×

FIRST ON CNBC: CNBC TRANSCRIPT: FDIC CHAIRMAN SHEILA BAIR ON CNBC'S "SQUAWK BOX" TODAY, TUESDAY, OCTOBER 13TH

Sheila Bair
AP
Sheila Bair

WHEN: TODAY, TUESDAY, OCTOBER 13TH

WHERE: CNBC'S "SQUAWK BOX"

Following is the unofficial transcript of a FIRST ON CNBC interview with FDIC Chairman Sheila Bair today, Tuesday, October 13th on CNBC's "Squawk Box."

All references must be sourced to CNBC.

----------------------------------------------------------------

CAMDEN FINE: I THINK THAT IS AN ABSOLUTE WORSE CASE SCENARIO FOR THE FDIC.BECAUSE HOW THE MEDIA WOULD PORTRAY, THAT IT WOULD BE SEEN AS A BAILOUT FOR NOT ONLY THE FDIC BUT EVERY BANK IN THE UNITED STATES. WE'RE VERY PROUD OF THE FDIC BECAUSE IT'S ALWAYS BEEN BANK FUNDED. A LOT OF PEOPLE DON'T KNOW THAT ON THE STREET. BUT BANKS HAVE FUNDED THE FDIC SINCE DAY ONE, AND I THINK THEY WILL CONTINUE TO FUND THE FDIC.

KERNEN: THAT WAS CAM FINE. FIRST HE WAS TALKING ABOUT IF THE FDIC WENT TO TREASURY AND THAT WOULDN'T BE GOOD. THEN HE WAS TALKING ABOUT A LOT OF THINGS. WE'RE GOING TO TALK WITH SHEILA BAIR ABOUT ALL OF THIS, THE ROLE FDIC HAS AND THE OPTIONS IT HAS. YOU'RE GOING TO ALSO BE IN FRONT OF CONGRESS AGAIN, SHEILA BAIR. YOU'LL BE A WITNESS. THANK YOU FOR COMING ON VERY MUCH.HE SAID A COUPLE OF THINGS. THE PREPAYMENT, DIDN'T LIKE ASPECTS OF THAT, THREE YEARS BOOKING IT AS AN ASSET WHEN THEY HAVEN'T REALLY DONE IT. IS IT POSSIBLE YOU'D GO LESS THAN THREE YEARS OR IS THAT THE WAY TO DO IT?

BAIR: I THINK WE NEED THE THREE-YEAR PREPAYMENT. WE WANT TO MAKE SURE WE HAVE ENOUGH OF A CUSHION FOR LIQUIDITY NEEDS. WE NEED CASH. OUR CASH POSITION IS STRONG RIGHT NOW. NEXT YEAR IT COULD GO NEGATIVE. OBVIOUSLY WE HAVE LOTS OF AUTHORITY TO BORROW FROM TREASURY. WE WANT TO AVOID THAT.

KERNEN: LIKE BAMBOO SHOOTS IN YOUR FINGERNAILS?= IS THAT OVERSTATING IT.

BAIR: THAT MAY BE OVERSTATING IT A BIT. ALWAYS-OF- I ALWAYS SAY NEVER SAY NEVER.A LOT OF DISTRESS THE INDUSTRY FACES IS ABOUT THE ECONOMY, WHICH IS BEYOND OUR CONTROL.BASED ON OUR CURRENT PROJECTIONSI THINK WE CONTINUE TO RELY ON INDUSTRY-FUNDED RESERVES AND RESOURCES TO GET THROUGH THIS. I THINK THIS HAS ALWAYS BEEN WHO THE FDIC IS. WE ARE INDUSTRY FUNDED, DEPOSIT INSURANCE A BENEFIT THE INDUSTRY HAS PAID FOR AND SHOULD PAY FOR.I THINK THEY TAKE PRIDE IN PAYING FOR IT.EVERYONE HAS BAILOUT FATIGUE. WE WANT TO AVOID THAT. NEVER SAY NEVER. BASED ON PROJECTIONS I THINK WE CAN CONTINUE TO RELY ON THE INDUSTRY TO FUND THE FDIC.

KERNEN: WE ALL GO HOME ON FRIDAYS AND SEE THE BANKS BEING CLOSED. I'M JUST WONDERING, I DON'T KNOWIF YOU HAVE A MONITOR, ARE WE STILL ON RISING UPWARD SLOPE? WILL COMMERCIAL REAL ESTATE CAUSE THE NUMBER TO KEEP INCREASING OR ARE WE STARTING TO SEE WHERE THE NACENT ECONOMIC RECOVERY IS HELPING THE DECREASE, WHAT WE'RE LOOKING AT EVERY FRIDAY.

