RACHEL MADDOW: Joining us now is Democratic Congressman Barney Frank of Massachusetts. He, of course, is chairman of the House Financial Services Committee.

Mr. Chairman, it‘s good to see you. Thanks for coming in.

REP. BARNEY FRANK (D-MA), HOUSE FINANCIAL SERVICES CMTE. CHAIRMAN:

Thanks, Rachel. Great to have you in town.

MADDOW: You have seen the Frank Luntz memo, the Republican blueprint for trying to kill Wall Street reform. What‘s your reaction to it?

FRANK: Well, first of all, it includes one major lie. He, apparently, gave people choices as to what was their biggest reason for being against the Consumer Financial Protection Agency that‘s focused on trying to stop the agency to protect consumers from credit card abuses, overdraft abuses, payday lending abuses, et cetera.

And one of the choices is, it needs another bank bailout. They are totally unrelated. The Consumer Financial Protection Agency is a stand-alone section of a larger bill. By the way, we, in our bill, put an end to the bank bailout policies.

Go back to your original theme by the way. One of the striking things about the Republican Party is, on January 21st, I have to quote my partner, Jim, on this, we had one of the worst mass disease outbreaks in American history. Widespread amnesia struck the Republican Party. Everything that had happened before January 20th, 2009, disappeared from their minds-unemployment, deficits, the financial crisis, and the bailout.

I was going about my business, trying to do some financial reform when in September, the two top Bush administration economic appointees, Ben Bernanke, who before Bush made him chairman of the Federal Reserve was chairman of Council of Economic Advisers under Bush, and Henry Paulson, a very decent guy, came to us, the Democratic and Republican leadership, and said, we need to do this bill. Otherwise you go back a step.

On the Tuesday of that week, Mr. Bernanke and Mr. Paulson came to us and informed us, didn‘t ask us, that they had decided to provide money to AIG. That was a Bush administration unilateral decision. They then came back two days later and said, "Would you vote on $700 billion?" We said, "Well, here‘s what we‘ll do. Because you‘ve announced that the world will collapse if we don‘t do it."

And, frankly, I think they were right that there was terrible trouble.

But when the two top presidential appointees come to tell you that if you

don‘t do this publicly, there‘ll be a collapse, then there‘ll be a collapse

because confidence is so important. So we were the ones who insisted on putting some pay controls on there. You‘re going to have Ken Feinberg on later.

 

We also said, "No, you can‘t do the $700 billion all at once, you‘ve got to do it in sections." If you look at the way it was administered under President Obama, it was administered in a much fairer way. Moreover, because of some of the things we did, we put restrictions in there about repayment so that where the banks are concerned, not the auto companies, but where the banks are concerned, we made some money.

The one thing when Mr. Luntz talks about don‘t support the consumer agency because of bailouts, let‘s be very clear, every single activity of the federal government that‘s considered a bailout, AIG, the TARP for banks, the automobile companies, everything, was done by George Bush. And it‘s just astounding that they say no.

Now, the other issue was he talks about the loopholes in the consumer agency, because some entities were exempted. Yes, by Republican votes. What happened, in a few cases, a minority of Democrats voted with a majority of Republicans to exempt them. We still covered almost everybody.

So, the fundamental thing is to say that the consumer agency is meek to the bailout, it‘s just a lie. It‘s just made up.

MADDOW: Well, is there a Republican counterproposal? I mean, it seems-it seems clear to me just in pure politics terms that if this was a bill to say, "Happy Mothers Day" to the moms of America, Republicans would be opposing it and saying it was going to be, you know, a socialist dictatorship dawning from sea to shining sea. It seems like they‘ve got to say no to everything, no matter what it is.

But is there a Republican counterproposal on financial reform?

FRANK: Well, there is on the consumer agency was-right now, by the way, we‘re not-we are creating a new agency by taking power away from existing agencies. Consumer regulation now is done by the Federal Reserve that controls the currency and who‘s the bank regulator, and other regulatory bodies whose main job it is to keep the banks healthy. We have found them to have done a lousy job so we want to take it away.

