WHEN: TONIGHT, MONDAY, SEPTEMBER 15th AT 6PM ET
WHERE: CNBC'S "MAD MONEY W/JIM CRAMER"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Wachovia President & CEO Robert Steel tonight on "Mad Money w/Jim Cramer."
All references must be sourced to "Mad Money w/Jim Cramer."
JIM CRAMER, host: Two thousand stocks in my head, one goal in mind: to try to make you MAD MONEY. You can't afford to miss it.
Hey, I'm Cramer. Welcome to MAD MONEY. Welcome to Cramerica. Other people want to make friends, I'm just trying to preserve some capital. My job is notjust to entertain you, but to educate you. So call me at 1-800-743-CNBC.
Well, this was it. This was one of the ugliest days I have ever seen in close to 30 years of trading. Billions of dollars of losses. Oh, in many stocks, but particularly in the financial stocks. Billions. And to some it seems like there's no end in sight. So how did we get here? How did we end up at the point where Lehman filed for bankruptcy? Where AIG, the biggest insurance company in the world, is staring into the abyss? Washington Mutual, the largest savings and loan, $2 stock? The turmoil in the financials caused a massive decline in the Dow Jones average, S&P, even the Nasdaq, which doesn't have a lot of financials. So you have to wonder what's going to happen next.
Ever since August of 2007, I've been adamant that things would get this bad if nothing was done. Well, look, in the end I'm a cable guy, all right? A rare admission of humility. I'm not a CEO. I'm not a policy maker. But I want to talk to someone who is in a position to deal directly with the mortgage mess because he's a banker, someone who's neck deep in it, someone who I think actually knows how we got here and how bad things really are--maybe they're not as bad as we think--and someone who knows how they can become better. Robert Steele, the CEO of Wachovia, former undersecretary of domestic finance at the Treasury Department, not to mention the former head of Goldman Equities and a guy I worked for.
At the Treasury Department, Steel was one of the few government officials, I believe, who understood the full nature of the problem. As far back as September 2007, he was warning us that the turmoil in the credit and mortgage markets, stemming from housing, was far from over. When he took over Wachovia, the bank, I think, was in pretty sorry state, having paid $24 billion to buy Golden West, California S and L, back in 2006--not his doing--right at the top of the housing bubble, saddling Wachovia with billions in bad mortgages and--but more importantly, hard to value bad mortgages that were really written, you know, on the idea that there'd continue to be house price appreciation. I think Bob Steele's the one guy I trust to turn this bank around, which is why I've told you on weakness to buy Wachovia. We got weakness today.
Less than two weeks after he took over on July 22nd, he did about the most bullish thing a CEO can do: He bought a million shares of his company's stock between $15.32 and $17 on the open market. Down about 6 bucks now. Seems to me that insiders only buy for one reason, though, to make money. Which leads me to believe that Steele thinks Wachovia is worth a lot more than the 10 and change it's trading at now. Bob Steele's an old hand, a seasoned pro. He was at Goldman back in 1990. He remembers the mortgage resolution trust--the commercial mortgage resolution trust, the RTC, that worked back then; similar to the solution that I've been calling for now to deal with residential mortgages. And he's the man we want to hear from right now, to talk about how we got to this point and what the future holds for financials in general, Wachovia specifically.
Mr. Bob Steel, welcome to MAD MONEY.
Mr. ROBERT STEEL: Jim, thank you. It's great to be here.
CRAMER: All right. Good to see you. Good to see you.
Mr. STEEL: Good. Thanks for having me.
CRAMER: You're a reassuring face. Maybe you shouldn't be, but you are.
Mr. STEEL: I'm here.
CRAMER: OK. Can you explain in English to our viewers how we got to this point and how we can get out of this point?
Mr. STEEL: I'll do my best.
Mr. STEEL: I think first, Jim, you have to begin going back, you know, six, eight years ago. And if you think about it, going back for the last six or eight years, up until last summer, people kept getting more and more comfortable in taking more risk. So basically, when in doubt, people took more risk. There was no penalty with risk. So everywhere people were taking on more risk in their portfolios, in their home purchases, in their savings strategy. And businesses were taking more risk in terms of leverage and things like that. People got very comfortable with risk. So then we turn it back to the clock to last summer, and basically here we sit last summer, and I think there was lots of dry tender where the problems could have begun. But, instead, the place that it really began was in the residential housing area. You know that basically people began to think of their homes as the equivalent of an ATM, where they basically would either take capital out so that they became more leveraged...
