Friday, July 27, 2012

Wells Fargo's Dick Kovacevich: Dodd-Frank Would Not Have Prevented the Financial Crisis of 2008

Rough Transcript:

Andrew Ross Sorkin: Ikay, let's talk about dick kovacevich. comments made on this show is still rocking the financial industry, sandy weill's change of heart on financial super markets like the ones he created. take a listen to this for a second.

Clip of Sandy Weill: what we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans and have banks do something that's not going to risk the taxpayer dollars, that's not going to be too big to fail. the banking system is really very, very important. i think that the problem that was created was created by too much concentration in investments in the banking system, way too much leverage, very little transparentally with lots of off-balance sheath things that didn't really count and i think a lot of those things have to change. i think that there should be transparency and nothing off the balance sheet. if a bank or institution wants to do something they should have it on the balance sheet. they can call it special purpose vehicles or whatever they want to call it, but it should be shown. our next guest does not agree with mr. weill's notion of breaking up the banks and he knows a lot about banking, dick kovacevich, former chairman and ceo of wells fargo, also note while running wells fargo during the financial crisis he strongly protested against his bank needing part of the government's bailout program. good morning, great to see you this morning. good morning. good to be with us. there's a couple ways to look at this. some people say the banks should be broken up because of the safety and soundness issue. sandy weill's proposal really was about breaking up the banks because ultimately he thinks they'd be more profitable and the shares higher. you say he's wrong on both counts? yes, i do. because? well, first of all, i think the way our industry should evolve, should start with the customer and what they want and what they need, and in addition to the traditional banking products, our customers need capital. they need our help in underwriting bonds and equity. they need our help in merger advice, acquisitions, divestitures, institutional investors in particular need our help in buying securities that they want and selling securities that they don't want. they need our help in reducing risk. right. interest rate risk, foreign exchange risk and commodity risk. we are a financial institution. these are financial products, and these are our customers. why shouldn't we provide those products to our customers? now sandy says the reason we shouldn't do it is that these products are risky. would you, please, tell me what are the risks of providing these products to our customers? let me take one step back. i think the sandy argument is that, given the environment, the regulatory environment, the public pressures on banks, the way the markets are analyzing and valuing, frankly, the shares of these companies, that there's somehow an opportunity if they're broken up to actually create more value, and i think there's a distinction and this is what i'd be curious to hear from your perspective, wells fargo has always been a relatively simple bank but many of these other banks, jpmorgan or citigroup or bank of america are a little more complicated, no? well, they're different, and perhaps more complicated, but i think we should leave it up to the management of the institutions to decide how to maximize shareholder value. they don't have to be complicated. they can be very narrow. i happen to believe that, because we're in the risk business, you have to be very divified and diversified in your revenue streams and that leads somewhat to complications, but it reduces risk, and if you aren't diversified because of macro economic factors or you make mistakes, you can have very serious consequences. i don't think it's up to sandy or regulators to decide how to maximize shareholder value. by the way, dick, i think what he is suggesting, i'm not sure he's suggesting that regulators break up the banks. i think he's saying if you're a ceo, jamie dimon, you should do it yourself. no, that's not what he said. he said that commercial banks should not be in investment banking, very clearly, should not be. dick, i think what you're -- it's too risky, because it's too complex, and so on, and the only risky part of investment banking is not what they do for the customer, it's what they do for themselves. they do structured products that no one can figure out what they are and take triple b and triple c tranches they can't sell and when the products fail they have big write-offs and they leverage their institution to 30 times leverage with proprietary trading and proprietary investments. there's really three types of financial institutions i think throughout there, there should be hedge funds which is where your excess proprietary trading should be, there should be banks as we call them that are really kind of a combination of the client base of investment banking, and old commercial banking and then there are boutiques and boutiques basically do the client part of investment banking but they don't take the risk the investment banks do, and if you do all of those things for a lot of different clients, and have a lot of different products, you could have consistent revenue growth over a long period of time without risk, and eventually the stockholder will benefit, because of that kind of consistent revenue growth. all that's well and good, dick, but i mean, you say the managers should decide and you should do what the clients want, but right now, what we're talking about is where the public interest coincides with the decisions of managers, and i think the conclusion has been that the managers and the decisions that were made, for whatever reason, either because of the client, has ended up with a potential bill to the taxpayer and that's the nexus for the government getting involved and saying you know what? banks should be limited as to what they should do. hold on, we were talking about public interest or at least i was, that this was going to reduce risk, not increase it, and i think andrew was talking about, it's good for the stockholders, so you're going both ways here. which way do you want to discuss this? i was -- i believe it's in the public interest and it will be in the stockholder's interest that we focus, banks focus on client needs and these needs can be done without taking excessive risk, if you're diversified, and i do not believe that the client side of investment banking is risky. in fact, it is riskless, and we need that kind of additional -- just to be clear, dick, you're in favor or not of the volcker rule? i think it's how you execute the volcker rule. i am in favor that you should not have excess or