The Republican proposal was to take all of those agencies that are doing a bad job and have them come together as a council, who would then do a bad job.

But the thing on the Republican‘s financial reform here is the key. The answer is, when they got serious, no, they unanimously voted, the Republicans in the House, for zero additional regulation. No more regulation of derivatives. No more diminution of the excessive leverage that the banks have owing too much money.

We in our bill could kill the power under which the Federal Reserve gave money to AIG. Section 133 of the Federal Reserve Act that lets them to give money out in unlimited ways, we put an end to that and put some severe restrictions going forward on a different proposal.

When the final vote came to the House, and you people know the procedure, it‘s called the motion to recommit. It‘s the minority‘s right to offer whatever they want. And they offered a motion to recommit to the financial reform package that said, cut off the TARP. But, of course, we stopped giving out money under the TARP, they didn‘t want us to use some of the TARP money for job creation. And the rest of it said nothing, kill everything in the bill.

There‘s a phrase that you use when you want to kill a bill, quote, strike all after the enacting clause, which means everything‘s dead, on derivatives, on reducing bank leverage, on the Federal Reserve‘s unlimited power to bail out, in every case, here‘s a Republican counterproposal: strike all after the enacting clause.

And so, if they had won the vote and every single Republican voted for this, there would have been zero change in financial reform. The banks, the investment houses, the hedge funds, the derivative ball games, nothing would have changed.

MADDOW: Would be left intact the system that brought us.

FRANK: Totally-totally intact.

MADDOW: And, of course, the first line-the overall premise of the Frank Luntz memo for killing Democrat‘s financial reform proposals is to make sure that voters know that Republicans think the status quo is not OK, that things has to be changed, that there has to be realistic change, meanwhile they‘re voting.

(CROSSTALK)

FRANK: Quickly, and just to recap, the bailouts-the lack of regulation that caused the crisis was Republican-explicit policy, then came the bailouts that they asked us to do. We modified some, but I think, frankly, given the situation we were in, we couldn‘t have nothing at all done. They then proposed that no changes be made.

And one last point: part of what we do, they keep blaming liberals, because we wanted people to buy homes that couldn‘t afford them. In fact, I‘ve been an advocate of rental housing for American people. But we began in 2004 when we were a minority and they wouldn‘t allow us.

In 2007, we did in the House pass a bill and we passed it as part of this bill, in the House again, to restrict bad loans, bad subprime loans. We said, no, you can‘t lend people to people who can‘t pay it back. They voted against it.

The "Wall Street Journal," which says, "Oh, you liberals gave these poor people homes," denounced the bills that we passed as an interference with free-market. They called it a Sarbanes-Oxley for mortgages. What we said was, please do not give mortgages-not please, you may not give mortgages to people who can‘t afford it.

Let me give you one example what they opposed. One of the biggest problems we had is that it used to be that if you borrowed money, you would have to pay back the person who lent it to you, and that meant he or she was pretty careful about lending it to you. They came up with a new system called securitization, where I make a bunch of loans and then I sell the right to be repaid 100 percent of the people. I don‘t care as much.

MADDOW: Right.

FRANK: We said, no, you can‘t do that, you have to retain some of the risk, up to 10 percent. They‘re opposed to that.

MADDOW: Yes.

FRANK: So, anything we try to do to prevent the recurrence of the mess they created, they vote no.

MADDOW: They vote no, emphatically with an exclamation point at this point. Democratic Congressman Barney Frank of Massachusetts, chairman of the House Financial Services Committee, it‘s always a real pleasure to have you.

FRANK: Thank you.

MADDOW: Nice to see you here.

(COMMERCIAL BREAK)

MADDOW: Here in Washington today, the president unveiled his new budget. And he name-checked what Democrats are fast realizing could be the funniest thing in it.

(BEGIN VIDEO CLIP)

OBAMA: There are other steps we‘re taking to rein in deficits. I proposed a fee on big banks to pay back taxpayers for the bailout.

