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Interview Transcript: Deutsche Bank CEO Seth Waugh

By CNBC.com
Tuesday, 28 Aug 2007 | 11:24 AM ET

The following is the unofficial transcript of a CNBC interview with Deutsche Bank Americas CEO Seth Waugh on CNBC's "Squawk on the Street" today at 9:30 AM ET. All references must be sourced to CNBC.

In the CNBC exclusive interview, Waugh discusses Deutsche Bank subprime, the credit crunch and the market's volatility, among other topics:

Erin Burnett: Deutsche Bank, are down nearly 6% over the past month but it is a whole lot better than a number of competitors. We have to be fair here. Is the worse of the credit contagion behind us or lurking around the next corner? Joining us is Chief Executive Officer of Deutsche Bank Americas Seth Waugh. After we managed to extricate you from the Tiger crowd down there; right?

Seth Waugh: It was fun.

Erin: It was very fun. Let me first of all ask you about the credit situation. I mean would you say over the past 30 days it has -- right now is it better than it was a week ago?

Waugh: It is definitely better. I wouldn't say it was back to normality. It is a little confusing too. You have a lot of changes going on in the market a lot of repricing as well as the fact it is last week of august which is normally sort of a quiet period anyway. Yesterday felt frankly like the first day of summer in terms of how quiet and reserved it was obviously we'll see what happens today. To refer it to a credit crunch I think is -- obviously that's a bit of what's going on. But really it started with an asset problem right in the form of sub prime which has caused contagion to some other things in the marketplace, but there really isn't -- you know, there isn't a classic credit problem in a sense that, you know, companies are actually -- earnings are good and we feel as though, you know, there's not a -- there's no defaults that are necessarily going on. We did end up with a liquidity crisis, which was as a result of --

Mark Haines: That was your fault, wasn't it? Wasn't it the banker's fault?

Waugh: Well, I think it is the -- any time there's a repricing in the market and there's stress put on the market, you are going to find the stress points; right? I think really what happened is there was a fear of the unknown, and so what people -- there wasn't -- what is a triple a anymore; right? What does that mean? And so you had a flight -- or a fear of general panic of -- panic is probably too strong but a general aversion to lending because of the uncertainty of what was behind certain assets.

Mark: First, what is the commercial paper market look like now? Because my opinion that was the bullet lodged near the spine.

Waugh: I agree with that. I agree with that completely. That's where the fed acted last week; right? Because we went from a fairly, you know, contained sort of small part of the market into something that was much broader. Suddenly companies that had nothing to do with sub prime were having a bit of a problem financing, and you suddenly are talking about some, you know, potentially large failures in the marketplace and other things like that.

More from the interview...

Erin: Are these markets open right now or closed? I mean, because you are the ones trading in and out of them every day.

Waugh: I would say they are more open. They are not back to levels certainly of a couple months ago, but they're well ahead of
Where we were two weeks ago before the fed's action. You know, you're starting to see some things getting termed out. You are starting to see the fed tweak a little bit about what they are allowing to come to the window, and that's made a big difference in terms of the collateral that's being put out and it is being put out for term. What really happened is you had a term market that turned into overnight market.

Erin: What are you putting into the fed? You used a window I know you haven't said how much you went and put stuff through it. What was it? Was it mortgage collateral that people were giving you?

Waugh: We went to the fed not because we needed liquidity but because we were able to fund in fact we did it at a cost to ourselves we did it in a sense of supporting the fed we believe the message the fed was sending we’re all in this together. We are going to be there until liquidity is restored. There has to be a concerted effort among the community to do it. We went in with some collateral we could have financed elsewhere but we did it in support of what the fed is trying to accomplish which we obviously wholeheartedly believed in.

Mark: You kind of danced close to this point a little earlier. I'd like to zero in on it. What sort of damage has been done to the ratings system?

Waugh: Again, that's an interesting question, right, and what has happened, and you get a lower interest rate environment, right, and so people are looking for yield. They are looking for return, and that's true on the short end as well, and so what you created was a whole new market which was based on ratings and triple a ratings of securitized product, asset backs, etc., etc. Those were a little bit of a classic old problem as well which is, you know, you borrow short to lend long that's what happened. As the problems of the sub prime market went through obviously triple as you know were repricing dramatically on intraday basis, and so I think we are going to have to go back and figure out what that is. Now I think one of the trends going forward will be that again back to basics, back to transparency that, you know, sort of a double a corporate is going to be a bit of a flight to quality in our view because you are going to know what it is as opposed to having the uncertainty. Markets as you well know hate uncertainty, right, and the trend. You will see a flight to transparency, a flight to simplicity, and, you know, a re-kind of figuring of what these securities look like.

Mark: I don't want to put words in your mouth but it sounds to me reading between the lines what you are saying is the damage if any to the ratings systems and the ratings agencies is kind of limited to securities which contain mortgage obligations, not nonmortgage obligations, is that fair?

Waugh: Well, yes, and what -- mostly fair and sort of how, you know, how, you know, how these securities behave when you put them under stress and how does that work, right, and so the answer to that is yes, but I think the whole collateralized market will have to be sort of looked at in the -- in the rearview mirror of how it reacted and quote unquote the -- reacted in quote unquote the latest storm; right?

Erin: The market exists in anything other than in a very sad form of itself.

Waugh: By that market I don't know what you mean. You mean asset back?

Erin: Yes.

Waugh: It will be smaller. There will be some fundamental changes that will go on in the marketplace as a result of this. There's no question about it. I also think we're at the beginning of the end of the crisis in my view given the fed's actions, but that doesn’t mean that you won't have more bad news. You know, we all kind of come back to school next week. It will be interesting to see kind of what happens, but I think, you know, there's dramatic repricing that sort of has to continue to go through, and there will be some things that continue to happen.

Erin: And Seth, I know you are among the many who had to cancel your vacation as a result of what's going on. Let me just ask you this question, because this is what so many are talking about in media publications and even within your own company, you have got a lot of traders. What I have been hearing is some units are doing well and others have lost a couple of hundred million dollars. Is it fair to say that Deutsche Bank like everyone else has lost a lot of money?

Waugh: Well, I think the -- you know, we have been focusing on trying to deal with our client's needs in the last month or two, and that's what we do sort of all the time. But there's two ways to look at it; right? The glass half full half empty. If you walked in today and didn't have a position, this would be an interesting market to trade. On the other hand, if you were on the other side of the market, there's clients and others that have issues dealing with that. So there's both opportunity and cleanup that has to go on kind of everywhere. And so --

Erin: Which is a nice way of saying he's not going to tell us they lost money.

Waugh: Well, we are in the middle of --

Mark: He's told us almost more than I expected him to.

Erin: Yes. We appreciate you coming up here.

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