Barney Frank

Mr. FRANK of Massachusetts

Mr. FRANK of Massachusetts. If you don't like the answer, don't ask the question.

Mr. FRANK of Massachusetts. Mr. Chairman, at a meeting of the committee, I thought the gentleman was present, the gentlewoman from Florida (Ms. Ginny Brown-Waite) asked if I would join in a letter to the GAO asking very many of the questions he asked. I have the letter, dated August 9, 2007. And earlier in the general debate, Ms. Brown- Waite asked me to engage in a colloquy and commit to taking seriously the recommendations. So we have already asked the GAO for a study, and I believe that study will be going forward. And if it hasn't already been done, at the appropriate time I will place the letter that the gentlewoman from Florida (Ms. Ginny Brown- Waite) and I sent to the GAO into the Record. House of Representatives, Committee on Financial Services, Washington, DC, August 9, 2007. Hon. David M. Walker, Comptroller General of the United States, Government Accountability Office, Washington, DC. Dear Mr. Walker: We request that the Government Accountability Office (GAO) initiate a review into a variety of questions regarding the expansion of the National Flood Insurance Program (NFIP) to include an optional wind insurance program. The results of your review will assist congressional understanding of how such a program could be implemented and to what extent it would affect the private market. As background, Section 7 of H.R. 3121, the Flood Insurance Reform and Modernization Act of 2007 creates a new program at the NFIP designed to enable NFIP participants to purchase both wind and flood coverage in a single policy, A key provision of Section 7 requires that rates charged for this new, optional, wind coverage be risk-based and actuarially sound, so that the program collects premiums sufficient to pay all reasonably anticipated claims. In so stating, H.R. 3121 specificaI1y departs from the method of determining actuarial rates currently used by the NFIP. Under H.R. 3121 the NFIP would provide optional wind coverage in communities that already participate in the NFIP and that agree to adopt and enforce building codes and standards designed to minimize wind damage. In order for you to better understand the details of the new wind insurance program we have enclosed a copy of H.R. 3121, Section 7 with this request. In addition to any issues you deem appropriate, we would like the GAO to initiate a comprehensive analysis and determination of the following: 1. The ability of the Federal Emergency Management Agency (FEMA) and the NFIP to implement an actuarially-sound (i.e., with rates priced according to risk, or as defined by standards and methods generally accepted by the actuary industry, incorporating up-to-date modeling technology, and taking into consideration administrative expenses) wind insurance program, including: whether FEMA's current staff and resources enable it to efficiently and effectively expand the NFIP to offer optional wind coverage; how actuarial rates for such coverage could be determined; the likelihood that consumers would purchase coverage at these rates; how this new coverage would be underwritten and sold; how claims arising from this new coverage would be adjusted and paid; whether FEMA's staff and resources are sufficient to be prepared to implement this new wind insurance program on or before June 30, 2008; what additional staff and administrative costs are necessary in order for FEMA to effectively implement and administer this new wind insurance program; and how the availability of optional wind insurance through the NFIP could affect the enforcement of the NFIP's mandatory purchase requirement for flood insurance. 2. The effects, if any, this program could have on existing State wind pools, including capitalization of, and participation in, the wind pools. 3. Whether expanding the NFIP to provide optional wind coverage could: affect the availability and affordability, over the long-term, of wind coverage nationwide; influence the development in private sector markets, including the surplus and non-admitted markets, for multiple peril insurance, or alternatives; result in adverse selection, whereby the wind insurance program could be under diversified and particularly vulnerable to large events; and lead to the development of lower, yet actuarially sound rates for wind coverage similar to wind coverage offered by the private sector, in the same geographic area. 4. To what extent, if any, the new wind insurance program could expose U.S. taxpayers to loss, including but not limited to the case of program deficit. 5. Are alternative methods available to provide NFIP participants with better wind coverage options. 6. To what extent, if any, gaps in coverage may still exist, between the coverage included under most homeowners policies, and the flood and wind coverage provided by the

Mr. FRANK of Massachusetts. Mr. Chairman, I yield back the balance of my time.

