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ATTLEBORO - If companies are going to pay executives big bonuses for good performance, they should also dish out penalties for failure, the head of the congressional committee that oversees financial regulations says.

U.S. Rep. Barney Frank told a meeting of area Democrats Saturday that Congress will soon seek to put restrictions on executive compensation.

Frank, D-Newton, whose district includes most of the Attleboro area, said some executives now enjoy "perverse incentives," with "one-way bonuses" that do not take money back for poor work performances.

"It's heads they win, tails they break even," Frank told the annual Democratic unity breakfast at the Moose Cabin Restaurant.

The chairman of the House Financial Services Committee, Frank said the regulations should apply to all publicly traded firms. He said he believes the measure will enjoy wide support in Congress.

His comments came in the wake of national outrage over bonuses given to employees of a division of AIG that caused the company to fall into financial turmoil that necessitated a federal bailout.

Critics said AIG was rewarding failure and wasting taxpayer money.

The House passed a 90 percent tax on the bonuses, but momentum behind the taxing measure has weakened.

Frank said his committee will soon begin considering a series of regulatory measures aimed at restoring balance to the financial services industry and preventing future meltdowns such as the one now engulfing Wall Street.

He laid most of the blame for the problems on the lack of regulation on fairly new schemes such as credit default swaps, subprime mortgages and securitization of lending.

One needed regulation, he said, is a requirement that firms that sell mortgages keep at least 10 percent of that loan.

"It's called having skin in the game," he said.

Frank explained that when financial institutions sell risky loans to unqualified buyers, they sell the loans off in bundles to other institutions.

He said that process removes the incentive to make sure the person taking out the loan has the ability to pay it back because the loan originator is not at risk. Frank noted that community banks that keep loans "frisk" loan applicants thoroughly to make sure they can afford the loan. Those banks have not gotten into trouble during the recent crisis, he said.

Another cause of the problem, he said, is credit default swaps, which insure investors against losses from bad mortgages.

The insurance companies - like AIG - thought there was no chance they would have to pay off on the insurance policies because they thought home values would keep increasing so foreclosed homes could be easily resold.

"They thought they were selling life insurance to vampires, and vampires never die. Well guess what, this time the vampires died," he said.

He said Republicans are spreading a "mythology" that Democrats who were out of power in Congress from 1995 to 2006 were somehow responsible for the lack of regulation.

Republicans have accused Democrats, especially Frank, of causing the financial problems by forcing banks to give mortgages to unqualified minorities.

In response to the claims, Frank said he and other Democrats will start making the case next week that for the past several years Republicans in Washington resisted their calls to regulate the financial institutions to avoid some of the problems that have surfaced now.

"Asking them to regulate is like asking me to judge the Miss America contest. They just weren't interested," he joked.

JIM HAND covers politics for The Sun Chronicle. He can be reached at 508-236-0399 or at jhand@thesunchronicle.com.