tv Today in Washington CSPAN October 22, 2011 2:00am-6:00am EDT
world to satisfy special-interest, we could tax the there wouldn't be enough money and we could start borrowing. there wouldn't be enough money and that is when they resort to the inflation. the amazing thing is that our government and our country has gotten away with it for so long. but the world has trusted us because we have and still are probably the wealthiest country in the world and we have a lot of weaponry so there is a false illusion that we will be there forever. but now that we are the biggest debtor in the history of the world ever that we know that this end is coming and we have to replace it with something. so it is the basic question we have to ask what should the role of government be and what does liberty mean? this liberty means something to us? are we frightened by it, and we feel insecure? to be whatever government to take care of us from the cradle to grave and make sure they will protect us from all dangerous?
basically we are not safe because we have a big government, we are not safe because there is a lot of -- we are safe because people assume they have to protect themselves and one of the reasons we were given the second amendment to make sure we were safe. [applause] unfortunately in my lifetime there's been a transition away from the way we look at our local police, let alone the federal police. we have a 100,000 federal bureaucrats now who regulate us and our property and marched into our business is and they are carrying guns. i would say those are the guns we ought to regulate. [applause]
even the local authorities have become more authoritarian the way in force what they consider the of legitimate law. right now there are 50,000 break-ins by police without proper search warrants that are sting operations looking for somebody that might be smoking cigarettes were smoking marijuana, so they break into these houses and i read a terrible story today of a -- one of the operations. they broke in and was in an ex-marine's house. been to iraq. the put his family in a closet so he pulled his gun but he heard somebody banging on the door and busting answer he had a gun in his hand and the door opened and he never shot a shot. he didn't even take the safety of his gun and he ended up with 32 bullets in his head and his
body and he had nothing in his house. so what are we doing to ourselves? yes, we take an oath to defend our constitution against all enemies foreign, but right now i fear for the destruction of my liberty in your liberty from domestic threats today. [applause] not only did the founders understand exactly what self ownership meant, they also translated that into seeing that was a whole piece. it wasn't in part. today we sort of break up. because of economic liberty and personal liberty. we actually even have the freedom of speech broken up into places. we have political speech and advertising or commercial speech. but speech is a speech and freedom is freedom and economic
freedom is the same as personal liberty. it shouldn't be mixed up. [applause] so we have to put back together again, and we have to have the confidence that a free society is the best and right now i'm afraid of the minority side of this we are believing that only the government can take care of us as we have to have a new understanding and a new conviction that what we want to have is to live in a free society and at the right to our lives and our bodies and the rights to our fruits of our labor. this will give us the property though we really want and i believe that if you translate that into the proper forum policy this is what is going to give us peace as well. if we can have a system of peace and prosperity, how can we lose the argument. so, we don't do this, the
problems are going to get much worse and there will be more undermining of liberty. and in that case, then it's going to become more chaotic. if we don't do something about it and get a handle on it, my suggestion in the campaign right now on getting a handle the budget is in the very first year cut a trillion dollars out of the budget and get serious about it. [cheers and applause] i start with getting rid of five of the departments. there's too many departments in washington. we don't need them. [cheers and applause] and i cut the military budget. i don't say defense. the military budget down to 500 billion. and the year nearly hysterical because in washington are not
even allowed to cut a nickel out of the budget whether it is democrat or republicans because then you are an american and you do not support the troops. one thing i am the proud boast about in our campaign last go around and this go around even more so is the fact i have been accused of not supporting the troops and that i am not patriotic in volume of american because i will support the war. but when it comes to donations i have the three top groups of individuals a chemical the computer and within the category of what their occupation is. the top category of donations coming from individuals come from the u.s. air force. [applause] and the second is the u.s. army. [applause] it third is the u.s. navy. [applause]
so this whole notion that people going to the military just to fight the war coming useless war already declared is complete nonsense. they are willing to defend our country but they don't want to just go to the war for the sake of war. let's go rarely if you have to go with it and do it properly to make a proper declaration by making sure we really have an enemy and don't make it so vague and that's coming from our military, people. [applause] now there is another candidate and i will let you guess who it is that he's in the polls right now, and we looked at his top tree donations and they all came from three big banking institutions.