Mr. FRANK of Massachusetts. First, Mr. Chairman, I hope the gentleman from Texas will remember this problem about spending when we again debate the proposal to spend hundreds of billions of dollars sending a manned spaceship to Mars, which I have been opposed to, and I hope he will join me in that unnecessary expenditure and oppose it. Secondly, CBO says he is wrong. The wind part is written, unlike the flood part, to require actuarially sound policy premiums to break even, and CBO certified that it's there. So the notion that this is adding trillions or even billions to our debt is simply wrong, according to CBO.

Mr. FRANK of Massachusetts. Mr. Chairman, I have no further requests for time, and so I reserve the balance of my time.

Mr. FRANK of Massachusetts. I'll take back my time to say that's irrelevant. We weren't talking about the history of the flood program. The gentleman said we shouldn't let the private companies walk away from their social responsibility. I wish he would tell me how he thinks we can do that. I will be glad to yield to the gentleman if he wants to get back to the subject, but not when I'm still posing the question, because he apparently didn't understand it. He said if they're not living up to their social responsibility, we should make them do it. I don't know how we can do that. If he wants to suggest to me new powers it would seem to me for us to take to do that, I'll listen. I yield to the gentleman.

Mr. FRANK of Massachusetts. Mr. Chairman, will the gentleman yield?

Mr. FRANK of Massachusetts. Mr. Chairman, I yield myself 2 minutes to take up the suggestion of the gentleman from Georgia. He said that the insurance companies should be required, I guess, to live up to their social responsibility. I agree. The committee of which I'm the Chair has the jurisdiction on that; and if he has any recommendations about what we can do, I'd be glad to do it, but not in that way right now.

Mr. FRANK of Massachusetts. I yield to the gentleman from Georgia.

Mr. FRANK of Massachusetts. Mr. Chairman, I yield such time as he may consume to the gentleman from Mississippi (Mr. Taylor).

Mr. FRANK of Massachusetts. Mr. Chairman, will the gentlewoman yield?

Mr. FRANK of Massachusetts. I must say, Mr. Chairman, the gentlewoman asks for my word, and I am tempted to assume a cultural pose which I haven't always had and simply say, ``Word.'' But I am not sure that is still in vogue. I'm sometimes behind in my fashionableness. I will say this to the gentlewoman; she has been very constructive and we have been able to work together on this and other matters, including on the most recent legislation involving floods. Certainly I will do everything I can to see that this is given very serious consideration. Now I should add, the recommendations may mean a curtailment of the program or an adjustment of the program. If the argument is that FEMA is not well structured, the response might be to try to improve the structure of FEMA. But I take this report very seriously. So she has my word that we will take this very, very seriously. In fact, I would say when we get the report, the first thing we will do will be to have a hearing on it and then go from there.

Mr. FRANK of Massachusetts. It is not in our power to tell them not to take a walk. They are a private sector entity. So unless there was to be some legislative change, there's simply no power, particularly at the Federal level, because insurance has historically been a State issue; but when the gentleman says we shouldn't let them walk away, I might be inclined to agree with that. There's nothing in the Federal Government now that would allow us to stop them from walking away, and our committee is available if anybody has any proposals to increase the role of the Federal Government, and I yield to the gentleman.

Mr. FRANK of Massachusetts. Mr. Chairman, I yield 4 minutes to the gentleman from Oregon (Mr. Blumenauer).

Mr. FRANK of Massachusetts. His point about the flood insurance not being actuarially sound is right; but in this bill, because it is subject to PAYGO, we have a more stringent standard. So it is not totally valid to say, oh, look, it was supposed to be actuarially done. The wind program here is written to a much stricter standard.

