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FIRST ON CNBC: CNBC INTERVIEW: CNBC'S "SQUAWK BOX" INTERVIEWS SHEILA BAIR, FDIC CHAIR, TODAY

JOE KERNEN: JOINING US FIRST ON "SQUAWK" THIS MORNING IS SHEILA BAIR, FDIC CHAIRMAN. IT'S GREAT TO SEE YOU.

SHEILA BAIR: GOOD MORNING. NICE TO BE HERE.

CAMDEN FINE: GOOD MORNING, SHEILA.

KERNEN: AND CAM FINE IS HERE.

BAIR: HELLO, CAM.

KERNEN: I WAS AFRAID TO CALL YOU CHAIR BAIR. FOR SOME REASON WHEN YOU USED TO BE IN HERE AS OUR GUEST HOST -- YOU'VE COME A LONG WAY. I'M NOT SAYING IT'S BECAUSE OF "SQUAWK BOX" AND WE MADE YOU OR ANYTHING, BUT NOW I'M AFRAID TO CALL YOU THAT SO I'M GOING TO CALL YOU, I GUESS, MS. BAIR OR -- CHAIRMAN. CHAIRMAN BAIR. YOU WERE INVOLVED, OBVIOUSLY, IN TRYING TO DECIDE HOW TO APPROACH THIS WHOLE RESET ON OUR REGULATIONS. IS THIS A GOOD ONE N YOUR VIEW, MS. BAIR?

BAIR: WELL, I THINK IT'S AN OPENING TO THE PROCESS. IT'S A VERY GOOD OPENING. AND I REALLY COMMEND THE PRESIDENT FOR GETTING PERSONALLY INVOLVED IN THIS AND TAKING LEADERSHIP AND PUTTING HIS OWN CONSIDERABLE INFLUENCE BEHIND THE EFFORT. THERE ARE A LOT OF COMPETING VIEWS ON HOW THIS SHOULD BE DONE. WE'RE STILL ANALYZING THE WHITE PAPER. BUT WANT TO WORK WITH THE ADMINISTRATION AND CONGRESS CONSTRUCTIVELY ON THIS. I THINK THERE IS A NEED FOR REFORM SO WE NEED TO MOVE FORWARD IN A CONSTRUCTIVE WAY.

KERNEN: IF YOU COULD CHERRY-PICK THE THINGS THAT ABSOLUTELY NEED TO BE DONE, IS THE SYSTEMATIC ISSUE THE MOST IMPORTANT?

BAIR: ENDING THE TOO BIG TO FAIL IS THE MOST IMPORTANT. THE BEST WAY IS TO HAVE A RESOLUTION THAT WORKS, AND WORKS FOR VERY LARGE INSTITUTIONS, THAT ALLOWS THEM TO FAIL AND DOES IMPOSE MARKET DISCIPLINE ON THOSE MARKET PARTICIPANTS WHO MAY HAVE INVESTED WITHOUT DOING DUE DILIGENCE THEY SHOULD HAVE DONE. THIS IS THE PROCESS WE HAVE FOR BANKS RIGHT NOW BUT IT NEEDS TO BE DONE FOR THE VERY LARGE FINANCIAL ORGANIZATIONS. THAT IS A KEY PART OF THE WHITE PAPER. THAT'S A CENTRAL FOCUS OF OURS.

KERNEN: WELL, GO AHEAD, CAM.

FINE: I WAS GOING TO ASK, CHAIRMAN BAIR, DO YOU THINK THAT THE TREASURY PROPOSAL WHERE IT TALKS ABOUT THE FINANCIAL SERVICES OVERSIGHT COUNCIL IT CREATED, DOES THAT COUNCIL, AS IT'S PROPOSED, HAVE ENOUGH TEETH? THAT'S -- THAT'S A CONCERN THAT I HAVE.

BAIR: YEAH.

FINE: SHOULD IT NOT BE GIVEN MORE ROBUST POWER?

