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