[booing] i wonder if the get to get federal reserve for just a bailout. but we do live in crucial times, and we need to -- we do need a reenergize the defense of liberty. we need to understand what it is, put it back together because we do have a wonderful tested this country. we have the freest country and the most prosperous country, we have the largest middle class ever. but it's not there anymore. the middle class is shrinking. the poor are growing more numerous. other rich are getting richer, the small number, and most of them are making money off the system. so, this, this is being challenged we have a great system. but now we don't have that. freedom has not been overly
successful in that not many countries enjoyed it. even today think of how many countries do not have real freedom, and also we don't have real freedom anymore but there's so many that throughout history that has been that way. most of history has been dominated by tierney, and today the americans are unplayed and confused at times and i don't know if they clearly interest and the the major problem is we are having less and less freedom and more and more tierney and it is going in the opposite direction and we need to change that direction. that is my goal and my intent to fight for the cause of liberty to make sure that we have the maximum allowed us prosperity in this country. thank you very much. [cheers and applause]
i would just know two things that i think showed the kind of regulator -- u.s., both in terms of being farsighted and actually been able to say no when she needed to say no. so about 10 years ago she was actually assistant secretary of the treasury among other things became aware of the burgeoning growing problem of subprime lending and tried very hard at that time to raise that issue to the public consciousness and to work with the industry. i'm afraid to say the industry didn't respond perhaps the way they should have. she became chairman in 2006. she was i think by far the most outspoken break up a corrupt that time, warning of the dangers of the subprime lending boom in what needed to be done
to address it. another thing she did what you think is very relevant to today's situation. people say the problem started here, why is europe in such bad shape? why are european banks apparently worse off than ours? i'm sure there's many, but when answers this question we have what is called a leverage ratio, but if you're a bank must maintain a ratio of about 5% of your assets. and that is not adjusted for any perceived risk or lack of risk. in europe, there was no leverage ratio. for example, they were that jazzier capital for something that, even greek dad as i hate to say. the european banks are about half or less were sometimes quarter or less capitalized as their base, which is why such a serious problem here. they were major players in this country that wanted to get rid of the leverage ratio of about six, seven years ago in the last
four or five years. it's her great credit that chairman bair was that those who said no, we're not going to get rid of it. it's a critical safety cushion that we need and thank heavens chairman bair succeeded. without further ado, please welcome chairman bair. [applause] >> thank you, that was the very nice introduction. i'm in the process of writing my memoirs right now. and i am reliving a lot of these experienced this and msm are not very happy memories. i'm through 2008 on the pain is somewhat a keogh. but you know, in 2006 i became chairman of the fda's the and in june of 2006, one of the responsibilities was being a member of the oslo community and
as arthur pointed out, we were in the process, the fdic was art in the process of the big fight with both the other domestic regulators here as well as the foreign regulators over implementation of something called the basel to ratings-based approach, which in my view is basically a way to let her decide for themselves how they want to risk assets. about a thousand pages of rules. if you have the day that was kind of where it came out. so we are fighting not, but were also fighting keeping a leverage ratio as a complement to risk based capital. if you only have one without the other, you can have perverse incentives, where they really voted up in on the higher yielding, high-risk sovereign debt because they could give it a zero risk. and the u.s.a. for 5% leverage ratio, 5% of capital can't be held against exposures. that was not the case in europe. anyway, not knowing better and went to my first basel committee meeting in a sober 2006 and a
told will make the chairman of the basel committee that i wanted to bring up the idea of an international leverage ratio. so we're fighting to keep you here. i was going to tell them they needed one, too. so that wasn't not very well. i really got raked over the coals and part of it was coming in and who did i think i was? but it was amazing the french and the germans really went after me in daily to story to the economist. it was like i've just been shot three or four months. they're trying to throw attenders of all the sophisticated work on myspace capital. so the rest is history. we finally did an international leverage reissue in 2010. it's only 2%, not 5%, but it does cover off balance sheet exposures. but still, i think it's going to be a struggle to implement even
not appear so it's really unfortunate. but you just have to keep fighting. i did apropos the topic at the conference. i did want to share some news with you on dodd-frank. it's obviously a very big law, so i won't be able to cover the full waterfront. but we did want to talk about a few areas and provisions that are sort of topical and ones that i think are very important. one obviously is too big to fail -- ending too big to fail. this is certainly my signature issue when congress was to returning dodd-frank. you know, i went to the crisis having to do things i didn't want to do in terms of dealing out and supporting institutions i thought it been quite poorly managed. we just didn't have the tools they need to turn the crisis with the information to do with the situation in any other way. a big part of the problem with the resolution authority only applied to ensure banks.
so much of this is occurring outside of ensure banks. i think one of the lessons -- the historical lessons of this crisis is after the s&l debacle in the banking crisis in the early 90s, congress really tighten up in regulating insured banks, as they should have. a guy pc in stronger capital standards and a lot of good things. what ended up happening is yet better capitalization of supervision within the insured things, that you had everything coming -- popping up outside of insured banks. when the crisis hit, so much activity in distress is even within bank holding companies, really the activity causing the problem was outside at the bank. but there is really no way. we also did not good enough rules to separate the insured bank from the nonbank pieces. there wasn't a way to resolve the institution a a way that would not involve the stomach risk in a holistic manner.