BAIR: WELL, THE GOOD NEWS IS IT'S IN THERE. SO I THINK THERE IS A GOOD DIALOGUE ON POLICY GROUNDS THAT NEEDS TO OCCUR ABOUT WHAT THE APPROPRIATE ROLE OF THE COUNCIL IS, VIS-A-VIS THE FED, WHAT TYPES OF POWERS THE COUNCIL SHOULD HAVE, VIS-A-VIS THE FED. WE OBVIOUSLY WOULD LIKE A SEAT AT THE TABLE AND DECISION-MAKING, THE REAL DECISION MAKING ON SYSTEMATIC RISK, PARTICULARLY ON CAPITAL STANDARDS AND LEVERAGE CONSTRAINTS. IF YOU INCLUDE THE ADDITIONAL $250,000 BUMP UP ON THE DEPOSIT INSURANCE LIMIT, AS WELL AS OUR TRANSACTION ACCOUNTED GUARANTEE, WE'RE GUARANTEEING OVER $6 TRILLION IN DEPOSITS RIGHT NOW. WE HAVE. THE FDIC HAS TREMENDOUS EXPOSURE TO THE SYSTEM SO WE WOULD LIKE A REAL SAY ON SYSTEMATIC RISK ISSUES.

KERNEN: THE FED IS -- I DON'T KNOW. I THINK SOME OF US FEEL THEY SAVED US, TO SOME EXTENT, THEREFORE, THEY'RE IN VOGUE, SO WE'RE WILLING TO GIVE THEM THE BENEFIT OF THE DOUBT IN BECOMING MORE POWERFUL, I THINK. BUT IS IT A GOOD IDEA? I MEAN, MONETARY POLICY AND MONITORING SYSTEMATIC RISKS, THEY DON'T SEEM LIKE SAME THING AT ALL.

BAIR: WELL, THOSE ARE DIFFERENT FUNCTIONS. MOST OF THE DEVELOPED COUNTRIES HAVE SEPARATED THOSE FUNCTIONS. SO I THINK THERE'S LEGITIMATE POLICY ISSUE ABOUT WHAT YOU WANT THE APPROPRIATE SEPARATION OF POWER, THE CHECKS AND BALANCES TO BE, WHERE YOU WANT TO INVEST THIS AUTHORITY, I THINK THAT'S SOMETHING CONGRESS WILL BE LOOKING AT. CLEARLY, I THINK PARTICULARLY IF YOU HAVE AN ERA, AS WE DID, OF GENEROUS MONETARY POLICY, LOW INTEREST RATES, THAT YOU NEED A VERY ROBUST REGULATORY AND SUPERVISORY SYSTEM BECAUSE THIS EASY CREDIT BY ITSELF WILL PUT DOWN THE PRESSURE ON LENDING PRACTICES. I THINK THIS IS A LEGITIMATE ISSUE THAT NEEDS TO BE LOOKED AT BY CONGRESS. WE'RE HAPPY TO BE PART OF THE DEBATE. I DO THINK ADDING AN ADDITIONAL CHECK AND BALANCE WITH THE SYSTEMATIC RISK COUNCIL THAT HAS REAL TEETH COULD BE PART OF THE SOLUTION.

KERNEN: IF YOU'RE CYNICAL YOU COULD SAY, IT SHOULD BE THE FED SINCE THEY CREATED THE TOO BIG TO FAIL BANKS, RIGHT? THEY'RE THE EXPERT ON THE WHOLE SUBJECT.

BAIR: RIGHT.

KERNEN: I MEAN, WHO ELSE --

FINE: GREENSPAN NEVER SAW A BANK BIG ENOUGH HE DIDN'T LIKE, LET ME TELL YOU.