Mr. STEEL: ...or when they made the initial decision to buy a house, they would buy a house that was a bit more aggressive than they might have historically. So then, with house prices appreciating, you had a system set up so we had the potential for a real downfall.
CRAMER: Well, but the thing that surprises me is the people involved at major firms. Bear Stearns, some--we knew a lot of the people at Bear Stearns...
Mr. STEEL: (Unintelligible)
CRAMER: ...together. Lehman Brothers, Dick Fuld, been an old hand. How did these people, who could see everything that you just described, have their institutions, great institutions, succumb so quickly?
Mr. STEEL: I think, Jim, it was really kind of a three-part domino. First of all, it began with bad credit issues. And then it became an issue of liquidity and then began to affect the real economy. And so as people basically were slow to accept the reality of some of the poor credit decisions...
Mr. STEEL: ...it was exacerbated by lack of liquidity, and then we're saying some challenges in the real economy. And so that domino effect has basically exacerbated the situation so that it's a bit tough to get out of the way.
CRAMER: All right. A bit tough, but I think there are a lot of people who watched today and they saw Lehman crumble, go bankrupt. They saw AIG under tremendous pressure. They see a lot of stocks--Washington Mutual, $2--and they basically say, `Listen, there's no way out. Everything has to cascade lower. There really isn't anything that can be done until most of the big institutions go bankrupt and we start over again.' That's a recipe for catastrophe. Is catastrophe on the table?
Mr. STEEL: Before I answer that, let's first take a second and recognize, you know, we have lots of friends that worked hard and cared a lot about their firms, at Lehman Brothers and other places, and Bear Stearns before them. And it's a sad, hard day for them. And you and I cared a lot about the places we worked, and those people care the same way about where they work. And we just have to kind of put that in the back of our minds as opposed to just being too overly analytical about this. This is about people and their careers.
Our way out of the catastrophe? First of all, I don't think it's a catastrophe. We're working through this and we're making progress. But I think it's really about three things. Transparency. People have to understand the assets and really be able to say, `This is what I own, this is what I'm thinking about buying, this is the nature of the assets.' Complete disclosure.
Mr. STEEL: Second, that transparency will generate enough confidence so people will buy and sell the assets at real prices where they know what they are. And last is the system needs enough capital to be able to work through with the setting of prices, the confidence in prices and then basically going forward.
CRAMER: We're not out of capital? It looks like that we're done, that there isn't anyone else that can still come from the sidelines, that everybody who had money has already spent it, and that, frankly, everybody's exhausted.
Mr. STEEL: It's not true. Jim, there's lots of money in the world. There's money in money market funds at high levels, there's money in sovereign wealth funds, and there's money in savings. People need confidence, and they can come back and we can work through this with transparency, liquidity and capital.
CRAMER: All right. But everybody felt, at the time when Bear Stearns occurred, maybe that had to happen. Lehman Brothers no better or worse than Bear Stearns. Lehman goes under, Bear gets bought with government guarantees. Why is--where's the equity here?
Mr. STEEL: Well, I think their business model's being reassessed. You know, if you go back to my model of people getting comfortable with risk, the--some of these securities firms were running with less liquid balance sheets, which they chose to do, and they were running with higher leverage. And what the world is saying is that we want to get a re-evaluation of these business models, and they want more liquidity and less leverage. And that's the word from the potential investors.
CRAMER: Is there anybody left who's--after we saw Lehman Brothers--who literally is too big to fail, where there has to be a backstop that just says, `You know, that institution can't go under because we don't want a worldwide depression.' If we're back in 1929-30, and someone said, `You know what? We can't have bank after bank after bank fail...' we all studied the Great Depression. There's nobody re-evaluating Hoover right now and saying, `You know what? Maybe he had it right.' Do we want to be able to avoid that Great Depression, or is it just worth having?
Mr. STEEL: Well, I think that the Fed as--I know you've had some perspectives to offer about the Fed at various times.
CRAMER: Right, right.
Mr. STEEL: But I think...