so really, what we needed was the ability to resolve both the nonbank pieces and the big pieces of the holding company for the very largest institution and that is pretty much what dodd-frank gave the fdic at 32. you know, i just heard this -- a republican candidate, dodd-frank institutionalized too big to fail. it's just not true. it's the opposite. prior to dodd-frank, there was something called the systemic risk which gave the fdic authority with the super majorities in my board and the sad and the secretary all in green to provide individual open bank assistance to financial institutions. dodd-frank got rid of that. it says you're not going to daylight individual institutions anymore. we're going to give regulators authority to provide systemwide support to help the institutions who have a truly systemwide event, where everybody is having trouble.
at the individual one-off poorly managed institutions have to be put into receivership. we don't care how big they are. they need to be put into receivership and resolved in accordance with the fdic's rolls which are very, very much like bankruptcy. some people call a sufficiency bankruptcy and that's an accurate description because the same claims priority with equity shareholders and unsecured creditors taking the losses if the institution goes into resolution. so it's a tough love. i think if people read a lot they will see that. we've toughen it up more and implementing rules. for instance, dodd-frank does give the fdic ability to differentiate among creditors, but with a straight claims priority similar to that if you have a bankruptcy. there's discretion as the reason bankruptcy. it is necessary to continue operations in the franchise. each day employers, vendors,
security people come the people that all blondes preview can make those creditors hold to maintain essential operations. you can also differentiate what maximizes recoveries. again, similar to what you have in bankruptcy now. we actually use that with insured banks now frequently when we feel a failed bank auctioned it off to other bidding institutions. they were typically get us what we call in all deposited, which means that the bidder does not want to impose haircuts and uninsured depositors. so if you're uninsured come your subject to loss by the fdic, but the acquires we find the want to pay more to keep those uninsured deposits whole. which actually will save us money if we sell the whole deposit then as a poster haircutting that depositor. they want to die because typically the big business customers don't want to impair those customer relationships. so in that kind of limited situation, we would make an
shirted depositor because that makes more sense to us mathematically speaking a maximizes recovery. you could do the same type of thing with the nonbank resolution now. those are two very narrow exceptions to differentiate. they are somewhat objective i think an easy to determine. so we have put out raids to say very strictly these will be the narrow circumstances that we differentiate a lucky step further and say you know what? if you're a term debt holder than a year, will never differentiate because we've had dozens of resolutions and there's never been a situation where we found that he turned unsecured debt holder needs to be paid off to maximize recoveries are to continue operations. it's just not the nature of the liability. so that was even tighter than wide dodd-frank provided. of course anybody shorter than not come your also subject to loss, but there may be for
short-term liabilities the trade-off where will maximize recoveries if you maintain this relationship. so, the fdic even made it tough for. and you know, i think too big to fail well and -- of course it's over. the fdic restarted as soon as dodd-frank was enacted. we started internally. we have resolution plans in place for other major institutions now. i don't think anything is going to be happening, but this is a matter of being prepared. there are strategies come a lot of skepticism, the strategies can be used now to resolve these very large institutions. one instructive document you might want to look at if you're interested is to go to the ftc's website and take a look at analysis of the lehman brothers bankruptcy and how that could've been resolved in resolved and that dodd-frank.franc provision. how could it have been resolved under title ii?
and there's also a lot more creative thinking, both at the fdic as well as internationally, using something called bail and that. i know if he talked about that or not, but the point of resolution within fdic resolution, all the unsecured data is available for losses for haircut. the idea would be for a large institution, hopefully with this resolution plans will able to get large institutions into marketable pieces. part of the planning process is to get them to a separate legal subsidiaries that can be sold up in marketable pieces appeared for lurch and become another strategy is to recapitalize that. one of the ways you can do that is by converting some piece of the unsecured debt into an equity position. but that is another thing we've been in robust discussions and there's a lot of issues there in the report. that's another strategy is very actively considered at the fdic and they will be presenting similar papers and roundtables
on that subject because it really is important for the market to understand the kinds of tools that can be available and would be used in that situation. and again, we are going to entity to fail unless the market itself is convinced that you know your money's address and you invest in large financial institutions, government will not bail you out anymore. before you invest, each kick the tires come as he was on the balance sheet and what kind of management they have. baby about to charge more of a risk premium for buying that debt because there is no more bailout. i was very gratified to see the rating agencies to eliminate some, not all do some of the bump that they give the largest financial institutions for so-called perceived systemic support. when i talk to the rating agency, it was funny, s&p went out for, not a question of how they should rate and i actually broke them a comment letter saying they should be downgraded, that i didn't want
to see a bump up anymore and the wall street editorial board says something is wrong when a bank regulator is asking for a bank to be downgraded. [laughter] i want them to stand on their own two feet. i don't want anyone to think the government will come anymore because they're not. you will feed the beast if you maintain too big to fail. they will continue to access market funding and lower premiums than they showed because people are thinking the government is going to come and bail them out and not let them fail. so when a too big to fail is the biggest thing that dodd-frank does. take a lot of dodd-frank, it's a lot about implementation regulators using the tools that they have. but these resolution pants will be huge. we really were flying blind during the crisis. i felt like we had -- i had one arm tied behind my back because our information systems really justify to the main. we didn't have much information outside the bank in the sec of