(END VIDEO CLIP)

MADDOW: Making banks pay back the bailout. This is turning out to be the best thing for Democratic politics since Michael Steele.

(BEGIN VIDEO CLIP)

OBAMA: And we‘ve recovered most of the money we spent on the banks.

(APPLAUSE)

OBAMA: Most, but not all. To recover the rest, I‘ve proposed a fee on the biggest banks. Now.

(APPLAUSE)

OBAMA: Now, I know Wall Street isn‘t keen on this idea, but if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.

(APPLAUSE)

(END VIDEO CLIP)

MADDOW: And that‘s the political money shot right there. Should Wall Street pay back taxpayers for the bailout? Democrats-applauding, thundering applause, leaping to their feet. Republicans-time to fidget and maybe grumble. Definitely no applause.

Republicans siding with Wall Street against paying back the bailout money is pure political gold for Democrats at a time when Democrats really need some of that. On the substance, though, there‘s one fact about the bailouts and the whole idea of paying it back that hasn‘t really sunk in politically.

When it comes to TARP funds, that $700 billion bailout, most of the banks have already paid back their loans. JPMorgan paid back its loan. American Express paid its loan back. Capital One paid its loan back.

Goldman Sachs paid its loan back. Morgan Stanley paid its loan back.

Except for a handful of companies, much of the TARP money‘s been repaid already. Why are the banks so eager to return these loans? It‘s in part because they are afraid of our next guest.

Joining us now is Kenneth Feinberg. He‘s the special master for TARP Executive Compensation, also known as the pay czar by people who know that the word "czar" in this case is hyperbole and that he‘s probably not even really Russian.

Mr. Feinberg, thanks very much for coming on the show.

KENNETH FEINBERG, SPECIAL MASTER FOR EXEC. COMPENSATION: Thank you.

MADDOW: As I understand it, your job is very narrowly-defined by Congress. You are to set executive pay limits at companies that received the most bailout money, and only why they still have bailout money outstanding, is that right?

FEINBERG: That‘s exactly right. That‘s the way the statute reads. I started with seven companies. Bank of America and Citigroup repaid the taxpayer. That was my primary objective under the law. They‘re out. In 2010, I‘m down to five companies, AIG, G.M., GMAC, Chrysler, and Chrysler Financial.

MADDOW: When you say it was your primary objective, it was your primary objective to get those companies to pay the money back?

FEINBERG: Clearly. The secretary of the treasury made that clear, the president made that clear. We‘ve succeed with those two banks. My secondary objective, an important one, is try and align executive compensation, so that it avoids the type of risk-taking that helped bring on this financial debacle, and we are trying to influence, voluntarily, how Wall Street aligns its compensation so that it better reflects value rather than risk-taking.

MADDOW: So executive pay, in this case, being done in a sort of demonstration project, because you‘re not talking about a large number of executives or a large number of firms here, but essentially defining executive pay as part of financial reform, saying the way that people are paid is part of the problem for why these institutions are taking on too much risk?

FEINBERG: That‘s right. Give them low base cash salaries, no guaranteed salaries, no guaranteed bonuses other than a base salary. Give the remaining compensation in the form of stock, so that your individual compensation is tied to the success, the financial success of that company. And don‘t let that stock be transferred until three, four, five years out so that long-term growth in the company will also influence your own individual compensation. That‘s the goal in terms of how we structure pay going forward under my program.

MADDOW: Could it-could there be changes made in corporate law, corporate governance structure, regulatory structure, so that that‘s the way it had to be, rather than you demonstrating that this is the way it ought to be?

FEINBERG: Absolutely. The best way to look, I think, at what the administration is trying to do with executive pay, is look at the menu of initiatives. Not just me. My role, as you say, Rachel, is rather limited.

But look at what else is being tried, corporate governance reform. You heard Congressman Frank. Regulatory reform, new compensation prescriptions at the Federal Reserve, at the SEC, at the FDIC. And to rein in the huge excessive bonuses, you have the bank fee legislation proposed by the administration, you‘ve got the Volcker proposal in terms of breaking up powerful banking entities.