Mr. STEEL: ...I think that you can see they--they've done what I think is a good job of trying to provide liquidity, which is part of the whole system, and they're also working with the banks with regard to capital. And so I think we're making progress as we work through this. It's messy and it's hard, but there's progress being made.
CRAMER: Shouldn't we most be worried right now--with the house price appreciation/depreciation model obviously going the wrong direction, isn't employment now the big issue?
Mr. STEEL: Well, I said before, I thought this had gone, basically, from a credit issue, basically, to liquidity, and now affecting the real economy. And to be honest, I think you and I both will be surprised at how up until now the economy has probably...
Mr. STEEL: If I'd sat here a year ago and rattled off for you all the things were going to happen from August 1st of last year until August 1st of this year and asked you about the growth of the economy, I think we both would have underestimated the first and second quarter strength.
CRAMER: Right, right.
Mr. STEEL: OK? I would have, anyway.
CRAMER: OK. I definitely would have. But...
Mr. STEEL: And so my point is that the economy has held in there pretty well. It's now--more headwinds are surfacing. We're seeing some unattractive unemployment signs coming forward.
Mr. STEEL: So we're going to have to watch this and monitor carefully.
CRAMER: In 2003 we took rates to 1 percent. You've got to admit that things are far worse now than they were then.
Mr. STEEL: I think the Fed's got to be challenged as to how to move next.
CRAMER: OK. Bob, stay with us, please. I want to talk about how Wachovia's meeting these challenges...
Mr. STEEL: Perfect.
CRAMER: ...and why you're the right man for that job.
Mr. STEEL: Thanks.
CRAMER: OK. Jim Cramer, Bob Steele. Stay with us at home.
CRAMER: Down almost 500 points, really concentrating on the financials. One that was down severely today, Wachovia, down about 3 1/2 bucks. Wachovia's right in the middle of the vortex. And we have Bob Steele, who was at Treasury, who was at Goldman and is now running Wachovia. Fortunately, we talked in the first segment about what can happen globally. Let's now drill down to Wachovia. Bob, first of all, a mistake to take the job?
Mr. STEEL: No, are you kidding? It's great to be there and learning a lot and a lot of great businesses to work with. You know, Jim, I arrived in early July and, really, we've kind of had a three-part strategy. Number one, take responsibility and understand the issues. These are the challenges we have. We're going to be open and talk about them. Number two, work on the balance sheet. We've basically been working. We cut the dividend, we're reducing expenses by $1 1/2 billion. We're also cutting the balance sheet by $20 billion. Those three things will generate between 5 and $6 billion in incremental capital in the next year.
CRAMER: But we had an analyst on earlier today, Meredith Whitney. She was on with Maria Bartiromo. She said that you're using wildly optimistic assumptions for your gigantic California portfolio, and that has to be marked down. What do you think of that kind of analysis?
Mr. STEEL: Well, I heard Meredith's comments, too, and what we've taken the approach is, you know, everybody has lots of assumptions and you can choose one number, Meredith can choose another. Our strategy was to give you all the data so you could make your own model. We tell you what we're doing. Basically, if you want to look at it, it's $124 billion, it's about 385,000 homes, and basically we've given you by ZIP code what the addresses are...
Mr. STEEL: ...where they are. But I think people are missing something when they try to assign the numbers. We don't own securities, we own whole loans. We own them on our balance sheet. We have the ability to engage with each of these homeowners and find a solution. In some cases, the mortgages are performing well and are basically in the conforming mode. Others are going to need attention and work. But we have the ability to work through this, and we have the time and the inclination. And we set up a special project being led by one of our strongest executives to drill on this. We've taken what you've talked about of the idea of separating it out from our regular mortgage business.
CRAMER: Right. A Mellon Bank solution.
Mr. STEEL: Yes. We're doing a partial of that. We're taking it out and applying all the skills we would as if it were a separate business. We look at this as if we were distressed debt investors. What would we do to maximize the rate of return? We have time and we can work with the individual mortgages. We think that will yield quite attractive returns over time by owning these assets.
CRAMER: But in the Mellon Bank solution that we talked about when you split the good--it's the good bank/bad bank solution, there needed to be more capital raised. How can you, at 10 bucks, raise more capital?