extreme levels of proprietary trading and investment. you shouldn't have extreme, none of your businesses should be over 10% of your total. it's all it diversification. dick when you see what happened with jpmorgan inside the cio and some of the trades, is that something you think is appropriate, inappropriate? i think you bring up a very good point. let's look at what happened at jpmorgan. i happen to believe that this was an aberration. i don't think there's systemic risk within jpmorgan. let's see what happened, they lost a lot of money, self-inflicted that jamie said very clearly was a mistake, but because they were diversified, they still had an outstanding quarter. their credit card business did extremely well. their mortgage business did extremely well and three years ago when they were writing off credit card losses and mortgage losses their investment bank was doing really well, so we cannot avoid problems. problems will occur, some self-inflicted, hopefully few, but there will be. we all have made mistakes, and some that are macro economic, but if you're diversified, you can handle those problems without putting the tax at risk and investors at risk. i think the jamie dimon example proves my point of the value of a diversified financial institution. dick, peter fisher here, fixed income at blackrock. i have a lot of sympathy for the government coming in and slicing up the banks doesn't give me comfort and in particular i don't think the classic glass-steagall dividing line between writing loans and underwriting loans makes a big difference but as a bond investor, looking in at some of the big holding companies and having heard the government, as steve was saying, saying never again, you bondholders are going toat e it, it's pretty hard for the bond investor to know where am i going to eat it? where in these big holding companies with all the debt they're issuing is the government going to stick us with the tab for a systemic resolution? and so there's a case i think for simplifying the holding company's structure is making clear what's going on in different subs. forgive me but a little more 23a, a little more division of how subsidiaries lend to each other, even accepting your argument about diversification, what do you think of that? yeah, i'm in favor of that. by the way i'm in favor of bondholders taking a haircut, should there be failure. i think the best people to control financial institutions in their size are actually the bondholders because they have no upside. the equity holders have upside. both the leaders and cfos of the big banks have to tell us where that's going to come, at the holding company or all the subsidiaries. sure, and i think that is -- disclosure is good, and whatever is needed to make sure that is understandable is good. and i think some of the simplification that is going on, is a positive step. i don't think we need 5,000 subsidiaries in our financial institutions. and i think simplification of some of the regulatory areas and not having this distinction, false distinction between investment banking and commercial banking, and so forth will benefit that, but i totally agree with you and think it should be done. dick, let me ask you about something else sandy weill said. he said that in terms of dodd frank, he doesn't agree with it, it's 2,300 pages long, a little too confusing. he said he could do what you needed in two or three pages, pointed out a few things, limiting leverage, making sure there is no such thing as off balance sheet, everything is fully reflected, like having derivatives trades so you can have mark-to-market every single day. what it b those ideas and what do you think about dodd-frank? i agree with sandy on that. i think dodd-frank had little to do with, if dodd-frank was in effect, the crisis still would have occurred, and it won't keep the next crisis from happening. there are so many things in there that have nothing to do with the crisis, and in fact, you know, the really crazy thing about dodd-frank is, let's face it, this crisis was caused by about a half a dozen investment banks and about two dozen s&ls. there's only one commercial bank that was involved in perpetrating this crisis, and yet 8,000 commercial banks are being reregulated for doing nothing wrong, and what we need to do is clean up the investment banking side of things and get the excessive proprietary trading and investments out of investment banks. there are no investment banks left. there's just boutiques and morgan stanley and goldman are basically banks today. so again we have three categories, hedge funds, which are unregulated, never be 30 times leverage because no one will lend to them at that level so that's mostly equity, which is good. you have boutiques, who are very limited in what they offer, again, not risky, and then you have banks, who, in my opinion, have to be very large and diversified in order to satisfy their customer needs and not be a taxpayer risk. dick, bill isaac interviewed you on breaking up the banks for his book senseless panic. you debated these issues. i'm curious, do you have any change of heart now, not so much about what to do about the banks but when you go back and think about t.a.r.p. and all of the things that have happened since 2008? do i have any change of heart? in terms of pushing back, for example, on t.a.r.p. at the time. oh, no. i think t.a.r.p. was one of the worst economic decisions in the history of the united states. t.a.r.p.'s made money for the treasury. what was the problem with the whole layout? well the premise of t.a.r.p. was that, if we gave billions of dollars to all financial institutions, including those who didn't need it, is that the confidence level in the industry would increase, right? um-hum. so what happened? but do you think the banking system -- hold on, what happened, andrew? within three months of t.a.r.p., the stock market fell by 40%. right. and the bank industry stocks, every one of them, those who needed the one and knows who didn't, fell by 80%. how can you conclude that that action increased the confidence in the industry when you have that kind of reaction? isn't there a counter fact to be made when you look at a bank like citigroup, b of a clearly, wells obviously there's still questions whether you needed the money or not. there's no question, there is no question, andrew, within three months of t.a.r.p., we had record earnings. if we could take a bank who needed $25 billion and in three months cause them to have record earnings, with he should do that for every corporation in america. we've had ten quarters of record earnings in the midst of the worst recession ever. what doubt is there? dick, we would have to continue this conversation. so would i. maybe we can have you come here the next time you're in new york and talk about it. dick, you can come by every

