Following is the unofficial transcript of a CNBC interview with FDIC Chairman Sheila Bair today, Tuesday, September 15th. A portion of the interview aired during CNBC's "Power Lunch" (12-2PM ET) and the remainder of the interview aired during CNBC's "Closing Bell with Maria Bartiromo" at 4PM ET.

All references must be sourced to CNBC.



MARIA BARTIROMO: Good morning, Bill. Thank you very much. We are here at the-- most powerful women in business conference. And I am joined by-- one of them, Sheila Bair. Sheila, it's really nice to have you on the program--

SHEILA BAIR: Happy to be here.

MARIA BARTIROMO: --today. So, here we are, one year away from that Lehman collapse. Do you feel that the environment feels very different? How would you characterize things today?

SHEILA BAIR: It is-- it's much more stable. Liquidity is stable, insured deposits are stable. We still have some challenges to work through in the banking sector, but we have time and can do that in a methodical way.

MARIA BARTIROMO: You know, it's pretty extraordinary that the FDIC this year alone has-- shut down-- or-- taken over 92 banks.


MARIA BARTIROMO: And you really haven't seen-- such-- talk or fanfare about it. You're just quietly doing your thing.

SHEILA BAIR: Right, yeah.

MARIA BARTIROMO: How many more bank failures are you expecting?

SHEILA BAIR: Well, we don't make-- public projections. But I-- it's gonna be continuing to go at a pretty good clip this year and next. You know, banks are-- a lagging indicator of economic-- recovery. So, as the economy recovers, it'll slow down, but banks will lag that-- somewhat. But, you know, that's what we're all about. We're about-- protecting insurer depositors.

SHEILA BAIR: The small minority, when they do sale, it's-- really a non-event for insured depositors. And I think that's important for people to understand.

MARIA BARTIROMO: That people are also wondering and trying to understand how is it possible that the FDIC takes over all of these troubled-- assets? Let me ask you about-- the lost shares deals and how they work really. So-- a bank is teetering. The FDIC takes it over, absorbs the losses of the failed banks, but also exposes the FDIC and taxpayers to those losses, right? I mean, you-- you're acquiring, what, 80 percent-- covering 80 percent of future losses. And now that reserve fund is down to $10.4 billion. Is that right?

SHEILA BAIR: Well-- a couple of things. The-- actually our total reserves are about $42 billion. So, we reserve $32 billion to cover projected losses over the next 12 months. And after that, we have $10.4 left. So-- so, it's over $42 billion. The total--

SHEILA BAIR: --saved us money. Where they've saved us about $11 billion. Since over the past-- year. I think what people need to understand is we already have the exposure. We must covered those insured deposits. That's what we're all about. And then we-- we-- sell off the bank and the bank's assets and whatever franchise value it has to recover some of our costs. And the shortfall is it's a loss that we have to absorb.

If we sold the assets now with that loss share into these various still-- somewhat illiquid markets and distressed markets, we would take very, very heavy discounts. So, by agreeing to lost share-- we are able to-- to get the intrinsic value of the loans and-- we pay only for actual credit losses as opposed to the heavy discount you have for market uncertainty if you just try to-- to sell them outright for cash. We only pay for the actual credit losses. We pay them out over a period of time, so it helps preserve our liquidity position. And-- and actually it saves us money. It doesn't cost us money.

MARIA BARTIROMO: Do-- do you feel that at some point you'll have to go to Treasury and Congress to get more money?

SHEILA BAIR: Yeah. Well, not Congress, no. We have-- a line of credit-- $100 billion in place already. Up to $500 billion with the approval of the-- the Fed and the Treasury. I don't know if we'll have to do that. I never say never. But-- we have a variety of tools-- that are available to us. And the board is actively considering our different options now. Again, we have-- very wide ability to assess the industry. We can actual borrow from the industry, too. We have the authority to do that. So, there are a number of tools we have-- and we'll be-- dealing with that probably towards the end of the month.

