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CNBC Exclusive: CNBC Excerpts: PIMCO Founder and Co-CIO Bill Gross and Blackrock Chairman & CEO Larry Fink Speak with CNBC's Brian Sullivan

Friday, 4 Oct 2013 | 11:59 AM ET

WHEN: Today, Friday, October 4, 2013

WHERE: CNBC's Business Day Programming

Following are excerpts from the unofficial transcript of a CNBC EXCLUSIVE interview with Pimco Founder & Co-CIO Bill Gross and BlackRock Chairman & CEO Larry Fink. Following is a link to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000204659.

All references must be sourced to CNBC.

FINK ON DC GRIDLOCK

I think it'll be resolved very rapidly. But I think the most important thing we must understand is, the U.S. is the standard bearer of the world. People look to the United States as a country that lives by principles. And just the notion and just the conversation of a potential default is just unacceptable.

GROSS ON THEATRICS

We are the reserve currency. Our central bank is the central bank's banker. And to the extent that we set the set tone either in the form of interest rates or its stability from the standpoint of currency and the like. Of course we are. And is there the possibility of a debt default, like I mentioned yesterday on your program? Really, no- you know, I think it's basically theatrics.

FINK ON UNCERTAINTY

CEOS are certainly not going to build that factory or plant, they're going to wait and see how this is resolved. And so, I think that you are seeing that in the job data already. The job data has been incrementally disappointing – not good, not bad. It's all because of the uncertainty around Washington. It is because of this uncertainty around how we are going to navigate in Washington, what it means for the future, and CEO behavior- you know, people have to recognize, it is their behaviors, their decisions are determined by this type of noise.

GROSS ON BEING IN A PICKLE

The present value of the total obligations in terms of the United States, is really – instead of 15 trillion, is perhaps 60 or 65 trillion. We're in a pickle here.

FINK ON IRRESPONSIBILITY

That would be not just irresponsible, but it is inconceivable to have this episode every time. And, you know, I can tell you many leaders are speaking out now. And unfortunately now you are beginning to see some unlocking of some moderate Republicans and moderate Democrats now starting to speak out. So I don't expect to see this repeating itself year after year. If you're right, then we're not going to have not 2% GDP, we may be living in a period of many years of negative GDP because you cannot build a company with this type of uncertainty.

FINK ON ENERGY

The element that's going to be the transformational component of manufacturing is going to be energy costs. We and Mexico and Canada have a unique position that we've never even dreamed about having. And I do believe this is going to allow us to be differentiated. As I said, I am more worried about the Brazils – where a year ago, five years ago people were talking about the developing world, the BRIC nations and all the changes. I think there is going to be a huge paradigm change and that paradigm change is going to be energy.

GROSS ON CENTRAL BANKS

I think that central banks have lowered yields and compressed yields so artificially that in terms of the real economy – corporate heads, CEOs, insurance company executives – that the available returns in terms of investment and the real economy are so low relative to the risk, the historical risk, that they are unwilling to basically invest in real plant, real equipment, real technology- and take the back door venue of buying their shares back because it's the safest way to go.

GROSS ON REGULATION

You fix it in several ways, you do fix it with regulation, and there is a legitimate debate and dispute as to how much and how far to go. But you do inch back, I suppose that, to days in which investment banks and banks were separate entities as opposed to banks these days you know, employing, you know, trading for their own books and therefore putting depositors savings at risk. I mean, that is the principle here. So you do re-regulate with the hope that you don't go so far that the spirit of lending, the spirit of capitalism, on the part of banks, on the part BlackRock, on the part of Pimco – basically is impeded. And that is a delicate balance.

FINK ON LAWSUIT

We're doing this on behalf of our clients, this is not on behalf of Pimco and BlackRock. We're doing this for the pension funds that are invested in this. We're doing it for the individual mutual fund holders who have invested this. We are acting as a fiduciary on behalf of our clients. This is not our money. And if we did not stand for our clients rights in this and we did stand for this suit, we would not be a fiduciary to our clients. And we're going to find out in a court of law who's right.

GROSS ON MAIN ST.

Technology displaces workers, and technology creates vast spreads in terms of income that makes for lots of rich 1% people, or a few rich 1% people, and lots of 99s as their jobs are displaced. So the disparity between Main St. and Wall St. is serious, if only because, if I were a corporate leader looking to grow earnings per share and to reward my stockholders, if only because, you know, Main St. needs a fair share too.

FINK ON INFRASTRUCTURE

One of the myths about this country is small businesses create most of the jobs and large companies don't. Well the problem is, most small companies are in the business of construction. The plumbers, the electrical men. That's where – and so if you don't link this whole idea of construction -- that's why so many of these small businesses are being hurt right now because they are generally in some phase of construction. So take that now if we don't find a way to really rebuild infrastructure and get the investors together - we are going to have hard time.

FINK ON EDUCATION

The unemployment rate in the United States for a college graduate is below 3%. The unemployment rate for a high school graduate is over 12%. So we still have a target in this country to have 90% of our high school graduates graduate, but only 76% of our high school graduates are graduating. And so at the same time that we are talking about all of this, 24% of Americans are destined for some rather – a rather poor future. If we don't – you know we are hollowing out through technology – if we don't create these job training programs, if we don't create a process in which we help these families prioritize education so their children go get a high school education and hopefully something beyond – I mean these are structural, long-term issues – but if we don't address these issues, we're going to have a greater have and have-not society.

FINK ON MEXICO

Mexico is at the beginning of a real revolution. President Pena Nieto has proposed liberation and changes in the whole energy complex – it requires a constitutional change. He has made some taxation changes to prepare for that. Because what it means is Pemex needs to spend more money and it had no money to spend because all the money of Pemex's profits were going to the federal government of Mexico. But through this change, if it is approved, which it looks like it is going to be approved, you're going to have a tremendous opportunity for Mexico to become one of the largest providers of energy.

GROSS ON BLACKJACK

The blackjack system basically taught you much in terms of risk management. It basically said that you can have a streak of bad luck for 10, 20, 30 hands, even for several nights, and that if you put all your chips out on the table, or a significant amount of chips out on the table at the wrong time, then you would go home not only a loser but empty-pocketed, which is what casinos bank on.

FINK ON SAFER BANKS

We are quite a bit safer today. I think what drove the financial markets to the point of no return was leverage and lack of risk management. We have changed the whole structure of banking today where banks now are going to be required to have anywhere from 8 to 12% tangible equities. That's up from 4 to 5. We are now asking banks to have leverage ratios of 5. They had leverage ratios that were infinitely greater. Sometimes 60 to 1, depending on the structures that they had. So, unquestionably, we have created much safer leverage institutions. But that doesn't mean we are safe. Because we are now driving more and more businesses to the capital markets. We are driving businesses exchanges. Ultimately, I think even in the bond market we are going to have most of the bond trading being done in exchanges. And so we are going through this transition now. Because banks are not going to be able to use their balance sheets for that type of leverage anymore. So we are driving all this business to the exchanges, and the structural problems of the exchanges are they are not public servant vehicles, they are for profit vehicles. So in many cases, if we don't watch ourselves and regulate these exchanges, we are creating the same structure that Fannie and Freddie were. They were for profit and served a public service. And I'm certainly not suggesting the same similarities, but I do believe we need to make sure that these for profit entities as we move and migrate more and more business to these entities that we make sure that they are regulated properly, that they are spending enough money for technology – you know, most recently, we had some glitches recently – the question is are they putting enough money into technology and making sure they avoid it. So, you know, we are never going to be void of crisises, we're going to always have them, and hopefully we learn from them – but the next crisis will be most certainly different one than the last one.

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