ephedra in better shape, but they would acknowledge the information they had was not as good as it should've been. consider requiring resolution plans -- you know, resulting entities is really nuts and bolts. a lot of it is being able to map the business lines to legal entities. if your mortgage origination platform is than 500 legal entities, it's kind of hard if you decide you want to break at the entity to even identify the legal entities and package them and sell them off can be operationally quite difficult. suggest requiring this entity is not their business lines to the legal entities and only to simplify as well. they are far too complex, especially ones that have undergone rapid growth over the years through of acquisitions. this will have a tremendous benefit to the risk management at the institution as well. these are the two nations are
huge. when you look at the charge of the legal entities, if not impossible for regulators to figure out completely what's going on, but it's impossible for the boards and managers as well. simplifying the structures and getting understanding of what's inside the institutions will be very, very helpful to boards of directors as well as the senior executives. it's a part of this process the regulators in bank should be looking at creating more separate legal subsidiaries with their own boards and management teams. servicing is a prime example. but in the world is going on air? i mean, everybody was doing it. just rampant disregard for state laws and rules in having documents in order. have been under the nose of managers and supervisors, but i do think it's a good example of how these institutions are just too big to regulate and too big to manage. so maybe there are synergies or
you can share your i.t., share premium, but having separate legal subsidiaries that are separately managed and run with separately accountable management could do a lot to improve the management and risk control is that these very, very large institutions. as you probably know, dodd-frank gives regulators authority to order structural changes and they don't include that in the resolution plan. if they still can't demonstrate their institution is resolvable, there is authority to order them to downsize and start divesting. these are very, very powerful tools i think to make sure institutions can be put into a resolvable form. again, like with most of dodd-frank is really, will regulators be willing to use them? i think and i hope that they will. another feature is ending today to fail as it's interesting if you look at dodd-frank on the resolution plan, the goal of the
resolution plan is for the institution to demonstrate that the nonbank components of financial organization can be resolved of bankruptcy. not with title ii, but without systemic implications is a very, very tough standard and one which is not going to be reach for several years. it's not so much the banks because the banks have real work ahead of them. but it's also the bankruptcy code. then a few bankruptcy lawyers out there, let me just pitch to you for a few mins to reach a lot of bankruptcy courts because winnebagos and to resolution, frequently there'll be a bank holding company that will go into separate process. that's what happens at the smaller institutions. i've got to tell you, if iraq quagmire. first, the way derivatives are treated. all the counterparties have super priorities, so they have two close at their position, close collateral. that's what you saw with lehman.
average was point not collateral, trying to the hedge and that was really, more than anything, what froze the market. with our resolution process, we cannot counterparties continue to perform and accept to repudiate tributes contract performance. but that hopefully many disruptive impact you have an derivatives counterparties are trying to pull out at the same time. remember too, bankruptcy is just a really over litigated process. maybe the group of lawyers that doesn't sound like that to you. but you know, i look at the lawndale bankruptcy. it was result three years ago now. it was immediate. deposits are transferred, lending operation transferred. no deception in the credit functions of the institution. depositors have continued access. look what happened to the holding company. there's about a billion of value
and it is still not been paid out. lehman brothers is the same thing. with lehman, i have read administrative costs or it exceeded $2 billion now. now what is up with? cannot blame the bankruptcy. i think they do a great job. consider all the things they have to put up with. but i think what taxes is because the process takes so long, what i call the real creditors, dig it out and sell pennies on the dollar. and the scavenger funds currently pay anything for it. so it's really litigation takes and it just really creates a quite unpleasant situation and one that does not serve creditors well because it takes so long for the money to be paid out. most of them get out by selling very, very steep discounts. out of this part of this come in the congress to take another look at bankruptcy because it
soper track did inexpensive and the treatment is so disruptive i think it's going to be difficult here if they want non-banks, they really need to make some changes to the bankruptcy code. that is something that has not been looked at as much as it should be a i hope that we will get some more intentions. let me talk a little bit more about the local rule now because it's obviously very topical. i for one and still plowing through it. it's very long and complex if you've noticed. you know, i think the length and complexity underscores a broad concern about the dodd-frank rulemaking process. i do think dodd-frank is a big law and it needs to be big. there were a lot of things that needed to be fixed. gone the other hand, already regulation the subject to political pushback and pressure,
a lot of lobbying activity. now more than ever we need broad public support. we've got to have it. the regulators cannot stand up to all of this if they don't at least have some broader public support. that kind of support is difficult to obtain. these rules are so complex you, you can't explain what they are trying to accomplish and how that benefit the broader public. so i do think, you know, the rules are complex for a couple reasons. i spotted the fdic, a couple things happened. one is to try to prevent gaming. and i'm talking the lawyers. lawyers especially do this. they were going to have this basic rule on proprietary trading and risk retention for securitization or whatever they try to start trying to anticipate ways that could be gained. some of the thinking is good, but sometimes he gets in areas
that may or may not play out. you can build into the complexity, a prime example. it's a small thing, but when i was at the fdic, they started resolving banks, i discovered tremendous complexity we had with regard to how the insurance limits applied to trust accounts. my gosh there were complex rules about, you know, your granddaughter could be a beneficiary, the grandmother couldn't be. so all the different relatives that could account and couldn't count to know that. people got confused and they're naming the beneficiaries and that they didn't think their deposit insurance or ended up not having it when they thought they did. so i said, why, why are you doing up at? and they were really worried about being gained. they said maybe someone could just bought a phone book and start listing inside of the phone book and see their beneficiaries entitled to unlimited deposit insurance. i said why would somebody do that? are going to be leaving their money to some but people.