MARIA BARTIROMO: But if-- if we keep at this pace, I mean, 92 banks already, and you're saying that we are going to see further banks fail, isn't it likely that you'll go to Treasury to get more money?

SHEILA BAIR: Well, I think-- really there are-- our need to borrow from Treasury is really driven by our cash position, where our liquidity is. We can actually have a negative fund balance and still have enough cash. (CLEARS THROAT) Because we're doing these lost shares, we're paying-- paying for actual losses over a period of time. So, it's really driven by our cash position.

And as we're analyzing now and-- there are different (UNINTEL), there are special assessments-- there are prepaid assessments, there's industry borrowing, there's Treasury borrowing. There's a lot of different tools we can use to bring in more cash up front. So, again-- we-- still have a fairly strong liquidity position as of the end of the second quarter. And we'll be deciding towards the end of the third quarter what we're going to-- thank you. What approach we're gonna use, or some combination of approaches perhaps.

MARIA BARTIROMO: Let me-- let me ask you about the-- too big to fail issue. Because, of course, this has become somewhat of a lightning rod, too big to fail. But most people would say right now that given the fact that the government has supported some of the largest banks, we're still at that point where we have institutions out there that are, in fact, too big to fail. Would you agree with that, number one?

SHEILA BAIR: Well, I-- I think that is (NOISE) an unfortunate outcome. I think we did what we had to do. I support all of the stabilization measures. But it was at the cost of making explicit-- the too big to fail doctrine which was probably implicit-- going into this crisis. And I think frankly it helped-- helped feed the crisis, you know?

As investors and creditors think the government's always gonna step in and take the downside. So, they only have upside. That fosters additional risk taking. So, we absolutely have to have an exit strategy. And most importantly, I think of all the reforms that Congress is considering, a resolution mechanism-- akin to what the FDIC has for insured banks that would apply to any large financial intermediaries, so that they can be closed, and shareholders and creditors will take losses if the government has to step in.

MARIA BARTIROMO: So, how do you eliminate the too big to fail? Is it? I mean, can we eliminate this?

SHEILA BAIR: I think with an effective resolution mechanism you can. A bankruptcy does not work. That's what Lehman Brothers showed. They can fin-- the nature of financial intermediaries, you have to have a government role in the resolution of these very large institutions. But yes, our mechanism works quite well. And we think it can be expanded for any larger financial intermediary.

MARIA BARTIROMO: Let me ask you about the-- the recent changes in terms of the rules for private equity. Now, we know that the banking system needs new capital. We know that private equity firms are out there, at the ready, wanting to invest. You-- opened up an opportunity for some of these private equity firms to invest in banks, but a lot of P.E. guys are saying, "Look, it's not enough. We want to come in and buy more of these banks." What's the problem? Why not just have private equity firms-- invest-- their money in the bank? Since we need it anyway?

SHEILA BAIR: Well, we do-- we do want them in. We do-- recognize the need for additional capital in the banking system. On the other hand, they pose some additional risks to us that we would not see with-- a traditional strategic bank buyer. A healthy bank buyer-- will have a longstanding supervisory history. (UNINTEL) will have a supervisory-- knowledge of that entity. And also have a balance sheet to back-- the operation for the failed bank that they acquire.

With the-- the private equity funds, they don't have a regulatory history. They're-- they are not-- historically backed buyers. And they also invest (UNINTEL) holding companies. So, they'll only put in a limited amount of capital into that shell (?). And that's what will have to be used as a source of strength for the bank that they're acquiring. So, we do think it's-- it's warranted to impose some additional higher capital requirements and some additional safeguards on flipping, for instance. And-- and affiliate-- lending activities. And-- you know, I think most of the P.E. funds I've heard from-- can live with our guidance. We are-- they will have to-- abide by somewhat tighter rules, but they do pose some additional risk for us.