Wednesday, July 25, 2012

Sandy Weill Calls for Separation of Commercial Banking and Investment Banking

Sandy Weill, in an interview on Squawk Box on CNBC July 25, said that Glass-Steagall should be re-instated and that commercial banking and investment banking should be separated. Investment banks should not be allowed to have deposits, they would not be insured, and would be allowed to fail.

As the man who put together the mega-merger of Citigroup and Travelers that paved the way for the repeal of Glass-Steagall, this is a stunning turn-around in his views. His concern derives partly from the negative view of banking held by the public. But, he also feels that Dodd-Frank is crippling the ability of investment banks to be the innovators and leaders they have traditionally been and wants the United States to remain the leader in world finance.

Friday, July 20, 2012

Holtz-Eakin: Fiscal Clilff 'an Enormous Hit'

Daily Ticker Interview July 20, 2012

America is headed for a fiscal cliff if members of Congress fail to act before the end of the year.

Many economists agree that if no action is taken, 2013 will begin with a $600 billion drag on the economy, or a 4 to 5 percent hit to GDP, due to a combination of tax hikes and budget cuts set to take effect.

To put that in perspective, the knock to economic growth could be twice as much as current GDP growth forecasts for all of 2012 and more than any annual GDP growth in the last decade.

Former Treasury Secretary Robert Rubin said this week at the CNBC Institutional Investor Delivering Alpha conference that the impact of the fiscal cliff could be worse than the fallout from the 2008 financial crisis, which resulted in the worst recession since the Great Depression.

