conceivable'' that whoever becomes president-elect will ask Congress to consider legislation in November. He said it was ``too early to tell'' whether there is a consensus on an intervention.
Resolution Trust Corp.
In 1989, Congress created the Resolution Trust Corp. to dispose of bad loans for property and construction generated by failed savings and loans. He said that the S&L bailout, as well as that of Chrysler Corp. earlier that decade, ``did not work out badly.''
Frank said Treasury officials ``didn't have any choice'' but to let Lehman Brothers go into bankruptcy because of public opinion.
Lehman Brothers became the latest casualty on Wall Street of the subprime mortgage crisis yesterday. Barclays Plc and Bank of America Corp. abandoned takeover talks, forcing Lehman Brothers, the fourth-largest U.S. investment bank, into bankruptcy.
``I wouldn't have said this a week ago,'' Frank said. ``We just had this test'' with Lehman Brothers and ``there was no self-help capacity in the market.''
``People were saying let's let somebody go bankrupt, let's let them go belly up,'' Frank said. The market's reaction to Lehman's bankruptcy shows that ``looking at a dead belly apparently is not as much fun as talking about looking at a dead belly.''
