Facetime December 10, 2008, 5:21PM EST

Barney Frank on Detroit, Housing, and Executive Pay

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Ford Fusion Hybrid: Frank says building greener cars will be part of the deal David McNew/Getty Images

Bailout aid to insurer AIG dwarves the sums Detroit has been asking for Everett Kennedy Brown/EPA/Corbis

Getting bondholders to take a haircut and accept equity for half their debt is said to be critical to restructuring the automakers. But these bondholders have credit default swaps to protect them if the companies go Chapter 11. What leverage will you have over bondholders?

In the first place, credit default swaps ain't what they were made out to be. People were issuing those swaps like they were life insurance policies on vampires, and an awful lot of people thought they had protection. It turns out the people who issued the credit default swaps don't have the money to pay them. Second, that's the purpose of the czar or collection of czars or whatever the President decides to appoint. He's going to say to everybody: "You're going to have to take a reduction or else the whole thing goes bankrupt."

Should GM (GM) acquire Chrysler?

I'm not competent to say. I try to resist the temptation that too many of us in politics and the media fall into, which is telling people a good deal more than we know.

We just saw bonuses denied to John Mack of Morgan Stanley (MS) and John Thain of Merrill (MER). Will the terms of an auto bailout deny golden handshakes to departing executives? And will the next Congress act to rein in what some see as excessive executive compensation?

I hope so. But you know what? In 2006 when the Democrats were in the minority, I had a bill to try to [curb executive pay]. I didn't get much attention from the media. In 2007 the House passed a bill that I sponsored in the Financial Services Committee called "say on pay," which required a referendum by shareholders on any executive compensation. Once again, we were kind of ignored. So, frankly, the House and the committee I chair have been ahead of a lot of other people on this. I welcome the fact that people now are joining us, and yes, in 2009 we will pass, at the very least I believe, legislation that says you have to have a referendum on all forms of compensation: bonuses, golden parachutes, stock incentives, as well as salaries.

People are outraged out there. They want to know how the heck we got into this position in the first place. The next worry is that credit-card lines of credit are going to be cut. How are you going to ensure this doesn't get worse? How are you going to put money in people's pockets so that they actually have some confidence when the banks withdraw their credit?

I do think people should be unhappy. But this is not something that was visited on Americans by Martians. What we plan is a threefold approach: First, we need to take much more aggressive action to reduce mortgage foreclosures. Second, we need to do a much better job of insisting that banks that receive capital infusions from the Treasury Secretary re-lend that money rather than simply sit on it, and Treasury has not done a good enough job of forcing them to do that. Finally, once President-elect Obama is in office, Congress will pass a program for recovery worth hundreds of billions of dollars providing money to states and cities to do a variety of very necessary physical projects, and that's the single biggest thing that will get money back in people's pockets.

With all due respect, congressman, I saw videotapes of you saying in the past: "Oh, let's open up the lending. The housing market is fine."

No, you didn't see any such tapes.

I did. I saw them on TV.

Yeah, well, I never said open up the housing market, the market is fine. In 2005 a group of us in Congress were trying to pass a bill to restrict subprime lending, and we were opposed by right-wing Republicans led by [former House Majority Leader] Tom DeLay, and I don't remember us being able to get any media attention. No, I have been on the record as saying repeatedly that pushing people into homeownership when they can't afford it is a bad idea for them and the economy. In 1994, in fact, Democrats in Congress passed a bill giving the Fed the authority to restrict subprime lending. Alan Greenspan, as he later admitted, refused to use it.

So whose fault is this?

The right-wing Republicans who took the position that regulation was always bad, the market was self-correcting, and you should not have any restrictions on the free flow of capital. If you look at the loans made by banks, which are regulated entities, they didn't make many bad subprime loans in percentage terms. The bad loans were made by the unregulated entities. What you're going to see next year is a rediscovery of the importance of regulation. We've had a period of a philosophy that said: "Let capital do whatever it wants. Don't regulate it. Don't tax it. Don't restrict its international movement, and it will reward you." And yes, it does do some good because it creates wealth, but it creates wealth in a maldistributed way. More important, it creates excessive risk. What we will do next year is put rules in place that constrain those risks.

Why is so much money going to AIG (AIG)? Here we are wrangling over $14 billion for two auto companies, and we've given $140 billion to AIG.

I agree with you. But you should ask the Bush Administration because they're the ones who gave the money to AIG. Congress was not involved. The Treasury Secretary and Fed chairman came to us and said: "We're giving $85 billion to AIG." There's a great inconsistency, and some people who said O.K. to AIG are being hypocritical when they object to a much smaller amount going to Chrysler and GM. I believe to some extent there's a white-collar/blue-collar bias.

Is Obama going to raise taxes on the highest earners?

Not in the first year, I believe, because the economic situation is what it is. I do think it is appropriate: Bill Clinton raised taxes on higher-income people, and we went on to have a very prosperous economy.

Maria Bartiromo is the anchor of CNBC's Closing Bell.

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