Mr. STEEL: Well, I think first of all, we're raising capital ourselves by basically shrinking the balance sheet, cutting the dividend, cutting expenses. We can create more capital ourselves that way, $6 billion. Now, we're open minded; we'll watch this and see.
Mr. STEEL: We thought about bringing partners in to work with us on the portfolio. But, for now, we feel like we can work through this, and that's the strategy. And we've got our mind focused on trying to make these assets more valuable over the next three to five years.
CRAMER: Did the bankruptcy of Lehman make your job more difficult?
Mr. STEEL: Well, I think in some ways, yes, and in some ways, no. Let's think about it together. Number one, there's no question it's put strains on the credit markets in the short term.
Mr. STEEL: But I do think probably there's going to be a bit more of a perspective with regard to regulators and banks, and the Central Bank, so as to be a bit more accommodative and flexible, and maybe money will be a bit more available from that perspective.
CRAMER: OK. If the Federal Reserve takes rates down, could you explain to people why, because...(unintelligible)...it doesn't matter what the Fed does. What does a rate cut mean to the net interest margin, to your profit margin at Wachovia?
Mr. STEEL: Jim, it's quite positive. And it also--in this mortgage portfolio, it basically makes them affordable so that people can stay in those homes and stay current in their mortgages. That's part of the strategy.
CRAMER: Wachovia has a reputation for good service and has a reputation, and I'm not blowing smoke, I'm looking at the positive growth in this environment.
Mr. STEEL: Sure.
CRAMER: Tell people why deposits matter and now Lehman didn't have deposits, nd AIG may have had deposits, but you have a core asset.
Mr. STEEL: Jim, there's a distinction that is with a difference between depository institutions and financial institutions that are nondepository institutions. We take deposits. We have $300 billion of deposits to fund approximately $500 billion of loans. These deposits we take very seriously. We have 5,000 different financial services offices where we work with consumers, develop them and basically do our very best to give the best service possible so that--so that people--customers will come in and trust us with their deposits. It's a critical part of our business model.
CRAMER: Bob, how can we determine--you've got a lot of different--what I think we, in retrospect, are kinds of loans we don't really like, where you don't have to pay a lot of money that kind of gave your old bank, before you got there, gave people a lot of options. The people who selected options where they don't have to put up much money at all, are those the loans that are going bad, 40, 50, is it 60 percent of those loans? Is it from 2005 or 2006, are they going? Give us a sense of how many bad loans there really are of the three hundred and sixty some thousand?
Mr. STEEL: Well, let's look at it this way, Jim. First of all, let's recognize that Wachovia has a loan portfolio of about $500 billion. A hundred and twenty-five billion are the option adjustable rate mortgages that came from Golden West.
CRAMER: Bob, that's a lot.
Mr. STEEL: It is. And that's why we're focused on it. And as you suggested, we've taken it out of the portfolio and have it in a separate position to focus on with the right people and the right tools. We should be the best person at the world at understanding this type of asset and basically doing the very best to extract the value of that can be extracted. Now, so far, things are going well, and we're also doing what we can to make a group of these loans adjustable for FHA or conforming status. And so we can choose to take write-offs, we can choose to give people relief on principal. We have lots of flexibility to figure out how to do this. If we just owned securities, we would have two choices: hold or sell. We have lots of choices. So, basically, we're going to spend a lot of time. But let me just focus on the rest of the portfolio.
Mr. STEEL: OK? We have $150 billion of consumer loans. Roughly a third are legacy Wachovia mortgages. They're performing great. They're to guys like you and me that walk into branches that we know. The second group, Jim, is second lien, where our business is performing better than anybody else's.
Mr. STEEL: Yes.
CRAMER: These home equity loans?
Mr. STEEL: Yes. Whether there are people--again, people that came into the branches and know us well. And the last is our auto book, which is performing very well. That's 90 percent of our consumer loans, which are 150 billion. That leads us to a little over 200 billion of commercial loans.
CRAMER: Right. Now, that's supposed to be the next leg. Now, when are...
Mr. STEEL: Let me explain to you. OK. We have 40 of that 215 that you should ask me about. Of that 40, 40 is real estate. Of the 40 real estate, 40 billion, 30 billion are income producing, which are doing fine.