A new report by the American Action Forum forecasts between 2.8 million and 10 million jobs could be lost as a result of falling off the cliff based on a set of GDP economic multipliers developed by former White House economic adviser Christina Romer. Additionally, failing to take action would decrease the likelihood small businesses will hire by nearly 20 percent, according to American Action Forum.

"This is an enormous hit" to the economy," Douglas Holtz-Eakin, president of the conservative American Action Forum and former director of the Congressional Budget Office says in the accompanying video.

Taxes hikes would make up about $440 billion of the $600 billion economic drag. A major point of political contention is whether or not to extend the Bush-era tax cuts for everyone or just for middle class Americans, making the wealthiest American's pay a greater share of their income in taxes.

Senator Patty Murray (D-WA) signaled this week that liberals could be willing to push this debate until next year if a comprise cannot be reached with Republican lawmakers.

"[I]f we can't get a good deal — a balanced deal that calls on the wealthy to pay their fair share — then I will absolutely continue this debate into 2013, rather than lock in a long-term deal this year that throws middle-class families under the bus," said Murray on Monday.

While the Center on Budget and Policy Priorities came out in support of Murray -- "the economy won't immediately fall off a cliff if the scheduled tax and spending changes take effect," the center claims -- Holtz says the dangers of hitting the fiscal cliff are just too great. "I think the lesson here is that this is not something we should not even contemplate," he says.

According to the American Action Forum report, "failing to extend the 2001-2003 tax cuts would not only increase taxes on every single taxpayer in the country but would also put millions of lower middle class households who are not currently paying taxes back on the tax rolls at a rate of fifteen percent, and restore the marriage penalty."

Thursday, July 12, 2012

Bowles on CNBC: "We're Going Over the Fiscal Cliff"

Becky Quick at CNBC Interviews Warren Buffett, Alan Simpson and Erskine Bowles, in Sun Valley, Idaho, July 12, 8:03 am:

Rough Transcript:

Becky Quick: We are in Sun Valley as you mentioned and we are joined by our dream line-up this morning, Warren Buffett, who has been with us for the last half hour and joining us and sitting down with us right now are former Senator Alan Simpson and Erskine Bowles, former chief of staff for President Clinton, two gentlemen we have been hoping to get on the program for an incredibly long time, because of Simpson-Bowles, Bowles-Simpson and everything that's happening with the fiscal cliff.

Gentlemen we thank you for agreeing to sit down with us this morning. thank you. warren buffett can attest to this, but when we go around and talk to ceos, it is almost universal among them when they say if they had a chance and could vote for bowles-simpson or simpson-bowles, they would put this in immediately and they can't understand why this hasn't happened already.

Warren Buffett: it's not limited to ceos either. but i think if you polled fortune 500 ceos, it would certainly be 80%. i wouldn't be surprised if it's 90%, that would not only think it should be done. they think these fellows are heroes and so do i.

Beck Quick: what we'd like to say is first of all, thank you for the work you've already put in to this point and ask you what you think can happen, because the fiscal cliff is coming, it's a huge issue. to this point no one has listened to your advice and taken you up on this. how much more of a desperate situation are we now than when you first came out with the proposals?

Alan Simpson: here i am, these are the numbers guys. i do the color. erskine can tell you but let me tell you, this is a giant among pygmies on this kind of thing. People are not dealing with it. he strung the original package together with his patience and his brilliance because he was the last guy balancing the budget so ship them out a little bit.

Erskine Bowles: i'm not saying. doesn't get any better than that.

Alan Simpson: oh, no.

Warren Buffett: let me say something about these two, they sat down with republicans and democrats and they were given a charge to come up with a plan that got it down to 3% of gdp and they got it below that, got a majority of the republicans to vote for it, got 11 out of 18, they did exactly what they'd been asked to do, and they came up with a plan, no plan is perfect. you know, everybody comes up with a little different one but everybody knows that we need something done, and they did their job and congress has not done its job.