so we changed. so we said coming because i beneficiaries. we want names and addresses. you cannot fight beneficiaries and that's really all you need to do. i mean, everybody understood it then. it's so much easier when the resolve of bank. but it's one example of how was the best of intentions you can build complexity to address things that are going to happen. more fundamentally, it frankly is industry lobby. you start it with the principal and it found good, but they can send and says goodbye to do it this way. and you get that from everybody's trying to be accommodating and all of that. and pretty soon you have a lot of exceptions to your general principles. i hate to sound like nancy reagan, but sometimes you just need to say no. senator jax, say no that to bank lobbies. you've got to say now.
[laughter] you do. you just need to say no. [applause] i do think that's important and i think the principles need to be in there and i thought that the staff and support staff. the staff i think that is very important to let the staff know they just want a good clean quality rule. it's probably harder to write a simple rule than it is a complex role. so i think this is something the agencies need to be very, very focused on. all that said, i will say the poker was tough because activities restrictions are always tough. it's hard to decide to these restrictions. i would note that the report in the u.k., they are doing a bit of a different direction. they are basically saying, okay, keep high-risk activities in the larger financial organization, but we are going to have a retail bank and of higher capital and then we will have what they call us on the joke casino bank over here.
you can do a lot of bad stuff over here come the boule benefits of traditional banking functions. and so i think a couple things on that. i think it might help with the volker rule because of difficulties in defining bright lines in the proprietary trading as for the great areas to basically say, okay, we're not sure about this activity, but we know we are going to put it outside in the investment bank to require multi-applicants. and i think trying to look at legislation would it be as placed in having enhanced provincial decisions could resolve complexity and trying to fine-tune what is and is not proprietary trading. that said, why don't agree with the report is a suggestion somehow you need rest speculation. i think they have that upside down. if you're going to go that route, you want more capital, not less in the harvest banking activities.
again, goes back to derivatives and relationships. having less capital unless potential supervision over the investment banking functions i think it's a cannot say down. obviously as a performer deposit insurance is my strong belief. the bank holding company or organization should be a source of strength, not weakness for the bank. this is why we push hard for the collins amendment, and other provisions of the dodd-frank mother says the holding company has to have capital standards that are at least as strong as we have for the insured banks. it's been weaker in the past anything that was huge, but again, looking at where the activity is conduct and how much capital is held against it may be one way perhaps the volker rule could be simplified a bit. you know, just a couple more things. on the enhanced provincial standards, which is something the fed has charged under dodd-frank and opposed standards under the larger bank holding
companies and other entities designated as systemic. again, we need stronger, not weaker regulation for these holding company structures. the one thing i hope that the federal focus on, they don't have the rules out quite at, but one of the things that is supposed to be in the enhanced provincial standard is limitation on interrelationships and that relates to a piece of the living will called credit exposure reports in that piece actually has not been proposed yet. it was not in the rule that the fdic finalized. basically what a credit exposure report is telling the financial organization, you need to tell us who your counterparties are and you also need to tell us who out there is going to hurt you. that's really important
information. i think the knee-jerk reaction was always to bail out because of uncertainty. for that bank expert on foreign trust company go down, who else is going to go down? we just enough clarity on that subject. the credit exposure reports are huge. ticket information is important, making banks and bank holding come nice he is important, but limiting the concentration credit exposures will be equally important for the fed. if there is one thing which i doubt we tackled urgently enough, it is the center relationships. i look at what's going on in europe now and i keep hearing this. we can't let kris default for the whole system will come down. my gosh, look at 350 billion euros of outstanding greek -- and greece cannot default without our entire financial system -- global financial system coming down. what is wrong with our financial system? first of all, the statements are
exaggerated, but it does point to a larger problem. is this domino effect, especially with derivatives and credit default swap. so identifying credit exposures, limiting credit exposures, especially with credit default swaps by putting more stringent limitations on concentration, especially cbs, it will put more pressure to move them into a centralized clearing, which would be a good thing. these interrelationships are something that really is very urgent attention and i am hoping that will be part of what is addressed in the fed's enhanced provincial standards. let me just say final comment is i think the best regulations and most effective regulations are the ones that aligns economic incentives and let economic incentives work to make the market work week showed. that's why lakes can indicate requirement spirit i like high capital, risk retention ending