Mr. STEEL: And 10 billion is residential related, and they're problematic. Of that 10 billion, 5 billion is real estate, raw land, and the rest are condominium types. And those are quite challenging. But think of what I just did. I just walked you through the portfolio. Ten billion out of over 500 billion are the problematic aspects. So if you look at the 150 billion of consumer, if you look at 216 of commercial X, the unattractive real estate, we have a lot of very good loans that are doing well, and we're going to focus like crazy, as I said, on the $125 billion in Golden West.
CRAMER: Now, one of the things that--you ran Goldman Sachs equities. I have been adamant that the combination of no uptick plus no having to go to stock loan has created an environment where a group of hedge funds could knock down your stock. I am not a conspiratorial guy, but I was a hedge fund manager. That makes your job much more difficult. Should there be any sort of quick regulatory relief from the SEC that would make life easier to be able to make your bank much stronger?
Mr. STEEL: Well, I don't think it's about my bank.
CRAMER: Oh, OK. The industry.
Mr. STEEL: It's about what sets the fair playing field for all investors.
Mr. STEEL: And I think that my understanding is the chairman of the SEC has spoken today and said this is something he's going to re-evaluate. You know, they did that earlier this summer.
Mr. STEEL: And my impression is that's on its way back. But I don't know any more than you. That's what I've read in the headlines today.
CRAMER: Bob, the speed with which Mellon went into good bank/bad bank, removed a lot of people, and cut expenses was electric and dramatic. Are you on--are you on a similar aggressive timetable to get this done?
Mr. STEEL: Jim, let me just tell you. We cut the dividend within two weeks.
Mr. STEEL: Basically, that's $4 billion between now and the end of next year. We've said that we're going to reduce the balance sheet by at least $20 billion. We're almost done already. And we've also said that we're going to basically take a billion and a half out of expenses. That's 10,000 positions that--of people that will be leaving Wachovia. Eighty-six percent of those people have already been identified and notified.
CRAMER: John--look, if John Thain came in and said, look, he would fix Merrill Lynch and he would get it right, he did a lot of things right, in the end, he still--now you say maximize shareholder value because the stock was at 17, but he did have to sell. Is the goal here to get it so that your bank is ready to be sold to a foreign bank, to someone else?
Mr. STEEL: Jim, we have a great future as an independent company, but we're a public company. So we're going to do what's right for shareholders, I can promise you that. But we're also focused on the very exciting prospects when we get things right going forward. I didn't have time today to talk about the good things going on at Wachovia.
CRAMER: What you're saying--go ahead, because look, I've monopolized the view, and you're--I know you too well to not give you a chance to be able to tell me the things that--I've hit every negative. Hit me some positives.
Mr. STEEL: No. The infomercial's simple, Jim.
Mr. STEEL: It's basically, you said it. It's customer service.
Mr. STEEL: It's whether you look at it in the retail bank, the commercial bank, it's triple A any way you slice it. We basically have--you know, Ken Lewis today expressed a point of view about business model.
Mr. STEEL: He talked about how attractive the independent financial adviser model is. We've got it. We have 14,000 also. And, basically, we can tell you it is a good business. And Bank of America now has come in and followed us, and we think it's a good business to have.
CRAMER: All right.
Mr. STEEL: And so--and we're way ahead of scale on the integration of Wachovia Securities and A.G. Edwards. So any way you slice it, there are lots of good things going on, customers are pleased, and we're focused on delivering on that side, in addition to the balance sheet issues and the challenge in loan portfolios.
CRAMER: One last question. House price depreciation. Given the speed with which it's occurring, any chance you think we could get a bottom late next year?
Mr. STEEL: Jim, that's what most of the people think. When you speak to John Silvia, who you've heard here...
Mr. STEEL: ...his expectation will be late next year, early the following.
Mr. STEEL: It's in the process. There are a few anecdotal examples of things getting better. I'd be pretty cautious about that. I'd like to be more positive, but I think we should just wait and see and see how things work. We've got a lot of ability to apply the right energy to our portfolio to make it the best it can be.
CRAMER: Fair enough. Bob Steel, president and CEO of Wachovia Bank. Best of luck to you, sir.
Mr. STEEL: Thank you.
CRAMER: It does matter how you do. Thank you so much.
Mr. STEEL: Thank you.
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