Mr. FRANK of Massachusetts

Mr. FRANK of Massachusetts. First of all, of course it says ``promptly.'' Members make a choice. The purpose of this is terrorism risk insurance expires the end of this year. We are on a reasonable timetable but not one that has a lot of water in it. Yesterday, on an important bill that goes before the Committee on Financial Services, they said ``promptly.'' So the notion is that they can make the Committee on Financial Services a revolving door and then complain when we can't get the work done when we will have to do it two and three times. Secondly, Members on the other side, and I don't know where the gentleman from California was on this, but in Committee, before the PAYGO problem arose, while we got substantial Republican support, 14, 19 Republicans, including the ranking member, voted ``no.'' So the Republicans had taken an opposing position in the majority. The administration is in the majority against it. And what are they telling us? That a bill that the Republicans on the whole are against doesn't do enough for the people who want the bill. This is people intervening on behalf of people who don't want their intervention. It is true that there is some ambiguity that I hope will be resolved; but the American Insurance Association, and that is the group that, despite the Republican's argument that this can be done by the market, says no, the market can't handle it. And, in a letter signed by a former chairman of the Republican National Committee, Governor Marc Racicot, president of the AIA, they say please go ahead with the bill. And they say: We have concerns about this fix. We hope we can go forward and work on it as opposed to delaying it further. We got a letter today from the Chamber of Commerce and the National Association of Manufacturers, the Bankers, the League of Cities, being aware of the problem and of the first cut at fixing it, that say please go forward. Now, if the people who were expecting to be the participants in this program said, wait a minute, this can't go forward, they would be, I think, entitled to be listened to. When people who have on the whole been opposed to the whole program and who voted against it before this arose now appear to say, oh, my goodness, this poor program, you are not doing enough justice, when they want to kill it, I don't think have a lot of credibility. So, yes, this does need some work. There are a variety of suggestions that have been made. We do have a Senate to go forward and we have a conference process. And I will say to the Republicans, I understand their skepticism about a conference process, because when they were in the power, they didn't have any. They did a lot of backroom, okay, we will do this. We will have a conference. I am chairman of this committee. I can promise, and I have talked to the leadership, we will have an open conference and there will be debates and discussions. I am explaining it because the Republicans, some of them, the newer ones don't know what one is. It will be the House and the Senate, and we will talk about it. And so we will address this particular issue. And, again, all of those who are in favor of this program as it was drafted, all of them want us to go forward as we continue to make this final fix. Most of those who are saying, oh, no, you can't go forward, it is not perfect, didn't like it in any case.

Mr. FRANK of Massachusetts. It is rather odd to proclaim yourself an institutionalist while violating the rules. The fact is that I understand turf makes some people jittery. And I will certainly advocate that the Rules Committee be included in the conference report. Again, the Republicans have forgotten how conferences work. Conferences can have more than one committee, so the Rules Committee can get representation on the conference. Again, everybody who is for this bill in the House and the private sector, people on the whole and the cities, the representatives of the public affected, want us to go forward and say, in good faith work, this out. People who have been on the whole opposed to it, not entirely but on the whole opposed to it, have found this hook to try and hold it up. I don't think they are trying to hold it up to make it better when a majority of them wanted to kill it in the first place.

Mr. FRANK of Massachusetts. Mr. Chairman, I yield the balance of my time to the gentleman from Rhode Island (Mr. Langevin).

Mr. FRANK of Massachusetts. I yield 3\3/4\ minutes to the gentleman from Pennsylvania, the chairman of the subcommittee who guided this bill through a very thoughtful bipartisan markup. (Mr. KANJORSKI asked and was given permission to revise and extend his remarks.)

Mr. FRANK of Massachusetts. I yield 2 minutes to the gentlewoman from Florida (Ms. Wasserman Schultz).