BAIR: I DO THINK -- IF I DO SAY SO OURSELVES ON BEHALF OF THE FDIC, I THINK WE PLAYED A ROLE, TOO IN THE SYSTEM WITH OUR VERY STRONG BRAND AND INSURANCE GUARANTEE AND DEBT GUARANTEE PROGRAM WHICH I THINK REALLY HELPED STABILIZE LIQUIDITY WHICH WAS IN QUITE A BAD SITUATION LAST FALL. WE HAVE EXPOSURE. WE WOULD LIKE A SEAT AT THE TABLE. I THINK THIS IS AN INSTITUTIONAL ISSUE. NOT A TURF ISSUE OR PERSONALITY ISSUE BUT WE'RE HOPING CONGRESS AND THE WHITE HOUSE AND THE TREASURY WILL CONTINUE DISCUSSIONS TO GET THE BALANCE RIGHT.

BECKY QUICK: CHAIRMAN BAIR, OBVIOUSLY THE TOO BIG TO FAIL IS SOMETHING WE HAVE TO WATCH AS WE HEAD INTO THE FUTURE, BUT WHAT ABOUT TRYING TO UNWIND THE BANKS THAT ARE SO LARGE AT THIS POINT? ARE THE HEADS OF CITIGROUP AND/OR BANK OF AMERICA ACTING QUICKLY ENOUGH, IN YOUR OPINION, TO WIND THESE BANKS DOWN?

BAIR: I NEVER COMMENT, AS YOU KNOW, ON OPEN AND OPERATING INSTITUTIONS. AND I THINK THIS REALLY IS NOT AN INSTITUTION-SPECIFIC DISCUSSION AT ALL. I THINK GOING FORWARD, CLEARLY, THERE HAS BEEN MORAL HAZARD AND LACK OF MARKET DISCIPLINE FED BY THE TOO BIG TO FAIL DOCTRINE AND THIS IN TURN HAS BEEN FED BY LACK OF RESOLUTION MECHANISM THAT WORKS FOR LARGE FINANCIAL ORGANIZATIONS. THIS HAS BEEN A CENTRAL FOCUS OF OUR ISSUE. THERE'S ONLY SO MUCH YOU CAN ACCOMPLISH WITH REGULATION AND YOU NEED GOOD MARKET DISCIPLINE IN THERE AS WELL. YOU NEED INVESTORS AND CREDITORS LOOKING AT BANK BALANCE SHEETS, LOOKING AT BANK MANAGEMENT, MAKING THEIR OWN DECISIONS, DOING THEIR OWN DUE DILIGENCE, IS THIS A GOOD INVESTMENT, IS THIS A GOOD PLACE TO EXTEND CREDIT? REGULATORS NEED THAT ADDED MARKET DISCIPLINE AND TO THE EXTENT THERE'S AN IMPLIED GOVERNMENT BACKSTOP BEHIND LARGE BANKING ORGANIZATIONS, OR OTHER FINANCIAL ORGANIZATIONS, IT DILUTES THE MARKET DISCIPLINE WHICH WE NEED SO GETTING THAT BACK IS CRUCIAL.

QUICK: WITHOUT COMMENTING ON ANY SPECIFIC BANKS THE IDEA OF TOO BIG TO FAIL IS THIS SOMETHING WE CAN ONLY PREVENT IN THE FUTURE OR IS THERE A WAY TO GO GO BACK AND TRY TO DOWNSIZE SOME OF THOSE THAT ALREADY EXIST?