MARIA BARTIROMO: You know, Chairman Bair, I want to ask you about this position that you find yourself in. And how tough is it to ultimately balance-- overseeing the banks, ensuring that they have the proper capital, but at the same time looking at that reserve fund, needing to pump that up, do you need to increase premiums for the banks which ultimately will hit their earnings? We're gonna get to that on the closing bell-- in the meantime-- for-- (UNINTEL) lunch we're gonna send it back to the studio. We thank you so much for joining us today.

SHEILA BAIR: Sure. Happy to be here.

MARIA BARTIROMO: Chairman Sheila Bair. I'll send it back to you, Bill.



MARIA BARTIROMO: Chairman Bair, how tough is it to balance what you're-- what you're balancing right now? You're overseeing the banks, ensuring that the capital levels are where they need to be, but at the same time, you're looking at the reserve fund obviously paying out to close down some of these banks, take on, absorb the losses, and ultimately, you may be having to increase premiums for the banks. I mean-- and-- and that hits earnings and puts them in a weaker position.

SHEILA BAIR: Right. It does. Well, we may-- or we may use a combination-- of tools. But, you know, but-- deposit insurance is the cost of doing business like everything else. And so that has to be factored in-- to the equation. And it is a legitimate expense, a very valuable-- thing that banks have. And they have a way to pay it forward and should pay it forward.

We don't-- we are aware of the (UNINTEL) cyclic effects, obviously, of raising premiums too much. Which is why we're-- we're trying to look at some other options, as well. But-- you know, I-- I do think that-- it is an expense. It is cost of doing business. It's a valuable-- savings deposit insurance. And so, they-- they should be paying something for it.

MARIA BARTIROMO: Oh, are we-- is it fair to say that we probably will see premiums go higher?

SHEILA BAIR: The timing of that, I-- I don't know. But I think obviously-- we are-- gonna continue to have-- bank closings this year and next. And-- this will-- create additional losses for us. Which we will have to-- figure out how to pay for it in the timing for paying for it. So, we will try to-- minimize-- the impact on bank and bank earnings. On the other hand-- I think if we borrow from treasury, there are some important tradeoffs there. I think it-- they'll be subsidized-- funding by the taxpayer. It will be repaid.

We did it once before in 1991. Actually, the-- the fund balance went negative for about six quarters. And we borrowed from treasury and-- and paid it back in three years. So, it's happened before. And it was not a big event when it did happen. But I don't think there's some tradeoffs in terms of our autonomy and-- and pride in the fact that we-- we count on the industry resources to pay for deposit insurance.

MARIA BARTIROMO: In terms of financial reform, I mean, obviously, you've got your hands full. You're examining banks. You're closing banks. What is a realistic idea of what to expect in terms of this financial, regulatory reform? What are you counting on achieving, in what time frame?

SHEILA BAIR: Right. Well, we really strongly support a new resolution mechanism that will apply for very large financial intermediaries (?). And not just banks within a bank holding company, but the entire holding company, which is really you need a legal structure to be able to resolve the entire entity-- when it becomes nonviable. We think you have to have that (UNINTEL) too big to fail. We have to get market discipline back into these markets. It is not a good thing to have investors and-- and shareholders-- investors and creditors, excuse me, making investment and credit decisions based on the assumption the government's going to bail them out if-- you know, if they take-- bad bets and lose.

And unfortunately, the stabil-- the stabiliz-- lizing mechanisms that we've used, which I support, that has been-- an unfortunate impact is that-- it's reinforced too big too fail. So, we need to end it with a resolution mechanism that works just as the way smaller banks are closed, the larger institutions should be closed, as well.

MARIA BARTIROMO: So, how would that look? You-- you wrote an op-ed in the New York Times recently, talking about the idea of one regulator overseeing the entire industry is probably not the way to go.

SHEILA BAIR: That's not a good idea. I think that's right. And-- and we would think-- the resolution authority should be separate from whoever the systemic regulator is. We suggested a council of regulators-- that could oversee the entire-- system, both in-- from an institutional perspective, as well as a market perspective.