Mr. FRANK of Massachusetts. Mr. Chairman, this is a continuation of a program that the Congress adopted in one of the previous Congresses to provide insurance in case of a terrorist attack. We had, obviously, the terrible murderous attack on America in 2001. Substantial damage was done. Obviously, the overwhelming cost of that was in the human lives caused by these murderers, but we also had property damage. And I believe that it is unrealistic to think, and in fact inappropriate to urge, that the private insurance market, which functions very well in this country and serves us well, that that ought to be used in response to terrorism. We bring a bill forward that would provide both for life and property insurance from the Federal Government worked out in various ways. There are two arguments for continuing this on an ongoing basis. Everybody agrees that it needs to be extended for a while. Some have said phase it out, let the private market ultimately take it over. I believe there are two reasons why that is not a good idea. First, virtually no entities that are in the private insurance market believe that the private market could handle this well. Not only do the insurers believe that, but the customers of the insurance believe it. And primarily, by the way, the customers here are commercial real estate developers. People who are going to build large commercial buildings with tens, hundreds of millions of dollars in construction costs cannot build without a bank loan, and the banks will not lend and would not be allowed to lend by the regulators without fully insuring against all risks, including the risks of the terrorism that we wish were not around but clearly still is. We do not believe, based on extensive conversations with virtually everyone in the marketplace, that this will work. In fact, I submit for printing in the Record a letter from the head of Goldman Sachs in 2005, that very important financial institution, clearly an entity that knows a great deal about the market. And in 2005, only 2 years ago, after we had TRIA for a while and the question was coming up about whether or not to continue it, he wrote to the gentleman from Louisiana (Mr. Baker), then Chair of the Capital Market Subcommittee, that: ``Current data suggests that reinsurance, and consequently insurance, participation in the terrorism insurance market will decline if the Federal backstop is left to expire. ``Some have suggested that private markets for terrorism can successfully utilize risk transfer mechanisms such as catastrophe bonds. ``There is no evidence to suggest that the rating agencies or capital markets investors will be able to quantify the risk.'' And what he says is that he does not believe the market can do this. The Goldman Sachs Group, Inc., New York, NY, July 26, 2005. Hon. Richard Baker, Chairman, Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, House of Representatives, Cannon House Office Building, Washington, DC. Dear Mr. Chairman: On behalf of The Goldman Sachs Group, lnc., a leading global investment banking, securities and investment management firm, I am writing to express my support for maintaining a federal terrorism insurance backstop. The federal terrorism insurance program, enacted by the Terrorism Risk Insurance Act of 2002 (TRIA), has helped provide the underpinning to a robust economic recovery despite the ongoing threat of terrorism. Notwithstanding Treasury's conclusion that TRIA has achieved its original purpose, we are not aware of any meaningful evidence showing that private terrorism risk insurance or reinsurance markets have developed ample capacity to rationally price and insure against terrorism on a scale that would adequately protect our nation's economy. In fact, current data suggests that reinsurance, and consequently insurance, participation in the terrorism insurance market likely will decline significantly if the federal terrorism insurance backstop is left to expire. Some have suggested that private markets for terrorism risk can successfully utilize risk transfer mechanisms such as catastrophe bonds (CAT bonds) that transfer risk from insurers to capital markets. Such securitization vehicles, however, represent a minor percentage of the overall insurance market and have been used mainly for natural disasters, such as earthquakes and hurricanes. There is no evidence to suggest that the rating agencies or capital markets investors will be able to more effectively quantify the risk of terrorism than insurers or reinsurers. As such, CAT bonds and other risk transfer mechanisms are unlikely to offer, at this time, the broad capacity necessary to insure America's businesses, workers and property owners against the risk of terrorism. With less than five months remaining in the current program, American businesses soon will be forced to compete for portions of a severely constrained private insurance market and risk the possibility of being left with inadequate levels of terrorism insurance. In short, we simply cannot afford to let the private sector be economically exposed. I appreciate your attention to this very important matter. Sincerely, Henry M. Paulson, Jr., Chairman and Chief Executive Officer. The CEO of Goldman Sachs who signed this is a very distinguished expert, Henry M. Paulson, Jr. He is no longer the chief of Goldman Sachs; he is now the Secretary of the Treasury and has somewhat different views, but this is a letter that he sent in late July 2005. So we don't think the market can handle it. But I want to argue that even if you thought the market could handle it, we shouldn't ask it to for this reason: If you insure against risk, you ultimately pass the costs along to the people who are at risk. Insurance allows you to spread that risk out among those who are at risk. But the more you are at risk, the more you pay in insurance. If we were to adopt a purely market solution, that would mean that those parts of the country which were calculated to be likelier targets of terrorism would pay more. That is the insurance principle. If you are more likely to be the victim of terrorism, then you should pay more. I do not think we should allow vicious fanatics who hate this country and seek to inflict severe physical damage on us to decide where it should be more expensive to do business in our country and where it should not. But if you use the private insurance mechanism, that is what you get. There is another problem with the private insurance mechanism, not a problem, a good facet, that doesn't apply here. What you can do with private insurance is to say to these entities: You know what, if you lower your risk, we will lower your insurance costs. But people who have large office buildings cannot significantly lower their risk of being attacked by terrorists. If they could, we wouldn't want them to be. We wouldn't want people in America in the business sector to be told, well, why don't you try to appease the terrorists so they don't blow you up. So it ought to be a public program. Now, we have had significant debate in the committee. We had in the subcommittee and committee two full markups, an unusual degree of attention. A number of amendments were adopted from both parties. It is a different and, I believe, better bill now than it was when it was introduced. There are still some philosophical differences. There is one issue, though, that came up after the committee consideration, and to our surprise the Congressional Budget Office said that this is going to cost a certain amount of money. I will get the estimate. I think they said $10 billion over a period of 10 years. That is a very odd thing to say. A terrorist attack will cost hundreds of billions if it happens; it will cost nothing if it doesn't. They apparently used some calculation of probability, which I think is in itself kind of dubious. Nobody, I think, can realistically talk about the probability of a terrorist attack, to give us the number that it will cost $3.5 billion over 5 years and $8.4 billion over 10 years. One thing we know for sure is that these estimates are wrong. It will either cost a lot more, or nothing. CBO did its job, I don't think very well. Maybe that is because of the constraints they operate under. I don't make a personal criticism of them. But we have this PAYGO rule. I will say that my own preference as an individual Member would have been to grant an emergency waiver, because if a terrorist attack is an emergency, then we shouldn't have that in there. I do not represent the thinking of the majority as of now on this or the Democratic leadership. That is an open question to evolve. So we did the next best thing, which is to adopt a set of procedures to deal with what will happen if the Federal Government has to make a payout under this. I will say that I think that was a good effort, given the time frame. And I think it is important, given the potential expiration or the expiration date, that we should move forward, and maybe it will encourage our colleagues across the Capitol to act. I do not believe that what we have in here will be the final answer. We have one possibility: Maybe a consensus will develop on a waiver. I can't say that I have confidence in that, but I certainly will advocate for it. If we can't get a waiver, we will within the framework of the PAYGO requirement, $3 billion over 5 years, try to work something out. And I know that is what the Democratic leadership has assured the Members from New York in particular, that they will do their best within the context of PAYGO to work this out. And I believe we can improve on where we are. We will reduce the risk that there won't be payment to the minimum amount possible, and then maybe we share that risk. So I do not believe that what we have in this bill will be the final version. I think it is important to move this process along. I think this is as good an effort to do it as we could now. We will have to be consulting with the various parties in interest, including the cities, including the insurers, including the insured and others, and we will move forward on that. So I do believe it is very important to move forward now. The only reason to vote against this bill at this point is not because of disagreement on some of the specifics. They will evolve as we go forward, particularly in the PAYGO response. But if you believe this is something that should be left to the market, and I do not believe that the market can or should be asked to handle terrorism. Adam Smith is one of the great intellectual contributors to thought in this world, but I don't think he knew much about terrorism, luckily for him. I do not think that the free market was adopted or is adaptable to murderous attacks of the sort we had on September 11. So I believe this is the best we can do at this point. It is a very good bill, I believe, not perfect, with regard to the PAYGO fix, but that is something that I believe will evolve. I have every confidence that we will be able to do it better as we go forward, and I hope the bill passes. I reserve the balance of my time.

