CNBC News Releases

CNBC Exclusive: CNBC's Jim Cramer Interviews Treasury Secretary Jack Lew from CNBC Institutional Investor Delivering Alpha Conference in NYC Today



WHERE: CNBC'S "Squawk Box"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Treasury Secretary Jack Lew live from the CNBC Institutional Investor Delivering Alpha conference in New York City on Wednesday, July 16th.

Following are links to the interview on, and

Mandatory credit: CNBC Institutional Investor Delivering Alpha conference.

JIM CRAMER: I listened to your speech, and the first thing I think of is I've got some money in an account in a major bank that I know is not set to 250 million, and I'm thinking how do we prevent a run on a bank? If my money is not in my account tomorrow, I'm going to tell everybody my money is not there. How quickly can a run occur?

JACK LEW: Well, Jim, obviously we have a lot of protections that deal with individual institutions. We have the best insurance system in the world for our banks. I think the real challenge is how do we get institutions of all size to take seriously the challenge that I described in my remarks this morning. I think it's obviously harder for smaller and medium size institutions. They are much more reliant on third party vendors for many of their operational functions, and it's much more important for them to be in the space where collaboration and information sharing is safe.

It's one of the reasons why I think it's so important we have legislation and why it's so important for government and industry, organizations that have to do with the security industry to work across institutions, because the solutions probably don't lie strictly within your bank.

JIM CRAMER: Now, I thought it was very interesting language you used in your speech. You said you went to China and you told them basically that hacking would be unacceptable. Why do you have to tell them that?

July 9, when you started speaking here, the New York Times reported that the personnel management was hacked by China. How do we reconcile these?

JACOB LEW: Jim, I think we made clear when that incident happened that our systems are designed to detect intrusions, share the information, to protect individual information. I'm not going to comment on attribution of that incident. But it's one of the things we have to do in government to make sure if there's any intrusion from any source into our system, that we can detect it and stop damage from occurring. We have a lot of work to do, just like the private sector has, and I make sure that in the Treasury department, our guard is very high.

JIM CRAMER: Well, how high? Did you use your cell phone when you were in China?

JACOB LEW: I did use my cell phone. But I always use my cell phone carefully.

JIM CRAMER: You talked about the idea of a bank, but I'm thinking the idea of the internet... Someone here can short a Tesla. You can hack a Tesla and crash a Tesla, literally from your cell phone. Do we have to worry about the internet being too vulnerable?

JACOB LEW: I think the exposures we have to cyber threats are much broader than the financial system. Look at how much of our life we conduct through our iPad, iPhone, our smart device or our computer. It's our banking, our basic utilities, a lot of our personal information, our health records. There is a very high level concern that we should all have that cyber security, cyber hygiene is taken seriously by all of the providers that we do business with.

I think in a world where we were doing with -- kind of at the best level, everyone would adhere to the highest practices and consumers, both individuals and businesses, would demand that firms adhere to the highest standards in order to transact business.

JIM CRAMER: But if you're Twitter, which was mentioned in your speech, and you wanted an open, quick, free system and you're a bad guy, a nation state of organized crime, you get short very heavily. You put a bad tweet out, it causes the market to go down, because Twitter is really trying to not filter things. How would that stop them?

JACOB LEW: Jim, that's one of the reasons why we have to make sure that there's no taboo about acknowledging exposures. If something is not correct and it's put out there, there's someone that knows right away that it's not correct.

You have to be right out there, whether it's a business or government function, and say that's not true. You have to push back on whatever the maligned tweet is.

I think we're going to see more and more activity where there are things that are fabricated that are put out there, and we can't afford to have it take days or hours even for individual firms to push back on this. That means admitting that there was something done and getting out of the space where you're worried it's going to hurt your reputation if you say something was put out about my firm.

JIM CRAMER: Fair enough.

Mr. Secretary, while I was preparing my remarks and my questions on cyber, I got a letter from your office to Senator Wyden and of course to the whole committee talking about inversion, which is something that everyone in this room cares about. You used the following language. You say that Congress should enact legislation immediately, make it retroactive to May 2014, to shut down this abuse of our tax system. I regard this as a ratchet up by your office to try to get this thing nipped in the bud. True?