I don't think-- bigness has dangers. Well, there's an institution or government agency consolidation of-- of too much power, all the power in a single entity-- I think has a lot of risk. Those-- single regulator models in Europe did not work well. And-- I think, you know, you're making a huge bet if that single regulator is right. Or maybe (UNINTEL) more efficiently implement their decision, but if they're wrong, the entire system is-- is put at risk.

You know, the old federal home loan bank ward (?) was a single regulator, if you'll recall. They did the deposit insurance for the S & L's. They did the regulation for the holding company and for the-- the depository institutions. That was obviously a disaster. So, I think some-- some separation of powers, some checks and balances-- works well. And, you know, we do make decisions quickly when we need to. Witness-- a year ago-- last fall, when we were dealing with the aftermath of the Lehman Brothers bankruptcy. A lot of us worked together very quickly and very efficiently to make some key decisions to stabilize the system.

MARIA BARTIROMO: The other issue is, you know, when you look at-- from an investment standpoint. Why would an investor invest in a bank that's a smaller bank that he or she doesn't believe has the support of the government.

SHEILA BAIR: That's right.

MARIA BARTIROMO: They're gonna be investing, obviously, in a large bank.

SHEILA BAIR: Well, that's exactly right. And the cost of (UNINTEL) between large and small banks has been-- has been-- increasing. And that's unfortunate. And-- and that's wrong. And we don't-- we don't want more consolidation of the banking industry. If anything, we want less. And we need to preserve those community banks, especially for small business lending. That's so-- you know, important to those local communities. So, this is a very-- major concern of the FDIC. And again, why resolution authority's at the top of our list of reforms we'd like to see Congress implement.

MARIA BARTIROMO: Is there a turf war going on? People don't want to lose their own power. The Fed wants it all.


MARIA BARTIROMO: The FDIC wants-- doesn't want to lose the consumer protection-- part of it.

SHEILA BAIR: Right. Yeah. Well, I think-- we support the consumer agency. We do think that it would be-- for the examination/enforcement component, we think it would be better to leverage existing examiners that are in the banks (UNINTEL) banks to keep that in place. Give this new agency backup authority for banks. But have its primary focus be on the non-bank sector. And there's a lot of our banks-- take it on the chin a lot. And-- banks and bank regulators are far from perfect.

But this crisis really got started in the non-bank sector. And there's a lot of arbitrage between the more heavilated-- heavily regulated banking system. And the unregulated or very lightly regulated-- shadow banking system. So, I think that the focus, especially on consumers, should be on that non-banking sector. You know, I worry-- the-- mortgage originations, for example. I-- you know, I see these ads already. They're coming back.

And-- whose-- and if we need a federal enforcement presence for mortgage brokers, payday lenders, check cashers, there's a whole array of financial services provided by non-banks, where there's really no-- federal-- much in the way of federal standard setting. And really nothing in-- in terms of federal enforcement. So, we think it would be better to leverage new resources on the-- the shadow sector.

MARIA BARTIROMO: This is a very important point. Where is the shadow banking sector, though, standing right now? I mean, are they active in any way. You're saying the ads--

SHEILA BAIR: Well, I think they have--

MARIA BARTIROMO: --are beginning to come back.

SHEILA BAIR: That's right. I-- I think on the mortgage origination side, I am starting to see. And then some people joke, "Well, they're doing (UNINTEL) scams now." And I-- I-- first of all, and I don't want to-- (UNINTEL) on mortgage brokers. There's some wonderful mortgage brokers out there that provide-- real service. But it is a very lightly regulated, in some states, pretty much unregulated-- service-- that's provided. And that frightens me. Because a mortgage is a huge financial commitment-- for most people. The biggest-- financial commitment they'll ever make.

