SO THIS COBE A HARBINGER OF
BETTER THINGS TO COME BUT THERE
A LOT OF CONCERNS.
LET’S GO TO SHEILA BAIR, FORMER
ASSISTANT SECRETARY OF TREASURY FINANCIAL INSTITUTIONS AND
FINANCIAL INSTITUTIONS AND
FEDERAL DEPOSIT CORPORATION.
SHEILA, VERY GOOD TO HAVE YOU
BACK WITH US.
>> NICE TO SEE YOU.
THANKS FOR HAVING ME.
NEIL: WE HAVE AULT THE
VOLATILITY BACK AND FORTH.
THERE WERE RUMORS OVER THE
WEEKEND I’M SURE YOU HEARD LIKE
ANOTHER WORLD BANK,
CREDIT SUISSE CAME UP HAVING
SOME FINANCIAL PROBLEMS WITH
CREDIT DEFAULT SWAPS, ALL OF
THAT.
YOU HEARD A LOT OF THAT STUFF
DURING THE MELTDOWN.
HOW DID YOU SEPARATE THE REALITY
FROM THE FRIGHTENING FICTION?
>> YEAH.
IT’S A GOOD QUESTION AND I THINK
IT’S HARD TO KNOW.
IT SEEMS LIKE CREDIT SUISSE
PROBLEMS IS PRIMARILY IN THEIR
INVESTMENT BANK WITH COMPLEX
DERIVATIVE EXPOSURES THEY HAVE.
NOT A LOT OF TRANSPARENCY AROUND
THAT SO -- WE HAD THE SAME
PROBLEM YOU KNOW.
DERIVATIVES STRIKE THEIR, COME
BACK IN THEIR UGLY WAYS AGAIN.
SO IT IS CONCERNING YOU KNOW,
WHEN A BANK, MARKET CONDITIONS
LIKE THIS, AS THEY’RE
RESTRUCTURING, THEY WILL SELL
ASSETS, THEY WILL RAISE CAPITAL,
THEY MUST BE IN NEED IF THEY DO
IT IN THESE MARKET CONDITIONS.
I THINK THAT BEARS VERY CAREFUL
OBSERVATION.
I HOPE THEY DON’T HAVE TO GET
BAILED OUT THIS WILL BE A TEST
OF SOME POSTCRISIS REFORMS
WHETHER WE ENDED SOME OF
INTERCONNECTEDNESS CREATES
PRESSURE TO BAILOUTS OF LARGE
BANKS.
I HOPE THAT IS NOT WHERE WE END
UP WITH CREDIT SUISSE BUT I
THINK IT BEARS WATCHING.
TO BE HONEST WITH YOU, I DON’T
HAVE A LOT OF CONFIDENCE THAT WE
HAVE REDUCED THE SYSTEMIC RISK
THAT ARE POSED BY THESE VERY
LARGE INTERCONNECTED FINANCIAL
INSTITUTIONS.
AND --
NEIL: YOU’RE RIGHT TO POINT OUT
THOUGH IT IS A CREATIVE BUNCH
THESE MONEY GUYS.
THEY FIND WAYS TO PACKAGE, OR
MAKE MONEY OFF SOMETHING.
I DON’T KNOW ENOUGH ABOUT THIS,
WHETHER IT APPLIES HERE, WHETHER
WE HAVE SOMETHING TO WORRY ABOUT
HERE, NO MATTER HOW WE TRY TO
REIN IN FINANCIAL PLAYERS, ONE,
INVARIABLY GROWS TO OTHERS AS
CONTAGIONS BUILD, NOT SAYING IT
WILL HAPPEN HERE BUT THEY FIND
CLEVER WAYS AROUND IT.
>> YEAH.
I DON’T WANT TO BE ALARMIST
EITHER.
I THINK AT THE END OF THE DAY
PROBABLY THE SWISS NATIONAL
BANK, SWISS GOVERNMENT WILL HAVE
TO, IF THERE IS GOING TO BE
SYSTEMIC EVENT THEY WILL HAVE TO
STEP IN AGAIN WHICH IS
UNFORTUNATE BECAUSE WE’RE TRYING
TO END BAILOUTS AS PART OF OUR
POST FINANCIAL CRISIS REFORMS
GLOBALLY.
SO I DON’T KNOW WHAT IS GOING TO
HAPPEN BUT THE COMPLEXITY AROUND
THE THESE PRODUCTS, YEAH, THE
FANCY FINANCIAL ENGINEERING, WHO
IS LEFT HOLDING THE BAG, RIGHT?