to be too sad because the market will take was how america will do a better job of marketing financial institutions. capitalism cannot work if the people responsible for the decisions that caused the losses are absorbing losses. securitization was a prime example, where nobody was holding the list and the investors were happy relying on breeding agencies and they didn't hold the risk. so you had a situation throughout the incentives came to generate large volumes in. that amounts to several of us getting paid up front and no one thought they would have a problem. it was going to be someone else's problem if you have losses later on. so i think risk retention, capital, skin and again whatever form form you can find. making incentives work for u.s. regulators. i also think on risk retention rules, another piece of dodd-frank -- this may not be a popular view, but the
presumption -- the general rule is 5% risk retention for a securitize their issuing mortgages into a securitization. they need to retain 5% of the risk. i would like to be higher, but the statute says 5% amazing exception for something called a qualified residential mortgage. basically this is something that kind of got put in in this tells regulators to fine gold standards are really safe mortgages, were we look at standards and they just have to be so safe that we know we don't need to retain it. i think that's highly problematic. i think trying to write to a new page rules to define the save mortgages have a lot less efficient than saying if you're bridget made it, even if you put in securitization and every time there's a lot some out loud how they'll take 5%. i think that's a much, much better discipline on the origination standards. so i don't know a great leaders
will do with this, but i hope if anything the titans if you are in standard and not listening because again, risk retention, skin in the game, making people pay for mistakes will be the best disciplined against excessive risk-taking and leverage going forward. i thank you for the opportunity to share and i'd be happy to take some questions. thank you. [applause] >> so as moderator will take prerogative to the first question from which you mentioned economic incentives matter light and your agency is one of the few that is gone after executives at major institutions that have caused big losses. how do you think her approach to holding senior executives and traitors personally responsible, will show that played quite >> that's really good question. another disadvantage of the bailouts is the people that were
responsible, their institutions didn't fail. again, so much regulatory structure was fashioned with the notion that the entity would be inside insured bank said it was then. and so, we went and answer the fdic can see the officers interact tears who were responsible for the losses. if the institution doesn't fail, there's no capability to do that. so we do very vigorously go after folks the cost was 10 in my view when i was chairman of the shikoku personal assets. there's always a cost benefit analysis that is sometimes easier to set easier to set in the case if you and make it in terms of the discipline effect of the signal you want to spend. going after personal assets is important. there is a lot of talk about people should be going to criminal prosecutions in some cases that might be exactly right. for a lot of this, we probably did not breach the line of
criminality. but i too think people should pay out of their pocket and pay severely and again because the bailouts, mechanisms we have in place to pursue those recoveries just as they are. >> either questions in advance? >> if i could add one more thing. under title ii, we can just automatically forfeit two years worth of pay for the senior executives, which is good. i'm sorry, go ahead. be not thank you. hi, i'm angry at the source of bank analyst from new york. thank you for coming to speak at this event. i'm curious -- there are examiners on-site at the big financial institutions 52 week side of the year the occ and i'm not certain about the fdic, but i know if it is a state bank is in there annually. while the counterparty risk
analysts -- i mean, how committed they weren't interviewed come to understand voters that capital will translate it than my last question is, you get to see where there is some kind of sharing that the data. and i had kind on the fed had in its detailed in the revenues the unrealized cash gains from the performing mom, you know, were you at real operating cash flow versus all of this fake stuff i was unrealized, non-cash going to the income statement. so the fdic sees them. so how come along when you folks who knew that the fed was that really -- that the data could help you distinguish what was real honest cash flow versus state earnings, that later analysts were scrutinizing the data that was going to be collected for consolidated
enterprise and the nonbank subsidiaries. >> well, a couple things. i think you are right about the analysts. we should be engaged more. we created a complex financial restitution when i was at the fdic and we have a monitoring unit that we find more private analyst reports. there is more ongoing exchange of information with private analyst. so i think that is number one. i think the information is still complying primarily to insured banks. at least the stuff coming my way was going to insured banks. that is not to say that we couldn't her authority services including financial statements, perhaps could've done a better job of looking at that and we didn't. but as deposit insurer, perhaps our systems are geared toward supporting what is going on where exposure was.
