As chairman of the House Financial Services Committee, Rep. Barney Frank (D-Mass.) had the power to hold congressional hearings and introduce legislation aimed at calming and reforming the bond market. In March, he held a congressional hearing titled “Municipal Bond Turmoil: Impact on Cities, Towns and States.” In June, when the bond market was still in turmoil, Frank introduced two overhaul bills. Bond experts said the market was running scared.
“Investors were leaving en masse. Their fear was everything was coming apart at the seams, and this was next,” Marilyn Cohen, co-author of “Surviving the Bond Bear Market: Bondland’s Nuclear Winter,” told The Post.
Frank told The Post that problems with the bond market were twofold. Rating agencies were applying tougher standards to municipal bonds than private-sector investments, resulting in less favorable ratings. And bond insurers were taking on riskier investments, causing them to accumulate historically high debt. Investors feared the insurers would begin defaulting on bonds.
Despite Frank’s efforts, both bills stalled and fears about the bond market continued.
On Friday, Oct. 17, Paulson called Frank after the markets had closed. Frank said that the discussions probably centered on the $700 billion Troubled Asset Relief Program, known as TARP, and how banks would qualify for funds, the details of which Paulson revealed that following Monday, Oct. 20.
“We had one fight over TARP, and it was over the use of funds,” Frank said. “I wanted some of them to help with foreclosures.”
That day, Frank instructed his broker to raise cash for him, and the broker liquidated nearly $93,000 in Massachusetts municipal bonds in three separate transactions. The investments represented nearly 10 percent of his financial portfolio, according to his financial disclosure form. He said he moved the money into his campaign coffers because his support for TARP that year had placed him in a politically vulnerable position.
Under congressionally imposed rules, Treasury secretaries cannot make the moves that Frank did.
That year, Frank had seven other calls and three meetings with Paulson.
Frank said he worked in Congress to lower interest rates on municipal bonds, working against his own interests, and said his conversations with Paulson had nothing to do with his personal financial decisions.
“Were these things tied to the phone calls? No,” Frank said. “They didn’t tell you what was a good investment or a bad investment. They would tell you what was good or bad for the economy.”
Frank said he eventually was reimbursed by the campaign and reinvested in Massachusetts municipal bonds, because bonds are safe and provide good tax benefits. The bond market survived the crisis without defaults.
“To the extent that people said, ‘Oh, you were protecting your investment,’ I was protecting the financial well-being of Massachusetts,” Frank said. “What the hell else am I supposed to do?”
Deputy graphics director Karen Yourish
and researcher Bobbye Pratt contributed
to this report.