BAIR: WELL, BANKS ARE GENERALLY LAG ECONOMIC RECOVERY. IF WE'RE SURE THE ECONOMY IS RECOVERING, ON AN UPHILL CLIMB, BANKS WILL LAG BY A COUPLE OF QUARTERS. THAT'S HISTORICALLY BEEN THE CASE. I'D LIKE TO SEE MORE QUARTERS OF EVIDENCE WHAT THE BANKING TRENDS AND ECONOMIC TRENDS ARE. I CAN SAY MORE DEFINITIVELY WHAT WE'RE GETTING OUT OF THIS. OUR PROJECTIONS IS THAT BANK FAILURES WILL CONTINUE AT A GOOD CLIP THROUGHOUT 2010. WE'RE PREPARED FOR IT, READY FOR IT. INITIALLY WE WERE WORKING THROUGH LOANS AND HIGH-RISK INVESTMENTS WE SHOULD NOT HAVE MADE. NOW WE'RE DEAL WITH MORE TRADITIONAL CREDITS DISTRESS, LOANS THAT GOOD WHEN THEY WERE MADE AND GOING BAD NOW BECAUSE OF ECONOMIC CONDITIONS. THE RATE OF HEALING THE ECONOMY WILL DRIVE THE RATE OF THE HEALING OF THE BANKING SECTOR.

BOND: GOOD MORNING, SHEILA.KIT BOND. GOOD MORNING, SENATOR. GOOD TO TALK WITH YOU AGAIN.THANKS SO MUCH FOR BEING ON.

BAIR: SURE.

BOND: WE JUST HAD A CONVERSATION WITH CAM FINE. ONE OF THE THINGS I RAISED WITH HIM, I THOUGHT WHEN WE PASSED THE T.A.R.P. THAT THAT MONEY WAS GOING TO BE USED TO TAKE THE TOXIC ASSETS OUT OF THE SYSTEM. I KNOW YOU HAVE ONLY THE AUTHORITY TO GO WITH BANKS.I WOULD BE A STRONG PROPONENT OF EXPANDING YOUR AUTHORITY TO GO AFTER BANK HOLDING COMPANIES. IF THAT IS GOING TO COST MORE MONEY THAT HASN'T COME FROM THE TRADITIONAL BANK SOURCES, I HOPE THAT THE T.A.R.P. MONEY WOULD BE USED TO TAKE OUT TOXIC ASSETS. DO YOU BELIEVE THAT THE TOXIC ASSETS ARE STILL IN THE SYSTEM CAUSING COUNTERPARTY RISK AND MAKING IT MORE DIFFICULT FOR BUSINESSES AND INDIVIDUALS TO GET LOANS?

BAIR: WELL, I DO THINK, WE WOULD LIKE A MORE ROBUST MECHANISM FOR GETTING THE TOXIC ASSETS OFF OF THE BANK BALANCE SHEETS.WE DON'T HAVE AUTHORITY BEYOND BANK TO THE BANK HOLDING COMPANIES AS YOU POINT OUT, BUT WE HAVE LAUNCHED A PROGRAM, WHATWE CALL OUR LEGACY LOAN PROGRAM, WE TEST RAN A FUNDING MECHANISM,BASICALLY THE IDEA IS THE FDIC PROVIDES SOME FUNDING TO SELL THESE ASSETS AND IMPROVE THE PRICE A LITTLE BIT BY ADDRESSING THE LIQUIDITY DISCOUNT THAT YOU'RE SEEING RIGHT NOW FOR PROVIDING FINANCING. WE RAN A TEST RUN WITH RECEIVERSHIP ASSETS AND GOT A GOOD PRICE. 71 CENTS FOR ALT-A NONTRADITIONAL MORTGAGES WHICH WAS A VERY GOOD PRICE SO WE WOULD LIKE TO EXPAND THAT PROGRAM AND MAKE IT MORE GENERALLY AVAILABLE. YOU'RE RIGHT, THE LONGER THE DISTRESSED LOANS ARE ON BANK BALANCE SHEETS, IT DOES BUILD CONSERVATISM INTO BANK MANAGEMENT THINKING THEY'RE NOT QUITE SURE WHAT THE ULTIMATE LOSSES WILL BE. THEY NEED TO RESERVE HEAVILY AGAINST THEM F WE CAN GET THEM OFF THE BANK BALANCE SHEET, IT'S HARD BECAUSE YOU HAVE TO TAKE A LOSS WHEN YOU SELL THEM, BUT THAT BOLSTERS BANKS' ABILITY TO RAISE MORE CAPITAL AND DO A BETTER JOB OF LENDING INTO THE ECONOMY.