BAIR: WELL, WE HAVE SUGGESTED THAT IF YOU HAVE A RESOLUTION MECHANISM FOR VERY LARGE FINANCIAL ORGANIZATIONS, INCLUDING BANK HOLDING COMPANIES, THAT YOU ALSO -- CONGRESS SHOULD CONSIDER CREATING A FUND, JUST AS WE DO WITH THE DEPOSIT INSURANCE FUND. THIS SHOULD BE SEPARATE FOR THE HOLDING COMPANIES, BUT HAVE I FUND THAT COULD BE SET UP THAT WOULD HAVE RISK-BASED ASSESSMENTS SO IF AN INSTITUTION IS EXTREMELY LARGE OR INTERCONNECTED OR IMPOSES A RISK TO THE SYSTEM, THEY WOULD PAY A HIGHER ASSESSMENT. FOR INSTANCE IF THEY DID PROVIDE PROPRIETARY TRADING, HIGHER RISK, THEY WOULD PAY A HIGHER ASSESSMENT, OTC DERIVATIVES, OFF-BALANCE SHEET. ACTIVITIES, THEY WOULD PAY A HIGHER ASSESSMENT. SO THROUGH THAT TYPE OF MECHANISM YOU CAN CREATE ECONOMIC DISINCENTIVES TO LARGE GROWTH AND INTERCONNECTIVENESS, WHICH CAN PUT US ALL AT RISK.

KERNEN: CAN YOU JUST COMMENT, CHAIRMAN BAIR, ON THE -- WHY DOES IT HAPPEN THAT DIFFERENT REGULATORY BODIES HAVE THESE TURF BATTLES? AND YOU'VE BEEN -- YOU READ THE NEWSPAPERS, TOO. IS IT THE EGOS OF THE PEOPLE RUNNING THEM OR IS IT JUST TRYING TO MAKE YOUR OWN BODY AS EFFECTIVE AS IT CAN BE IN ADDRESSING THE CRISIS?

BAIR: WELL, I THINK IT'S REALLY NOT TURF. I THINK THEY ARE LEGITIMATE POLICY ISSUES HERE. AND TO CHARACTERIZE IT AS TURF, I THINK, DOES NOT DO JUSTICE TO SOME VERY FUNDAMENTAL ISSUES REGARDING HOW REGULATION AND JURISDICTION SHOULD BE STRUCTURED, WHAT THE CHECKS AND BALANCES SHOULD BE. SO I THINK THESE ARE VERY PROFOUND ISSUES. AND FOR MY AGENCY, AGAIN, WE HAVE TREMENDOUS EXPOSURE HERE. WE FEEL LIKE IT DOES BUILD IN A LOT OF CONSERVATIVISM WITH US IN TERMS OF HIGH CAPITAL STANDARDS, STRONG CONSTRAINTS ON LEVERAGE. WE THINK WE HAVE A GOOD PERSPECTIVE WHICH I HOPE CAN BE ADDED TO WHATEVER THE DECISION-MAKING AUTHORITY WILL BE ON SYSTEMATIC RISK.

KERNEN: SO BARNEY FRANK SAYS WE CAN'T CONSOLIDATE EVERYTHING NOW. WE HAD SENATOR SCHUMER ON YESTERDAY SAYING LET'S NOT LOSE THE POLITICAL WILL TO DO THIS RIGHT AND CONSOLIDATE IT. WHAT SHOULD WE DO?

BAIR: WELL, I'M A BIT CONFUSED ON THIS. TRUE CONSOLIDATION WOULD BE THAT YOU WOULD REMOVE SUPERVISORY AUTHORITY FROM EVERYONE, INCLUDING THE FED, AND PUTTING IN A NEW AGENCY. THAT'S THE FSA MODEL, AND YOU WOULD FOLD IN THE SEC AND THE CFTC AND THAT'S TRUE REGULATORY CONSOLIDATION. I'VE BEEN PERPLEXED THAT SOMEHOW WE FOCUSED ON REGULATION OF STATE CHARTER BANKS SEPARATE FROM THE REGULATION OF NATIONALLY CHARTER BANKS. WHICH IS SOMETHING WE NEED TO DO TO CONSOLIDATE REGULATORY CONSOLIDATION. THE ABILITY TO CHOOSE WE'VE HAD DUAL BANKING FOR A COUPLE HUNDRED YEARS IN THIS COUNTRY. THE ABILITY TO CHOOSE BETWEEN STATE AND FEDERAL CHARTER. I DON'T SEE AS CONTRIBUTING TO THIS IN ANY SIGNIFICANT WAY AT ALL. AND WE DO THINK IN THE INTEGRITY OF THE STATE CHARTER BANKS, ESPECIALLY FOR SMALL INSTITUTIONS, IT'S IMPORTANT TO MAINTAIN AND I QUESTION IF YOU CAN DO IT IF YOU PUT EVERYBODY UNDER A SINGLE FEDERAL REGULATOR.