JACOB LEW: We've made it clear for years that we want our tax codes to have incentives for investing in the United States and disincentives for taking business out of the United States.

On this question of inversion, I used language in my letter that's pretty strong and said we should have some economic patriotism here. It's not right to take an American firm and benefit from all the things that we do in the United States to make it a safe place to do business and then to say I don't want to pay taxes here, shift my corporate address overseas to pay a lower tax rate or no taxes.

What my letter says is the best way to deal with it is to do a comprehensive business tax reform. We have a plan out there that would accomplish multiple goals, as you and I have discussed, that we do business tax reform, lower our statutory business tax rate, provide resources to pay for infrastructure investments and fix the problem that is causing inversion.

In my letter yesterday, what I said was we cannot afford to wait, we need to send a signal that if we can't get comprehensive business tax reform done, we need to act on this question of inversion, that we need to do it now, and we need to do it retroactively so the businesses don't rush to do these transactions.

JIM CRAMER: But the other day, actually, July 14th, your Assistant Secretary for Legislative Affairs drafted a letter to Charles...basically saying, Look, the one thing you can't do is use the IRS, provision of 7874...will close a loophole. But why can't the IRS start some sort of rule making posture, which basically says to the general counsels out there, like Chris Cox and Cad...Waller, yes, you must do what you can to do an inversion right now?

Why can't you say, We're looking at the substantial interest provision. Because every one of the companies that are thinking about inverting right now is a mail drop, either in Switzerland or in Dublin. Just a mail drop. Nothing else. Many in the same building.

JACOB LEW: We have looked at the tax code. There are a lot of obscure provisions that we do not believe we have the authority to address this inversion question through administrative action. If we did, we would be doing more.

That's why legislation is needed. That's why we proposed it in our budget. That's why I wrote the letter last night. There are limits to what we can do without legislative action. It's important that this issue be addressed because we're seeing an uptick in activity of greater interest of companies moving overseas. We have to raise the bar and make it more difficult.

JIM CRAMER: I thought it was interesting in the Medtronic-Covidien deal. There's a clause, and they're starting to get clauses in many of these deals, which says, Look, if they change the law, obviously retroactive, the deal could be off.

And what worries me is that there are a lot of companies that want to game Washington, and they think Washington is so dysfunctional that it's worth taking the risk that you can't do comprehensive tax reform.

JACOB LEW: Actually, Jim, if you take a look at the letter I wrote, it has very much the case for bipartisan business tax reform. It recognizes we might not get it done quickly. This is the kind of issue that I think there ought to be bipartisan incentives on. I don't know anyone who wants to stand and defend the idea of U.S. companies moving their nominal ownership or even their real ownership in a way just to avoid U.S. tax laws. And we ought to be able to get bipartisan consensus on that.

We've seen on a whole range of issues where you can still, even in the difficult circumstances in Washington, get things done. My letter was to the both democrats and republicans to lead the finance and ways and means committee. I want to work with them. We can get that done.

JIM CRAMER: You use stiff language about protection of intellectual property rights, support of research and development. If I'm the owner of one of these companies that's doing inversion, do I have to worry that they're not going to get the support of the U.S. government because of these actions?

JACOB LEW: Our support doesn't go directly to the company. You know, when we do basic biomedical research, one of the things we're great at in the United States is we create knowledge. We create the basic ingredients for innovation. And the private sector does what it does best, it innovates. Obviously, there are benefits in the tax code for research and development spending, but we're not going to cut back on spending in basic biomedical research.

The argument that I make in the letter is that if you benefit from that, you ought to be willing to pay taxes in the United States to pay for that.

JIM CRAMER: What should be the tax rate? You're dealing with regimes that are 8, 10, 12 percent. You're not going to be able to beat them unless you get down to that level.

JACOB LEW: Well, I actually don't agree with that, Jim. I've had many discussions with finance ministers around the world. I think if we could get to a tax rate in the 20s, you would see world rates start to normalize. Right now we have kind of an anomalous situation. We have a very high statutory tax rate, but we have all the loopholes and deductions, so the effective tax rate is around the world norm.