When you look at the whole menu, not just what I‘m doing, you see a rather concerted effort here to rein in pay. And when you add the G-20 principles, proposed by Secretary Geithner, you get an international effort here to try and do something about excess of compensation on Wall Street.

MADDOW: It is-it is something that feels like an issue of fairness, because it‘s taxpayer money. It feels symbolic in terms of the harm done to the country by the financial services industry and the non- the departures from common sense that led them down the roads they went down in the last few years. You‘re making the case that it‘s also part of good regulatory reform in the sense that it would make these companies less less driven towards risk, as a matter of their incentives.

But there‘s sort of a philosophical question here, too, and I think it‘s the reason that your job has captured a lot of people‘s imagination, more than other reformers. It didn‘t used to be so, in this country, that the difference between the lowest paid person at a corporation and the CEO was as big as it is now. There‘s never been that big a gap before.

Is that-is there a normative judgment to make about that? Is that bad for the country?

FEINBERG: Yes, I think it is bad. I think the gap is much narrower in Europe and Asia. The gap in the United States in the last 25 years has become so wide that the perceptions here on Wall Street versus Main Street are incredibly difficult to overcome. And I can do something, the Treasury Department and the Special Masters Office, can make some effort to try and narrow that gap. I think the administration‘s various other proposals will further help narrow that gap.

MADDOW: Kenneth Feinberg is the Treasury Department‘s pay czar, and I use that term with affection, the czar part of it.

FEINBERG: My grandmother in Russia would be very surprised.

MADDOW: Well, see, now, you‘ve just opened up a whole another level of conspiracy theory. Congratulations. Nice to meet you, Mr. Feinberg. Thank you very much.

FEINBERG: Thank you very much. Thank you.

MADDOW: For all of the controversy it has caused and all of the lives it has ruined, the merits of the "don‘t ask, don‘t tell" policy have not been debated at a congressional hearing for 17 years. That changes tomorrow. The senator who led the fight for that hearing, New York‘s Kirsten Gillibrand joins us next.

Stay with us.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

OBAMA: This year, I will work with Congress and our military to finally repeal the law that denies gay Americans the right to serve the country they love because of who they are. It‘s the right thing to do.

(END VIDEO CLIP)

MADDOW: That was not the first time, just the most recent time that President Obama clearly enunciated his opposition to the military‘s "Don‘t Ask, Don‘t Tell" policy. It‘s the policy that kicks qualified gay servicemen and women out of the military, simply for being gay.

Interestingly, new Department of Defense figures say that the number of people kicked out of the Army, the Air Force, the Navy and Marines during President Obama‘s first year in office actually declined by about 30 percent from the year before.

In 2008, 619 people were kicked out. In 2009, the number was down to 428. Tomorrow, for the first time since 1993, "Don‘t Ask, Don‘t Tell" will be debated at a Congressional hearing. The Senate Armed Services Committee will hear testimony from Defense Secretary Bob Gates and the chairman of the Joint Chiefs-of-Staff, Admiral Mike Mullen. They are expected to lay out the Pentagon‘s coming effort to end the ban.

Joining us now is Democratic Senator Kirsten Gillibrand of New York. Senator, thanks very much for coming in. It‘s nice to see you.

SEN. KIRSTEN GILLIBRAND (D-NY): It‘s my pleasure.

MADDOW: Nice to have you here. Can you give us any sort of preview about what you‘re expecting at the hearing tomorrow?

GILLIBRAND: Well, I think Admiral Mullen and Secretary Gates will lay out some of the strategy for a repeal policy. I think we will get testimony that this policy does undermine the military readiness of our armed services. So I‘m looking forward to it.

MADDOW: In terms of the Pentagon‘s options for implementing this, a number of proposals have been made by people who advocate getting rid of the policy, including an immediate moratorium. That‘s something that you tried to introduce legislation, calling for a moratorium, implementing the policy until a full repeal could be arranged. Why do you think the White House hasn‘t pursued that?