KERNEN: WE DON'T LIKE CHANGE HERE. NO PART OF MY LIFE DO I LIKE CHANGE. DO YOU HAVE ANY FEELING YOU'RE GOING TO BE ABLE TO STAY IN A DEMOCRATIC ADMINISTRATION? WE TRIED TO GET AN ANSWER ABOUT BERNANKE, AS HIGHLY AS THE ADMINISTRATION SPEAKS ABOUT THE FED CHAIRMAN, I CAN'T GET ANY INDICATION ONE WAY OR ANOTHER THAT HE'LL BE REAPPOINTED. DO YOU HAVE ANY INDICATION ABOUT HOW LONG YOU'LL BE AT THE FDIC?

BAIR: WELL, I HAVE A FIVE-YEAR TERM THAT GOES THROUGH 2011. THAT'S MY BENCHMARK. I'M PROUD OF THE JOB WE'VE DONE AT THE FDIC. I'M SO PROUD OF THE AGENCY AND THE 24/7 EFFORT THEY'VE PUT INTO THIS WHICH HAS HAD A GOOD STABILIZING IMPACT ON THE ECONOMY. NONETHELESS, IT HAS BEEN A TAXING JOB. I DON'T HAVE AS MUCH WITH MY FAMILY SO AT END OF MY FIVE-YEAR TERM I'M LOOKING FORWARD TO GETTING BACK TO MORE SANE HOURS AND MORE TIME WITH MY FAMILY.

KERNEN: DO THE REGULATIONS THAT ARE BEING PROPOSED, WE KEEP COMING BACK TO WHETHER WE'RE CLOSING THE BARN DOOR AFTER THE ANIMALS ARE ALREADY GONE. CAN WE DO IT IN A WAY TO PREVENT FUTURE PROBLEMS, OR ARE THESE GUYS -- YOU KNOW, INNOVATION ISN'T JUST FINANCIAL PRODUCTS. IT'S I THINK IT'S GETTING AROUND THE LAWS, HALF THE INNOVATION THAT SMART PEOPLE COME UP WITH.

BAIR: WELL, THAT'S RIGHT. AND I THINK YOU ALWAYS HAVE THE POTENTIAL FOR ARBITRAGE. THAT DID FEED INTO THIS, WHICH, IF WE THINK HAVING A COUNCIL WITH EVERYBODY AT THE TABLE AND CONGRESS TELLING US ALL, WE HAVE OWNERSHIP OF IT CAN ADDRESS THAT A LOT. YOU WILL ALWAYS HAVE CYCLES. HOPEFULLY NEVER AGAIN THIS IS SEVERE. THERE WERE MANY FAILURES THAT CAN AND SHOULD BE CORRECTED. BUT YOU'LL ALWAYS HAVE CYCLES AND AGAIN THIS IS ANOTHER REASON WE THINK HAVING A CLEAN-UP MECHANISM THAT WORKS, A RESOLUTION MECHANISM THAT WORKS FOR THESE VERY LARGE FINANCIAL ORGANIZATIONS, SHOULD BE A CENTERPIECE OF WHAT CONGRESS IS LOOKING AT.

KERNEN: ALL RIGHT. I FEEL LIKE WE BONDED AGAIN. SO I'M GOING TO SAY CHAIR BAIR, THANK YOU FOR YOUR EXTENDED TIME THIS MORNING.

BAIR: THANK YOU. HOPE TO SEE YOU AGAIN.

FINE: CHAIRMAN, THANK YOU.





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