FIRST ON CNBC INTERVIEW: CNBC'S MARIA BARTIROMO SITS DOWN WITH SHEILA BAIR, CHAIRMAN OF THE FDIC, TODAY ON CNBC'S "THE CALL"

Sheila Bair
CNBC.com
Sheila Bair

WHEN: TODAY, MONDAY, MARCH 29TH AT 11AM ET

WHERE: CNBC'S "THE CALL"

Following is the unofficial transcript of a FIRST ON CNBC interview with Sheila Bair, Chairman of the FDIC, on CNBC's "The Call."

All references must be sourced to CNBC.

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BARTIROMO: WELCOME BACK.BREAKING NEWS. WE ARE COMING TO TODAY FROM THE TREASURY DEPARTMENT. I'M MARIA BARTIROMO IN WASHINGTON. I'M SITTING RIGHT NOW WITH THE CHAIRMAN OF THE FDIC, SHEILA BAIR. GOOD TO HAVE YOU ON THE PROGRAM.

BAIR: HAPPY TO BE HERE.

BARTIROMO: HAPPY TO HAVE YOU. WE JUST FINISHED A PANEL, THE OPENING PANEL FOR THE EVENT HERE AT TREASURY. WOMEN IN FINANCE. WHICH I MODERATED AND WE WERE TALKING ABOUT WOMEN AND THE ECONOMY AND REALLY A NICE NUMBER OF FEMALES LEADING THINGS IN IMPORTANT POSITIONS HERE. SO CONGRATULATIONS TO YOU ON THAT.

BAIR: THANK YOU.

BARTIROMO: LET ME KICK THINGS OFF AND GET THE STATE OF THE STATE RIGHT HERE. WHAT ARE WE UP TO IN TERMS OF THE NUMBER OF BANK FAILURES THIS YEAR?

BAIR: RIGHT. WELL, WE HAD 140 LAST YEAR. WE THINK IT'S GOING TO BE HIGHER THAN THAT. NOT A LOT HIGHER BUT IT WILL BE HIGHER THIS YEAR. WE THINK IT'LL PEAK IN THE THIRD QUARTER. TOWARDS THE END OF THE YEAR WE'LL BE SEEING THE LIGHT AT THE END OF THE TUNNEL. I THINK IT'S IMPORTANT FOR PEOPLE TO UNDERSTAND THAT BANKING RECOVERY GENERALLY LAGS ECONOMIC RECOVERY BECAUSE IT TAKES TIME FOR CREDIT LOSSES TO WORK THROUGH THE SYSTEM. OF COURSE, ALL THESE STATEMENTS ARE CONDITIONED ON WHAT HAPPENS WITH THE ECONOMY. IF WE CONTINUE TO HAVE A STABLE OR IMPROVING ECONOMY, I THINK WE'LL BE IN GOOD SHAPE.IF THERE'S A DOUBLE DIP, THEN WE'LL HAVE TO -- TO REVIEW WHERE WE ARE. BUT WE'VE STRESSED SOME PRETTY ADVERSE ECONOMIC SCENARIOS IN DETERMINING THE CAPACITY OF OUR RESOURCES. AND WE THINK WE'RE IN PRETTY GOOD SHAPE EVEN IF THE ECONOMY TURNS FOR THE WORST.

BARTIROMO: YOU'VE BEEN SO SMART IN LOOKING AT SMALL AND MEDIUM AND SORT OF NOT THE TOP LARGE, LARGE BANKS IN TERMS OF WHERE WE ARE IN THIS. AND A LOT OF PEOPLE SAY THAT IT'S THE SMALLER AND THE REGIONALS, THE MIDDLE-SIZE BANKS THAT ARE GOING TO SEE THE BIGGEST IMPACT FROM THE POTENTIAL OF A COMMERCIAL REAL ESTATE BLOW-UP IN 2010. NOT THE LARGE BANKS.WOULD YOU AGREE WITH THAT, AND WHY IS THAT?