Erskine Bowles: we got some hope. you know, i think if i had to tell you the probability, i'd say the chances are we're going of the over the fiscal cliff and I hate to say it but i think that's probably right, but we worked hard to try to get common sense to overrule politics, and that's a tough thing in washington, as al can tell you. we've been around the senate and the house. we probably have as many as 45 to 47 senators, equal number of republicans and democrats, who are in support of our efforts. we've got about 150 house members again relatively equal. we put together a ceo fiscal leadership council, which is, has over 100 fortune 500 ceos who are actively working to try to influence congress to do something that makes just plain common sense, and we've got a social media campaign that we're working on, where we hope to get about 10 million signatures of people around the country to tell congress, come on, let's put partisanship aside, and let's pull together and let's face this enormous fiscal problem that we have coming up.

Becky Quick: with all that on your side, why do you think that the odds are we do go over the fiscal cliff?

Erskine Bowles: because it's politically painful. it's really tough to get beat.

Warren Buffett: and it's not going to get less painful in the future. that's the other thing about it. if you had some kind of a disease you might not want to have somebody open you up and cure it but if you knew it was going to get worse next week, next month, next year, you'd face reality.

Erskine Bowles: the problem is real. the solutions are all painful. and there's no easy way out, but i was talking, warren, a couple of weeks ago, to american university's graduates and i just threw away what i was supposed to say and i said they ought to be mad at us, at our generation for shirking our responsibilities and kicking the can down the road. we've got to face up to this. this is our generation's problem and we got to fix it.

Becky Quick: senator, you've been criticized for coming out and speaking your mind on some of these topics.

Alan Simpson: if i could do it with less earthiness, it would be good.

Warren Buffett: no, no, give us a little earthiness. i'm waiting for that.

Alan Simpson. i know, you bait me. i've known this fine gentleman for years. he says, tell me that joke about the coast is clear. i do tell it to him, but i do -- it's frustrating for me, here in politics, and i loved it, you're entitled to be called ool, boob, idiot, whatever, but people try to nail me with a guy that hates veterans and hates seniors and the cat food commission, that just steams me and they say are you thin skinned? i say hell yes but i just punch back and never lost an election because an attack unanswered is an attack believed and when people lay that stuff on me that's distorting my persona, i fire back, and i could do it but i grew up with irrigators and they had a terrible vernacular.

Becky Quick: what's your joke about the coast is clear?

Alan Simpson: it's quick, this couple hit the sack, 3:00 in the morning the phone rings. guy answers and says how the hell do i know? that's 2,000 miles from wyoming. hangs up, his wife says who was it? he says some nut called and asked if the coast was clear, i don't know.

Warren Buffett: he's just warming up, folks. believe me.

Becky Quick: mr. bowles you're the numbers guy. tell us how bad this number is when we go over the fiscal cliff.

Erskine Bowles. Aw, look. i think if we don't get these politicians to come together and we face the most predictable economic crisis in history. i think it's absolutely clear that the fiscal path we're on is not sustainable and for me, the best analogy is these deficits are like a cancer, and over time, they will destroy the country from within. here's an easy way to understand it from a math viewpoint. if you take last year 100% of a revenue that came into the country, every nickel, every single dollar that came into the country last year was spent on our mandatory spending and interest on the debt. mandatory spending is principally entitlement programs, medicare, medicaid and social security. every single dollar we spent last year on these two wars, national defense, homeland security, education, infrastructure, high value-added research, every single dollar was borrowed and half of it was borrowed from foreign countries. that is crazy, crazy. it's a formula for failure in any organization.

Becky Quick: and right now we are faced with the benefit of incredibly low interest rates. what happens as interest rates start to climb?

Erskine Bowles: we're spending right now $250 billion a year on interest, at these incredibly low rates. that's more, to put it in perspective than we spend at the department of commerce, education, energy, homeland security, justice, interior and state combined, and if interest rates were at their average level in the 1990s over the first decade of this century we'd be spending over $650 billion.