GILLIBRAND: Well, I think it‘s been focused on a lot of things, but I do think now is the time to act. And I think Congress can take its own action and repeal the policy. And during that time, the president can also issue a stop-loss or do a moratorium.

So there‘s a number of measures we can take immediately to stop the enforcement of this very, very corrosive policy. It completely undermines the military readiness and strength of our armed services. And it‘s something that degrades and undermines the trust and integrity of our entire armed services.

MADDOW: As a senator who‘s taken a keen issue in this subject, though, do you have a preference on whether this is done slowly or quickly, I guess?

GILLIBRAND: I would like it to be done quickly.

MADDOW: Yes.

GILLIBRAND: We have two wars. We have terrorism threats everywhere in our United States. And we have to make sure that we have all the best and the brightest that are able to serve.

As you said, in this past year alone, we‘ve lost over 600 personnel. We need to keep all the best and brightest. And as you‘ve covered in the past, we‘ve lost, you know, 10 percent of our foreign language speakers in Arabic and Farsi languages that we really need in fighting terrorism.

We‘ve also lost over 800 personnel in mission-critical areas, meaning they cannot be easily replaced. So now is the time to repeal this policy, because we have urgent security concerns that we need all the best and the brightest serving.

MADDOW: This is going to be one of those issues in which the issues of - in which the issue of the relationship between the military and the political world has to be addressed overtly. I‘m trying to be sort of sensitive about this, but essentially, what I mean is that there will be questions as to whether or not the military knows what‘s best or politicians know what‘s best, in terms of how to proceed here.

When you hear from Admiral Mullen, when you hear from Secretary Gates tomorrow, is there a line for you? Is there a bright line where you think that what they‘re saying isn‘t - won‘t be fast enough, won‘t be enough, which you will push them to go faster than they my want to go?

GILLIBRAND: Well, I hope that they lay out their plans about how they will repeal this policy and how they will implement a repeal.

MADDOW: OK.

GILLIBRAND: Congress can act individually to do the repeal. And in other countries, if you look at the U.K., for example, Britain repealed a similar policy in 1999, and it took only less than a year, the following year, to implement their repeal, their policy, and so no suffering of military readiness or moral in their armed services.

So it can be done. It doesn‘t have to take a long time. I trust the military to make a decision about what the best way to implement is. But Congress can take action now and provide the leadership that‘s necessary to repeal this policy immediately.

MADDOW: In terms of building support for a repeal and highlighting the harms of this policy, as you see, I know that you‘ve been trying to highlight the stories of people who have been kicked out of the military. You‘ve got a Web site - linked to your Web site are the stories of some of the people who have been kicked out. Why did you do that and how does that work?

GILLIBRAND: It‘s not my Web site. It‘s "DADTStoryProject.com."

MADDOW: OK.

GILLIBRAND: And we have about 12 stories highlighted of individuals, about what happened to them and how this policy affected them. For me, it all started when Lt. Dan Choi came to me and told me about his personal story.

And this is a man who has accomplished so much in our military, one of our greatest heroes. And he talked about how he was being asked to lie every day about who he fundamentally is, who he loves, who he spends his free time with, and the corrosive effect that has on the basic command structure.

And so his story is so moving and powerful and inspiring to me, personally. I thought that the more stories we could bring to bear into the public discourse, it will move this debate forward to a place where we will earn the 60 votes we need to repeal it.

MADDOW: Well, after Dan Choi came out on the show, I can‘t tell you the number of people that we heard from, both in the military and people who were moved by his story and wanted to do something about it. So at least in his case, I can tell you from personal experience, it moves people, absolutely.

Sen. Kirsten Gillibrand, it‘s really nice to have you here in person and good luck tomorrow. See you at the hearing, huh?

GILLIBRAND: See you at the hearing. Take care.

MADDOW: Great. Thanks.