BOND: SPEAKING OF CAPITAL, WE'RE TALKING ABOUT MORE REGULATORY BELLS AND WHISTLES FROM WASHINGTON AND THERE ARE SEGMENTS THAT HAVEN'T BEEN REGULATED, MORTGAGE ORIGINATORS THAT NEED TO BE REGULATED. BUT I'M WONDERING, SHOULDN'T THERE BE MORE DISCUSSION ABOUT CAPITAL REQUIREMENTS. IT SEEMS TO ME MUCH OF THE FAILURE NOT ONLY IN THE INDIVIDUAL HOME MARKET WHERETHEY HAD NO OR LOW DOWN PAYMENT LOANS BUT THROUGHOUT SYSTEM HAS BEEN FINANCIAL INSTITUTIONS DEALING WITH ALMOST -- WITH TREMENDOUS LEVERAGE RATIOS. SHOULDN'T THERE BE AN EMPHASIS ON GETTING SKIN IN THE GAME FOR THE INSTITUTIONS AS WELL AS FOR THE MORTGAGE BORROWERS?

BAIR: WELL, YES, THERE IS ABSOLUTELY TOO MUCH LEVERAGE GOING INTO THIS CRISIS, PARTICULARLY FOR LARGER INSTITUTIONS, SMALLER INSTITUTIONS BECAUSE THEY CAN FAIL AND INVESTORS KNOW THEY CAN FAIL TEND TO HOLD MORE CAPITAL, HAVE TO HOLD HIGHER CAPITAL LEVELS, THE LARGER INSTITUTIONS WERE MORE HIGHLY LEVERAGED, COMMERCIAL BANKS WERE IN MUCH BETTER SHAPE THAN INVESTMENT BANKS OR CERTAINLY FANNIE AND FREDDIE, THERE WAS TOO MUCH LEVERAGE ACROSS THESYSTEM. WE NEED TO BOLSTER CAPITAL RESERVES INCREASE RESTRAINTS ON LEVERAGE, NOT JUST ON COMMERCIAL BANKS BUT ON FINANCIAL INSTITUTIONS ACROSS THE BOARD. BUT WE NEED TO BE VERY CAREFUL IN HOW WE DO THAT, IT NEEDS TO BE A GRADUAL PROCESS BECAUSE IF WE SPIKE UP CAPITAL LEVELS TOO MUCH NOW, IT COULD IMPAIR BANKS' ABILITY TO LEND AND WE NEED THEM TO LEND INTO THE ECONOMY RIGHT NOW.

QUICK: SHEILA BAIR, EARLIER. CAM FINE SAID HE'S VERY WORRIED ABOUT THE 12-1500 BANKS THAT RELY ON THE AGRICULTURE INDUSTRY AND MAKE THEIR LOANS THERE, THAT MAY BE THE NEXT BUBBLE. IS THAT ON YOUR RADAR SCREEN?

BAIR: WE HAVE BEEN MONITORING THAT FOR SOME TIME THAT ASSET CATEGORY SEEMS TO BE HOLD BE UP PRETTY WELL, WE BUTT WE HAVE BEEN MONITORING THAT AND IT'S STILL EARLY TO TELL TO WHAT EXTENT IT IS GOING TO PROVIDE ANY KIND OF SERIOUS PROBLEM BUT WE ARE MONITORING THAT.

KERNEN: WHAT DID THE FDIC WHAT PROBLEM DID YOU HAVE WITH THAT APPRAISAL OF CITIGROUP MANAGEMENT AND SHOULD WE ASSUME THAT WITH KEN LEWIS GONE THAT MAYBE THERE WILL BE INCREASED EFFORTS TO OUST VIKRAM PANDIT?

BAIR: I DON'T COMMENT ON AN OPEN OPERATING INSTITUTION.

KERNEN: YOU CAN'T-

BAIR: NO, CANNOT DO IT.

BOND: NICE TRY. A FOR EFFORT.

BAIR: YOU CAN TRY.

QUICK: LET ME ASK YOU ABOUT A PIECE LLOYD BLEINKFEIN HAS IN THE "FINANCIAL TIMES," HE SAYS IT'S NOT ONLY WHO THE REGULATOR IS IN THIS NEW WAY WE ARE LOOKING AT THIS IT IS WHAT THEY CAN SEE HE THINKS IT IS VERY IMPORTANT THAT YOU SEE EVERYTHING THAT'S ONLY ON THE BALANCE SHEET BUT OFF THE BALANCE SHEETS AND THAT HE THINKS LOOKING AT THINGS WITH FAIR MARKET VALUE IS VERY IMPORTANT. DO YOU AGREE?