What we're saying is lower the statutory rate to what our effective rate is, basically, closer to it. We think you can get to 28 percent by eliminating deductions and loopholes. That would be a lot better. I think you'd see a lot of companies making the right decisions.

When I talk to business leaders, they certainly believe that lowering the corporate taxes -- they would like it as low as it could get. But lowering it would create a situation that would take away a lot of the incentives for this. We have, in our plan, which would create a differential for domestic and international income to make it more attractive for the income to come home. It's kind of a hybrid system which we believe reflects bipartisan -- growing bipartisan consensus.

JIM CRAMER: Mr. Secretary, on a very positive story that I question why you don't talk about it, our treasury refunding. You've got Fannie Mae paying you a $122 billion. Their obligation was for $160 billion.

Can this continue, or are you going to make it so that, or do you recommend, because I know it's Congressional, that the preferred be made good and even the common stock be made good? Because Treasury's gotten all its money back.

JACOB LEW: You know, Jim, if you look at the most recent exposure report, stress test reports on the GSEs, on Fannie Mae and Freddie Mac, it shows that in a crisis, that the exposure would still be to the taxpayer, and it would still vastly outweigh what current profits are. I think as long as U.S. taxpayers are on the hook, it is appropriate for us to stay in the structure of conservatorship that we're in. We need to get on with financial reform, we need to have a clear plan for future that circumscribes the taxpayers' exposure in a very limited way. And the sooner we do that, the better.

JIM CRAMER: If we bump the $25 billion worth of Fannie Mae common that a lot of you guys say -- maybe keep the preferred. I don't think so.

Treasury, $70.5 billion surplus last month. Received 8 percent above, spending down 1 percent. Does this mean, as we project this, that we're not going to have a debt ceiling wrangle, even if some party wants it?

JACOB LEW: Jim, I think there's two questions. One, will we hit the debt ceiling at some point? Yes, we will. Because Congress extended it to a specific number. When we hit that number, it will depend what the flows are, how quickly that comes. I hope everyone learned in both last fall and in 2011 that it's a terrible thing for the U.S. economy to use our ability to pay our debt as a tool to gain leverage in a political debate. It hurt confidence, it hurt it in the United States, it hurt it internationally. It hurts the whole economy. It would be wrong for Congress to go back there. So I hope we never go back to what we saw last October, where there was a threat to cause the U.S. government to default, so you could get your way in a legislative battle.

JIM CRAMER: How about doing something like this? In October, the Federal Reserve was doing its bond buying program. I know when I spoke to Secretary Geithner, repeatedly he said, Look, there's nothing we can do to fund treasury while why they're doing that, using a long term basis. Once they're done, you know what the market is clamoring for, Mr. Secretary? They're clamoring for 30-year paper, and they love 50-year paper. How about a $300 billion 30-year, $500 billion 50-year once the Federal Reserve is done buying?

JACOB LEW: You know, Jim, we have the deepest and most liquid bond market in the world. We have worked over a long time to develop that, and part of that is we keep our maturities spread in a pretty normal way. We don't make big decisions to move radically and dramatically, and we try and stay abreast of what the market is interested in in terms of maturity.

We've seen a gradual lengthening of maturity in recent years, which is a good thing in terms of current interest rate environment. But we don't try to time our decisions based on capitalizing on interest rates at the moment. I think for the long-term, maintaining the deep and liquid U.S. treasury market is something that's very important to U.S. economic security.

JIM CRAMER: But you don't really need to time it. You can look at the great deals that Apple and Verizon did for multiple billions, and realize you know what? The Treasury is even better paper, I believe, than Apple.


JACOB LEW: I think we have the best paper in the world. And I think the markets around the world have reflected that. There is a reason why the dollar is the world's reserve currency. There is a reason why the appetite for U.S. treasury debt is so high. I think as you look at the way we've created new products, it has really reflected the evolution of market appetite for different kinds of products, and we will continue to try to be innovative in terms of introducing products that help to keep the deep liquid market that we have. But I think any attempt to try and design our products to capitalize on interest rate at the moment would be short-sighted.

JIM CRAMER: But at the same time, this trajectory is not a false one, right? I know $70 billion, that's in a month, that's a lot. But you have to be heartened that we are probably far more ahead of 2008 levels, and we're going lower. And yet I don't hear a lot of talk, as I did last year at this time, that the deficit maybe closing.