Becky Quick: senator, warren buffett has said that part of this is the problem that congress didn't act on this and didn't pick it up but the president also didn't act and didn't follow up with what he had set out. who do you blame for where we are right now?

Alan Simpson: well we try to stay away from the blame game because people will often say how did we get here? it's easy how we got here. we were told to bring home the bacon for the last 70 years. go get the highway, go get me some money, go raise this, do this, do this, and you got reelected by bringing home the bacon, and now the pig is dead. but let me tell you what happened. the president would have been torn to bits, his base would have said you are dealing with entitlements. you're dealing with medicare and you promised you'd never hurt we poor seniors and never do anything to all this vulnerable population. well, you know, that was his promise, and anything he would have done at that time would have been rejected unanimously by republicans. if he had said, i'm for this, it would have gone to the house or the senate and they would have said if he's for this, boy, we're going to nail him and just vote against it for no other reason than that.

Becky Quick: so in other words we cannot do politics as usual. this has to be a whole new way of looking at the situation.

Alan Simpson: and one of our members, dick durbin, give him a lot of credit. durbin voted for this and tom corbin, two fine men with totally everyone ideology and philosophy on politics and durbin kept saying where is the tipping point and that's the key. because when the tipping point comes and the guys who gave us money want more money for their money, inflation will kick in and all these things and interest and guess who will be hurt the worst? the little guy, that everybody talks about, day and night, what fakery, what phoniness.

Becky Quick: i tell you what, when we come back, we have to slip in a quick break, gentlemen, but when we come back we'll talk about some solutions, some of the specifics that you laid out, and get into some of those details. right now, andrew i'll send it back over to you.

Wednesday, July 4, 2012

Nigel Farge: Europe's "19th Nervous Breakdown"

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• European Parliament, Strasbourg, 3 July 2012

• Speaker: Nigel Farage MEP, Leader of the UK Independence Party (UKIP), Co-President of the 'Europe of Freedom and Democracy' (EFD) Group in the European Parliament -

• Debate: Conclusions of the European Council meeting (28-29 June 2012)
European Council and Commission statements [2011/2923(RSP)]



"Well that is the 19th crisis summit that Mr Cameron has been to, as The Rolling Stones might say "The 19th Nervous Breakdown."

And that's reflected I think by the funereal mood in the chamber this morning.

Yes on that Friday morning, "breakthrough" was cried, and indeed Mr Van Rompuy parroted the word this morning, "breakthrough". Nobody believes you, the wheels are coming off. This new European Stability Mechanism, your new bailout vehicle is doomed before it starts. We have legal challenges in Ireland and in Germany. We have the Estonian Justice Minister saying it won't fit their Constitution.

But most fun of all, the Finns and the Dutch seem to have broken the agreement that was made in the middle of the night. Perhaps they were excluded from this, perhaps the little countries don't have a say in Europe at all anymore. It's not credible, and I think the euro crisis now looks to me to be, frankly, insoluble.

And there's also a massive crisis of leadership - it is lovely to see you Mr Van Rompuy, you've not been here for many months. It's delightful to have you back. The last time you were here, you told us we had turned the corner, that the worst of the crisis was over and with every one of your predictions it goes on getting worse.

I'm sorry Sir, you don't have the presence, the credibility or the standing for the International markets to believe that you can provide a solution.

And Mr Barroso here at the G20, when he stood up at the press conference and said. 'We don't need any lessons in democracy,' said the unelected President of the European Commission.

You went on to say that the Eurozone's problems had been caused by unorthodox practices in North America. You've made yourselves an international laughing stock. You don't have any credibility, but one piece of helpful advice from me - Don't this summer go on any billionaire's yachts on extended holidays because the markets guarantee we'll all be back here in August. Thank you."

• Video: EbS (European Parliament)

• EU Member States:
Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Germany, Denmark, Estonia, Spain, Finland, France, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Sweden, United Kingdom