BAIR: WELL, I THINK BECAUSE OF THE CONCENTRATIONS. LARGE BANKS HAVE SIGNIFICANT EXPOSURES AS WELL.BUT THEY'RE NOT CONCENTRATED IN IT. WHERE THEY'RE SEEING EXPOSURES WERE THE EXOTIC INSTRUMENTS AND HIGH RISK MORTGAGES AND THE DERIVATIVES EXPOSURES, WE'VE WORKED THROUGH THOSE. THOSE HIT CRISIS STAGES EARLY ON. NOW WE'RE WORKING THROUGH A CREDIT DISTRESS IN THE COMMERCIAL REAL ESTATE MARKET WHICH IS ADVERSELY IMPACTED BECAUSE, OF COURSE, THE RESIDENTIAL MORTGAGE MARKET HAS SEEN SUCH DIRE TIMES. SO BECAUSE OF THE CONCENTRATIONS, THEY ARE MORE ADVERSELY IMPACTED.THIS IS SOMETHING WE'VE KNOWN ABOUT FOR YEARS. WE'VE BEEN WORKING WITH BANKS FOR SEVERAL YEARS TO TRY TO IMPROVE UNDERWRITING QUALITY, IMPROVE RISK MANAGEMENT, GET THOSE CONCENTRATIONS DOWN. AND SO I THINK THAT WILL BE THE KEY DRIVER IN BANK FAILURES THIS YEAR. AGAIN, IT'S SOMETHING WE'VE KNOWN ABOUT FOR SOME TIME AND HAVE BEEN WORKING ON SO IT REALLY SHOULDN'T SURPRISE ANYONE.

BARTIROMO: ARE YOU WORRIED ABOUT A COMMERCIAL UPSET IN REAL ESTATE?

BAIR: NO. I THINK -- I THINK THERE WILL BE LOSSES. AND WE KNOW THAT. AND THAT'S WHY WE'LL HAVE MORE BANK FAILURES THIS YEAR THAN WE HAD LAST YEAR. BUT I THINK WE HAVE PREPARED FOR DEALING WITH IT. AGAIN, THIS IS SOMETHING FROM A SUPERVISORY STANDPOINT WE STARTED DEALING WITH MORE INTENSELY THREE YEARS AGO, REALLY. SO I THINK THAT HAS HELPED MITIGATE THE IMPACT. BUT THERE'S STILL A LOT OF LOSSES THERE.THAT WILL DRIVE BANK FAILURES THIS YEAR.

BARTIROMO: WHY DO YOU THINK SMALL BUSINESSES STILL DON'T HAVE ACCESS TO CREDIT? A LOT OF PEOPLE ARE CONTINUING TO FEEL THAT STRAIN AND STRUGGLE IN TERMS OF ACCESSING CREDIT.WHY IS THAT?

BAIR: PART OF IT DOES TIE TO COMMERCIAL REAL ESTATE. I THINK ABOUT 40% OF SMALL BUSINESS LENDING COMES FROM THE SMALLER BANKS.

AND SO THEY ARE -- AND THEY ARE ACTUALLY DOING A BETTER JOB THAN THE LARGER BANKS IN MAINTAINING THE LOAN BALANCES.THEY'RE HAVING TO RESERVE AGAINST PROTECTING LOSSES FOR THEIR SOURING COMMERCIAL REAL ESTATE LOANS. AND THAT IN TURN IMPEDES THEIR ABILITY TO LEND. I THINK THE ADMINISTRATION HAS ANNOUNCED A PROGRAM AND PROPOSED TO CONGRESS TO PROVIDE SOME CAPITAL SUPPORT FOR SMALLER BANKS WHO ARE TRYING TO MAKE SMALL BUSINESS LOANS OR DO MORE IN THE SMALL BUSINESS SPACE.SO I THINK THAT WOULD BE HELPFUL. ANOTHER PART OF THE PROBLEM IS THE LARGE INSTITUTIONS, AND SOME OF THIS NEEDED TO BE DONE, HAVE CUT BACK SIGNIFICANTLY ON HOME EQUITY LINES AND CREDIT CARD LINES. A LOT OF SMALL BUSINESS LENDING WAS ALSO FINANCED THROUGH THOSE DIFFERENT MECHANISMS. THERE HAVE BEEN TREMENDOUS CUTBACKS IN THOSE CREDIT LINES. THAT'S ALSO ADVERSLY IMPACTED THE SMALL BUSINESSES, ESPECIALLY START UPS.