i think to the extent we have broader questions about the holding company we should have been asking, but again, we're thinking we're not holding company regulators in the information would've been brought to us by the holding company regulators there is cause for concern. but looking back, i found out a lot of things that we should focus on earlier. but our systems just for such a. i mean, we could be honor of getting into the fed's business and looking at the consolidated financials and asking what was going on outside of the bank. but again, i think it's always a challenge in diplomacy to do that and it was not within our mandate. and so, we didn't. but the good news is we're doing it now and dodd-frank giveth back up authority so the mindset going forward is looking more broadly at the entire financial organization. >> thank you very much, chairman
bair for talking to us. i'm a third-year student has he mentioned nancy reagan before and i am wondering if looking back on writing your memoirs you have a time where you wish you would've just said yes? last night >> said yes? boy. i said no so much. [laughter] i know, that's right. you stumped me. you really have. you know, i think if anything -- i'm sorry, but i feel like i should've said no more. i think during the urgency of the situation and money to make decisions very quickly, you know, if you do why the consequences are less severe than if you don't do enough. and so i think in retrospect,
i'm only through 2008, but so far i think if i have regrets, is that i should've said no more to be honest with you. [inaudible] >> in 2006, you are invited to a hearing before the house subcommittee on guidance on commercial real estate and he was a pretty rough hearing. you and the other regulators. a couple years later, 322 banks went down in the fdic analysis was, g we should've done more to restrain commercial lending -- commercial real estate. same thing happened with the subprime guidance. the same thing happened with fannie and freddie basically trying to stifle the regulator that might've stopped them from getting into as much trouble. i am wondering if there is a
problem that the industry too often lobbying against its own best interests. >> yes, there is. and you know, you're absolutely right. i'll never forget it the commercial real estate, mortgage guidance and subprime guidance which we initiated that. i will never forget we were pushing subprime guidance in an industry group came in to meet with me and it was the most unbelievable name. the subprime delinquents were going up significantly. we brought this database of private label securitized loans and loan level data. i couldn't believe what i was saying. the industry came in and said now, it's not our fault, not the mortgage fall. as for borrowers. the borrowers don't care about mortgages anymore. if they need a washing machine to go buy one instead of pay their mortgage. it was all the borrowers fall. i just could not believe it.
so it was a bit of a struggle, but we did get the subprime guidance finalized in june of 2007. of course the other piece is so much damage had been done we are trying to get loans restructured and we're very concerned about what was going to happen. we had a series of roundtables to talk about the legal authorities that the servicers had to restructure loans and we had accountants and tax workers and originators, everybody there and we were able to establish they did not have authority to restructure these loans. we got commitments and chris dodd got public minutes they were going to do it. and then movies.com did a report in august or september of that year, basically saying less than 1% of these prime loans are getting restructured. everything was going into foreclosure. and i went public into an op-ed.
and what to speak to another industry group in the securitization industry in new york. i said to them coming in to get these loans restructured and you need to do in a systemic way. to the extent they redoing it was this one by one laborious negotiating process and the volume of such -- we've joked that they step over a dollar to pick up a nickel. there were so worried that some borrower would get some great they shouldn't have. they were going to have to go and get whatever they could from each individual barring of course that was just against their self-interest. so anyway, i gave this speech and a hand shot up in the back of the room. it was not well-received. a hand goes up in here again they said you can't help these people. you can't help these people. you give them a break on their mortgage, they'll just go out and buy a flatscreen tv. so i said okay. if you feel that way, why did you make a mortgages to begin with?
[laughter] film of her day, he said bad regulation. so, it was my fault. why didn't i figure that out before quite this is securitization industry. these aren't even bankers. and i just couldn't believe it. all these years of the self-regulating market. as soon as things go bad if the regulator's fault. we still hear that a lot. so it is shortsighted not industry's part that was one reason why i felt so strongly that we were not going to go borrow from taxpayers to pay for the losses we are suffering because of this crisis. we ask industry to pay. we have $75 billion from the crisis to cover losses for the resolution of field names that they did pan out they take pride in the fact that they paid them cut their insurance fund self-funded. i knew the minute we went to text here borrowing, that would be a very bad signal and who knew on how long it would take us to pay a factor may get
pressure from the industry not to assess and i didn't want to do that because it is their deposit insurance fund and they need to do this game. economic incentives are in the consequences. next time around if we make sure the industry absorbs this, maybe they'll think a little harder when we try to tighten up on bad practices. that theory has been met with mixed results, but i still think of is the right thing to do. >> i know the chairman has a tight schedule, so we should probably let you go. but not without thanking you for your wonderful speech. [applause] [applause] [inaudible conversations] [applause] [applause]
[inaudible conversations] [inaudible conversations] [inaudible conversations] [inaudible conversations] [applause] >> before introducing simon johnson, who will be delivering pacers made you laugh: lecture, i thought it might be appropriate first to say it the words about manny coad, whose memory, the law school honors each year with this lecture.