JACOB LEW: You know, Jim, we have made enormous progress in reducing our deficit and getting our fiscal house in order. If you look at where we were when this administration too office, we had two wars that we were paying for on the credit card. We were seeing the debt rising, and we had to intervene to get our economy moving again to prevent a depression. We then took decisive action working with Congress. We had several pieces of legislation, the Affordable Care Act helps control budget spending. We had the Budget Control Act which brought discretionary spending under control, and we had tax bills beginning in 2013 that did part of the job of raising the revenues we needed to close the gap.

We are now on the task of bring are our deficit below 3 percent GDP for the next ten years. It's quite a sustainable place. We know we have longer term challenges to deal with. I think the attention in Washington needs to shift a bit. Right now the challenge is not immediately deficit reduction. It would be great if we could deal with all the issues that have been so divisive. Right now we need to get beyond the divisive politics and do the things that we need today. We need to rebuild our infrastructure. We cannot have a competitive economy in 50 years if our ports and our bridges and our roads are crumbling. We need to get on with things like dealing with immigration reform, as difficult as it is. Because we know that's important to our economy.

There's a whole bunch of issues. Worker training. That's actually an area where I believe there's a bipartisan bill that's going to come to the President for signature. So there are things even in a difficult political environment that we can do to make progress. If we could get some points on the board doing those things in the next couple years, there's time to deal with some of the longer term fiscal challenges. I think it would be a mistake to put the long-term fiscal challenges ahead of what I just described. That's a foundation. That will make it easier to deal with long-term fiscal challenges.

JIM CRAMER: Understood. Mr. Secretary, earlier this week the House basically cut 13 percent of the budge of the IRS. I thought they were supposed to be 20,000 new agents trying to make it so the Affordable Care Act was enforced. If you have 13 percent decline in the budget direct, there is no way you can enforce the Affordable Care Act.

JACOB LEW: Jim, we made it clear that if the House funding levels were to pass, there is no way we could do all of the things the IRS has to do to enforce our tax laws effectively and implement laws like the Affordable Care Act and others at the level that we should. It is a mistake to short-fund the IRS. It costs money to short-fund the IRS. Because what it means is ultimately, you are taking your enforcement actions down, and it means you're lowering the bar for people to get away with cheating on their taxes. That's not good for the money involved. Obviously, it's not good to lose the revenue. But it's not fair to people who pay their taxes. We depend on a system of voluntary compliance. And it would be terrible if Congress says, You know, you can get away with it.

JIM CRAMER: Mr. Secretary, in this room are literally maybe several trillion dollars worth of hedge fund assets. When I was a hedge fund manager, I had the right to be able to pay far less tax than the average American who is now burdened. Why not -- where are you on carried interest, yourself?

JACOB LEW: Well, my view is that the carried interest provision is used inappropriately. It ought not to be a way of converting what is normal income into enterprise income. It has been. We have a proposal out there that would cut back on it.

JIM CRAMER: Okay. You were in China. Part of your job is literally to take a look at these trade agreements. Is there a trade agreement that we've done in the last 20 years where the United States has a surplus?

JACOB LEW: Jim, if you look overall at trade agreements, if you look at the evolution of trade agreements, they are getting better and better at raising standards to a high level. If you look at the conversations we're having both with China bilaterally and more broadly with our other Pacific countries in the trans-Pacific partnership, what we're trying to do is drive world standards to a higher level, which will help U.S. businesses, help the global economy, and it will help the U.S. economy.

My discussions with China are about how important it is to the U.S. economy and also to the Chinese economy. If China wants to sit as a bigger economic power, that means they have to play by the same rules major economic powers play by; opening their markets to U.S. goods and services and international goods and services, and to investment by foreign firms. I think we're making progress. It's slower than I would like. In the conversations we had this week we agreed that we will, at the beginning of next year, have China present the next phase in our bilateral investment treaty negotiation, so we can quickly make progress there. It will be a good thing for the U.S. and China for us to conclude a bilateral investment treaty.

JIM CRAMER: I understand there's a carrot for both of us. Carrot for China, carrot for the United States. But what is the schtick? Would you ever consider a moratorium doing anything with China until they, say, comply with World Trade Organization, comply with currency, no more manipulation?