BARTIROMO: TODAY'S WSJ REPORTS THAT U.S. AND EUROPEAN GOVERNMENTS ARE MOVING TOWARDS TAXING LARGE BANKS TO RECOUP MONEY FROM FUTURE BAILOUTS. DO YOU BELIEVE THIS IS THE RIGHT STEP?

BAIR: WE HAVE SUPPORTED A FUND IN ADVANCE THAT WOULD BE ASSESSED ON LARGER INSTITUTIONS TO A POOL OF WORKING CAPITAL SO THAT IF ONE OF THESE LARGE INSTITUTIONS GETS IN TROUBLE AGAIN, THERE IS NO NEED TO BORROW FROM THE TREASURY OR THE TAXPAYER FOR WORKING CAPITAL TO UNWIND, BREAK UP AND SELL OFF THE INSTITUTION. IT'S NOT A BAILOUT FUND AS SOME HAVE SAID.IT'S REALLY A TAXPAYER PROTECTION FUND. WE HAVE LONG HAD THE ABILITY TO SET UP WHAT WE CALL BRIDGE BANKS. SOME CALL THEM GOOD BANKS.WHERE YOU HAVE A LARGER INSTITUTION THAT FAILS, PUT IT INTO A BRIDGE ENTITY. ALWAYS IMPOSE THE LOSSES ON THE SHAREHOLDERS AND THE UNSECURED CREDITORS. BUT THERE IS A TEMPORARY NEED FOR WORKING CAPITAL AS YOU BREAK UP AND SELL OFF THE INSTITUTION. WHERE DO YOU GET THAT SHORT-TERM LIQUIDITY? WE THINK THAT'S BETTER DONE THROUGH A FUND THAT IS ASSESSED IN ADVANCE. AND WE THINK THAT FRANKLY THAT WOULD BE BETTER FOR THE INDUSTRY, TOO. IT WILL SET UP A MECHANISM GOING FORWARD THAT DOESN'T PUT THE TAXPAYER AT ANY RISK FOR RESOLVING ONE OF THESE VERY LARGE ENTITIES IF THEY GET IN TROUBLE AGAIN. IT PUTS THE LOSSES ON THE SHAREHOLDERS AND THE CREDITORS. AND IT ALSO, FRANKLY, WOULD BE A MORE PREDICTABLE IN TERMS OF HAVING AN ANNUAL ASSESSMENT BUILT UP OVER TIME AS OPPOSED TO ASSESSING AFTER THE FACT WHEN YOU HAVE THESE HIGHLY CYCLICAL MEDIAL ASSESSMENTS ON THE INDUSTRY TO DEAL WITH THE FAILING INSTITUTION. FOR A LOT OF REASONS WE THINK IT'S A GOOD IDEA. THE EUROPEAN COMMUNITY IS MOVINGTHAT DIRECTION AS WELL.

BARTIROMO: SHEILA, WE ARE GOING TO SEE AMAZING REFORM COMING DOWN THE PIKE AT SOME POINT.I WANT TO GET YOUR THOUGHTS ON WHAT THAT FINANCIAL REGULATION REFORM SHOULD LOOK LIKE.WE'RE GOING TO CONTINUE TALKING ABOUT THAT ON THE CLOSING BELL.FOR THE LIVE PROGRAM I'M GOING TO SEND IT BACK TO THE STUDIO.THANK YOU SO MUCH FOR JOINING US FOR THIS LIVE INTERVIEW.

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