BAIR: WELL, YOU KNOW, IF I DID NOT SEE HIS OP-ED BUT I DO NOT THINKWE SHOULD GO TO FAIR VALUING ALL ASSETS. LOANS THAT ARE HOLD TO MATURITY THE ACCOUNTING RIGHT NOW IS APPROPRIATE. IT IS IDIOSYNCRATIC NATURE OF THE CREDOT QUALITY OF THE INDIVIDUAL LOANS. THEY'RE NOT LIQUID MARKETS THE WAY YOU WOULD HAVE WITH SECURITIES SO, NO, I THINK THE ACCOUNTING TREATMENT FOR LOANS HELD TO MATURITY IS RIGHT. IF YOU WENT TO A DIFFERENT REGIME AND REQUIRED FAIR VALUE, THERE WOULD BE A LOT OF VOLATILITY ON BANK BALANCE SHEETS M IN GOOD TIME, YOU WOULDPROBABLY INFLATE THE VALUE OF THOSE ASSETS JUST AS YOU WOULD UNDERSTATE THE VALUE IN TIMES OFDISTRESS.SO I THINK THE CURRENT ACCOUNTING FOR BANKS IS APPROPRIATE AND WOULD NOT WANT TO SEE FAIR VALUE EXPANDED

BOND: THAT MAKES A LOT OF SENSE

KERNEN: WHEN IT IS ALL SAID AND DONE AND WE EVER DO GET AROUND TO THE REGULATION AFTER HEALTHCARE HOW DOES IT FINALLY LOOK CHAIRMAN WHICH AGENCY IS GOING TO WIN HERE TREASURY THE FED OR THE FDIC

BAIR: WELL I THINK WE ARE ALL STILL I THINK THERE ARE MORE AREAS OF AGREEMENT THEN DISAGREEMENT WE VERY MUCH FEAR THE CONCENTRATION OF POWER IN ANY SINGLE REGULATOR WHETHER IT IS THE FED OR A NEW REGULATOR WE THINK THAT BIG REGULATORS TOO MUCH BECOME CAPTIVE OF LARGE INSTITUTIONS AND THAT WOULD LEAD TO FURTHER CONSOLIDATION IN THE INDUSTRY WHEN WE NEED LESS CONSOLIDATION IN THE INDUSTRY SO WE THINK WE NEED MORE MARKET DISIPLINE THROUGH ROBUST RESOLUTION MECHANISM THAT SAYS LARGE INSTITUTIONS IF YOU GET INTO TROUBLE YOU'RE GOING TO OPUT INTO RECEIVERSHIP WE THINK WE NEED A SYSTEM OF RISK COUNCIL MADE OF ALL THE REGULATORS HAS RULE MAKING AUTHORITY THAT CAN HIGHER STANDARDS THAT CAN SERVE AS A CHECK ON REGULATORY CAPTURE WHEN AN INDIVIDUAL REGULATOR ISN'T DOING THEIR JOB AND WE ALSO ARE VERY STRONGLY SUPPORTIVE OF CONSUMER AGENCY AND I THINK ON A BROAD PARAMETOR THERE IS A LOT OF OVERLAP AND AGREEMENT BETWEEN THE FDIC THE FED AND THE TREASURY

KERNEN: ALRIGHT YOU WERE VERY NICE TO THIS MISSOURI GUY EVEN THOUGH

BAIR: FELLOW MID-WESTERNER

KERNEN: IS THAT WHAT IT IS SO THAT'S EVEN MORE IMPORTANT THAN THE INTERSTATE.. THANK YOU SHEILA BAIR.. NICE TO SEE YOU

About CNBC:
CNBC is the recognized world leader in business news, providing real-time financial market coverage and business information to more than 340 million homes worldwide, including more than 95 million households in the United States and Canada. The network's Business Day programming (weekdays from 5:00 a.m.-7:00 p.m. ET) is produced at CNBC's headquarters in Englewood Cliffs, N.J., and also includes reports from CNBC news bureaus worldwide. Additionally, CNBC viewers can manage their individual investment portfolios and gain additional in-depth information from on-air reports by accessing http://www.cnbc.com.

Members of the media can receive more information about CNBC and its programming on the NBC Universal Media Village Web site at http://nbcumv.com/cnbc/.