We need some controls. We need some registration. We need training. We-- we need licensing, we need testing. We need oversight. And-- and we really don't have it now. So, it's my preference would be for the consumer front to focus more on that aspect. And leverage the current banking resources to enforce the rules. Again, with backup authority by the new consumer agency. If they don't feel that the banking regulators are doing our job, they can come in-- independently and take a look. But I think, you know, if we have good strong rules, our examiners will enforce those rules. They're very good at requiring-- banks to adhere to the rules.

MARIA BARTIROMO: When it-- let me ask you a questions, actually, that my colleague, Steve Leaseman (PH) asked-- the Treasury Secretary, Tim Geithner (PH), the other night. And-- and we recognize what the FDIC is doing and-- and doing it so well. In this-- tumultuous period. But, you know, Steve made an important point. He says, look, most people want to know, where's this money going? You had $700 billion in TARP money. You have $787 billion in stimulus money. And yet the money has been put to work apparently and the unemployment rate has gone from what, five percent to ten percent. And yet, we continue to expect what? More hundred-- more than 400 banks on your problem banking list? So, we're gonna see even more bank failures? Most of 'em want to know, where is my money?

SHEILA BAIR: Yeah. Well, most of that money did not go to smaller institutions. And those are the ones-- you know, that-- the-- on the-- the troubled bank list. So, I think-- you know-- the-- the smaller banks have not been the beneficiary, for the most part, of these-- these very large support programs. It has been concentrated on larger institutions.

I think some of the programs-- were designed to stabilize the system. For instance, our (UNINTEL) program was really designed to allow-- issuers of unsecured debt to be able to roll their maturing debt. So, we weren't trying-- we were trying to stabilize balance sheets. We weren't trying to really expand. We were trying to prevent a contraction-- but-- that was really the role. It-- it's harder to prove a negative-- with that type of a program.

I think-- with TARP it was-- capital it was the same problem. We-- the Treasury-- was trying to prevent-- a severe credit contraction-- resulting from the seize up of last year, through (UNINTEL) additional capital into banks. But again-- it's hard to prove a negative. I do think that-- we try to strike a good balance-- to our banks. That we want them to lend. We want prudent lending, obviously. But we want them to lend.

Another issue, though, is there was-- there was too much credit. There was some bad lending being made that should not have been made. So, there inevitably was gonna have to be-- some pullback. And, of course, the challenge is to make sure it doesn't go too far-- the other direction. In terms of the specific programs, I think, you know-- better-- auditing-- is-- is always a good thing. I think as part of reg reform, that's something Congress is considering.

Our books and records are audited by G.O. right now. We have a very large I.G. We've got about 150 people in our I.G. And they-- they continually review our programs. We-- pride ourselves in being transparent about the-- the-- the programs we have, the support programs we have. And the dollar amount and the exposure we're taking. So-- we think that is important for-- for people to understand.

But I think probably more could be done. And again, I think that's some of the reform that-- and Congress is considering-- going forward. Hopefully, we won't get into this kind of situation where these hundreds of billions of support have to be-- put into the system. But if it does happen, there need to be-- there needs to be a process in place for auditing and public exposure.

MARIA BARTIROMO: Final question here. Chairman Bair, with some of these banks-- still in bad shape. And we're expecting-- further failures. What are your expectations for 2010, 2011, 2012? When people are expecting commercial real estate to-- to weaken?

SHEILA BAIR: Right. Well, commercial real estate is a problem. It's-- it's a growing amount-- mortgages are still-- accounting for the lion's share of the losses. But the commercial real estate is catching up. And we're going to see-- more failures driven by commercial real estate. And that's going to be-- a big factor-- through 2010. But I'm-- I'm-- I'm hoping, at least.

Again-- so much of this depends on economic recovery, which is really something beyond a bank regulator's control. But assuming the economic recovery-- stays on course, I think we'll be through most of it by the end of 2010. Again, a lot of it's driven by economic conditions. And that's something that's hard to predict.

MARIA BARTIROMO: Chairman Bair, would you like to add anything else?

SHEILA BAIR: No. You've been very thorough.

MARIA BARTIROMO: Thank you so much. Chairman Sheila Bair joining us.

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