NEIL: RIGHT.
>> [INAUDIBLE].
BUT THERE IS A LOT OF
COMPLEXITY, EVEN INSTITUTIONS
LIKE CREDIT SUISSE DO NOT ALWAYS
UNDERSTAND EXACTLY THE EXPOSURES
THEY’RE TAKING ON YOU END UP
WITH SURPRISES.
NEIL: WE’RE ALWAYS TRYING TO
TEST WHICH INSTITUTION IS WORTH
SAVING, WHICH IS NOT.
THE OLD TOO BIG TO FAIL
ARGUMENT.
LEHMAN BROTHERS WAS NOT DEEMED
TO BIG TO FAIL AND IT DID, AIG,
OR ANY ONE OF THE BIG MONEY
CENTER BANKS WAS AND IT DIDN’T
SO I KNOW HOW THAT GOES BUT DO
YOU THINK THAT BIGGER CAPITAL
RESERVES AND REQUIREMENTS THAT
BANKS HAVE MORE CASH ON HAND
JUST IN CASE HAS MITIGATED THAT
SOMEWHAT?
>> WELL I THINK, IN THE U.S.
THERE HAS BEEN, WE HAVE BETTER
CAPITALIZATION IN THE U.S. THAN
WE DO WITH EUROPEAN BANKS.
THE U.S. TO ITS CREDIT WAS MUCH
FASTER GETTING ITS BANKS TO
RECAPITALIZE.
SO I THINK IN THE U.S., YES,
CAPITAL LEVELS ARE MUCH HIGHER.
WHETHER THEY’RE HIGH ENOUGH I
DON’T KNOW.
ONE CONCERN I HAVE, I HAVE
WRITTEN ABOUT THIS BEFORE, IS
THAT THE FED’S STRESS TESTS THIS
YEAR ACTUALLY IN THEIR ADVERSE
ECONOMIC SCENARIOS, ASSUMING
RECESSION, THEY DID NOT TEST A
RISING INTEREST RATE
ENVIRONMENT.
THEY ASSUMED THAT INTEREST RATES
WENT BACK TO ZERO.
I DON’T THINK THAT WILL HAPPEN
THIS TIME.
IF WE DO HAVE RECESSION WE’LL
HAVE ELEVATED INTEREST RATES.
IT IS MY GUESS.
I THINK THAT STRESS AREA THEY
NEED TO LOOK AT.
MAYBE THEY’RE DOING QUIETLY.
THEY SHOULD DO IT PUBLICLY SO WE
KNOW THEY RUN THE NUMBERS.
THE INTERCONNECTEDNESS OUTSIDE
THE BANKING SYSTEM RIGHT NOW, IT
COLLAPSES BACK IN THROUGH
COUNTERPARTIES OR BIG CLIENTS,
PRIVATE EQUITY, HEDGE FUNDS, A
LOT OF THESE ASSET MANAGERS NOT
A LOT OF TRANSPARENCY AGAIN WHAT
KIND OF EXPOSURES THEY HAVE.
THEY’RE ALL CUSTOMERS OF THESE
LARGE BANKS.
SO WE WON’T KNOW ACTUAL UNTIL
THINGS START, BECOMING STRESSED.
ONE THING I THINK IT IS
IMPORTANT TO POINT OUT IS IN THE
PAST FOR INSTANCE IN 2008, 2009,
THAT CRISIS FOLLOWED, THE
CATALYST WAS RISING INTEREST
RATES BUT IT WAS REALLY THE
FINANCIAL CRISIS, NOT THE
INTEREST RATES, BUT THE
FINANCIAL CRISIS REALLY HURT OUR
ECONOMY AS BANKS PULLED BACK
FROM PROVIDING CREDIT.
SO THIS IS ONE OF THE REASON THE
SUPERVISORY SIDE FED DOES,
CENTRAL BANKS EVERY BIT
IMPORTANT AS WHAT THEY DO WITH
MONETARY POLICY THEY HAVE TO
KEEP OUR FINANCIAL SYSTEM STABLE
AS IT THEY CONTINUE TO RAISE
RATES.
NEIL: BECAUSE YOU NEVER KNOW,
RIGHT?
HISTORY MIGHT NOT REPEAT ITSELF
BUT OFTEN TIMES IT SURE DOES