What do we have to be able to compel them? And do you ever think they are a paper tiger? Maybe they're not as powerful as we think.

JACOB LEW: Jim, there is no denying China is an enormous economy. Depending how you measure it, it's right up there with two of the largest economies in the world. And I think we ought to be building a relationship with China where economic relationship is part of what strengthens the ties and makes it easier to deal, frankly, with some of the strategic issues. I think it's important for economic and our security position. We are very tough at enforcing unfair trade laws, and that is not always an easy think when we talk to our Chinese counterparts. We bring actions against them when there is an actionable event for us to respond to.

While we do that we say the right thing to do is to enter into agreements and to enforce the agreements so that doesn't happen in the future.

I think for the global economy, bringing China up to the kind of standards that that would reflect would be an important thing, because the world is getting to be a smaller and smaller place. It is kind of impossible to imagine doing business just within the boundaries of any one country. I think realistically, the global economy depends on a good U.S.-China relationship. That's why I work so hard trying to build that by being very tough on issues like currency. I could not be more clear with our Chinese counterparts on the need for them to step back from intervention and to be much more transparent about their actions. We frankly got, as you can see, some important points on that just last week.

JIM CRAMER: Mr. Secretary, I would never talk stocks with you. For instance, you talked about Target, the third-party vendors, I know that a Palo Alto Network is trying to get involved. Palo Alto Network is kind of a bit of a speculative stock to some degree. Some people would say it's maybe one of the substantially stretched valuation stocks.

Is it ever right for a federal official to comment on substantially stretched valuations in stock, whether they be small cap, or whether they be security, or whether they be social media?

JACOB LEW: Jim, I think it's appropriate for us to comment on policies and trends. It is not important for us to comment on individual market movement.

JIM CRAMER: So you don't think necessarily that the smaller tax and the smaller social media stuff are overvalued, or you think that's none of your business?


JACOB LEW: I think a lot of people in this room ought to be making sensible judgments about proper valuations.

JIM CRAMER: They are maybe better qualified than some in the government. You talked about hedge funds. You mentioned hedge funds in cyber security. Who monitors whether they're doing it right?

JACOB LEW: You know, that's a very good question. I think in general we have growing parts of the financial landscape that are relatively more lightly regulated, and you're seeing more and more activity streaming through those kinds of businesses. And it is important to have voluntary standards for those institutions to kind of step up on things like cyber security. You know, I think the reputational issue that I mentioned, I'm sure that that's a legitimate concern. No one company wants to be seen as the outlier that's more exposed than others. It's why it's important to be shoulder to shoulder saying this is something we all have to do. The more you can do it collectively, the more it reduces the reputational risk and raises our overall level of defense.

JIM CRAMER: Excellent. Mr. Secretary, CNBC and Institutional Investor thank you. Thank you for your candid comments on cyber security and so many other issues. And best of luck to you, sir.

JACOB LEW: Good to be with you, Jim. Thank you.

About CNBC:

With CNBC in the U.S., CNBC in Asia Pacific, CNBC in Europe, Middle East and Africa, CNBC World and CNBC HD , CNBC is the recognized world leader in business news and provides real-time financial market coverage and business information to approximately 371 million homes worldwide, including more than 100 million households in the United States and Canada. CNBC also provides daily business updates to 400 million households across China. The network's 15 live hours a day of business programming in North America (weekdays from 4:00 a.m. - 7:00 p.m. ET) is produced at CNBC's global headquarters in Englewood Cliffs, N.J., and includes reports from CNBC News bureaus worldwide. CNBC at night features a mix of new reality programming, CNBC's highly successful series produced exclusively for CNBC and a number of distinctive in-house documentaries.

CNBC also has a vast portfolio of digital products which deliver real-time financial market news and information across a variety of platforms. These include, the online destination for global business; CNBC PRO, the premium, integrated desktop/mobile service that provides real-time global market data and live access to CNBC global programming; and a suite of CNBC Mobile products including the CNBC Real-Time iPhone and iPad Apps.

Members of the media can receive more information about CNBC and its programming on the NBC Universal Media Village Web site at