Mr. FRANK of Massachusetts. If the gentleman would yield, he has pointed to a very important issue. We did try to make some accommodation with the small insurers, but I don't think we have finally done that. But I would say, you know, the notion that a bill that comes to the floor is not graven in stone shouldn't come as a surprise to people. We have a Senate. We have a genuine conference. It will be an open conference. I should say I understand why some of my colleagues on the Republican side were somewhat puzzled at the notion that we might go to conference and, in an open way in conference, further amend the bill. They didn't believe in that. They didn't have any. So for them, that was all done in secret. We will have an open conference to address these. And this is one of the issues. I do believe that it is legitimate. We will be meeting with, and the staffs will be meeting with, the smaller private insurers. To the extent possible consistent with the purpose of the bill, we will seek to improve on the accommodation.

Mr. FRANK of Massachusetts. Mr. Chairman, I will give myself 15 seconds to say I was waiting for the gentleman to tell me he voted against the war in Iraq. He talked about all these things he voted against. Added together and doubled, they don't add up to the war in Iraq, the continuing indefinite drain. Hundreds of billions of dollars have already gone, and they are committed to spending hundreds of billions more to make us worse off. Mr. Chairman, I yield 1\1/2\ minutes to the gentleman from North Dakota (Mr. Pomeroy).

Mr. FRANK of Massachusetts. Yes.

Mr. FRANK of Massachusetts. Mr. Chairman, I yield 2 minutes now to a senior member of our committee, the Chair of the Subcommittee on Financial Institutions and Consumer Credit, someone who has worked a great deal on this, the gentlewoman from New York (Mrs. Maloney).