danny was from brooklyn, went to brooklyn college in brooklyn law school and started as a junior attorney with the sec in 1842, a few years ago. he rose through the ranks, as they say, and after being named an fcc commissioner, he was named chairman of the fcc and served as chairman from 1964 to 1969. so imagine a staff attorney today at the sec actually becoming chairman of the sec. but he did that. he was described by one of his successors as quote, one of the most sec's most energetic, dedicated and brightest leaders and in a gw law review article written after his death in 1877 called him quote, the greatest public servant the fcc ever had. gw law school had the good
fortune of having manny on its adjunct faculty for nearly 20 years. we are similarly fortunate today to have simon johnson with those to give this year's lecture. simon is the curse professor of entrepreneurial ship at m.i.t., the sloan school of management. if i could, having heard simon a few times, i would enroll there just so i could have them as professor. he is also a senior fellow at the peterson institute for international economics here in washington. previously, simon was bitterly a next-door neighbor to the law school, when he served as the imf's chief economist. in simon spare time, he is co-authored a best-selling book about the financial crisis, 13
bankers. he writes a very informative blog called the baseline scenario, which i would recommend to all of you. he appears on cool tv shows like the colbert report. and just this past wednesday, i saw him on the "pbs newshour." now, there's a lot i could probably tell you more about simon, but i don't have the time. but i will tell you one interesting thing. when i googled symons named and got a huge list of simon johnson related articles and whatnot popping up, there was an ad on the right-hand side of my computer screen. and simon, i am not making it up. the ad said and i quote, do you know simon johnson's criminal history a searchable? [laughter] i didn't go there.
at any rate, simon, i think you could use a good defamation lawyer. simon is very energetic, engaging, enlightening, witty, has a keen intellect in his words carry a lot of weight. the simon is not all sunshine and light. in a talk given last april, well after dodd-frank's enactment, simon told his audience quote, we have done nothing to prevent another financial crisis from happening again. so i am sure that in his remarks today, simon will address the theme of this symposium, whether we are on track or of course. anyway, simon, is a great pleasure and honor to have you with us today i hope all of you will join me in welcoming the 31st memorial lecture in a good friend of our law school, simon johnson.
[applause] >> thanks very much for the invitation to be here. it's great honor to give the code and lecture and it's a wonderful program. and that's a very nice introduction, although i'm going to go do your name, john, right after this. in fact, i may have to buy some google ads. last night. 80 years ago, almost exact way, ought to avert 1831, people like you and people like me -- and people like the former officials who gave his speech in washington felt that the crisis was behind them. the crisis of course to them at that moment was there had been the great crash of a covert 1829. two years later, the view among
people occluding the worst have been avoided. of course when we let that from a distance, this is hard to believe because those people were staring directly into the face of the world's greatest depression. in fact, looking back now, it's obvious to everyone who writes the history that the depression had really begun to unfold earlier. crake i'm scholz, the great austrian bank had collapsed in the spring of 1931. the british have gone in september. the shockwaves were already washing through the american financial system. and not only was nobody read the in official circles, nobody understood what was going on. in fact, the most senior people, the most distinguished americans
, the most accomplished people in the private sector were absolutely convinced that their policy frameworks, the way it seemed the world, their established operational procedures were exactly what was called for. and they were wrong. and the question i think we should all address, not just today, but every day at the moment does he read the newspapers, as we talk to our colleagues, as we pay attention to the beginning for the presidential election campaign, the question i would put before you today is a very simple and very direct question. and i apologize a little bit of as too dramatic. but i think the question is, are we now staring into the face of another great depression?
is the crisis of people talk about the financial crisis and then they put a date 2,072,008, you can choose various permutations. was that crisis perhaps not the crisis of the 21st century, but a forerunner, a precursor, the warm-up to something that is now facing a common something much more serious heading our way, actually heading our way because of the combination of the shocks -- incredible shocks coming from europe, particularly through its financial system and the nature of our financial system, how about version how policy asks and has that good, including the dodd-frank legislation. are we now looking to wreck lee
and another great depression? let me start with europe. are there any europeans here? i see one hand. i'm sorry, we are going to talk about you. [laughter] i will try to be polite. i was hoping to avoid that. [laughter] the situation in europe is obviously complex. there are many dimensions to what has gone wrong, not all of which are about thinking. i'm all of which are about politics, but many are about the way that those have become intertwined in europe. i hope in "the new york times" there'll be a spectacular graphic that lays out for you many of the dimensions of your that crisis. are having trouble fitting it on the biggest page available, but it should be in color that should be receiving a pretty bad at all. and then you check boxes off to
thank you for the ncaa is to follow process to the various rankings. let me try and cut to the essence of the moment now in europe. what is on the line? what is the fear that gripped the markets? but legitimate fear? it is not greece, but that i think is the default of some major restructuring is pretty much a done deal. it's not portugal. it is not ireland or spain. it is italy. think it's very useful situations to think about the numbers. the time government debt outstanding, gross debt of the general government is in excess of 1.9 trillion euros. now that is a lot. that is the third-largest bond market market in the world after the united states and japan.
it is larger than the gdp of italy. i'm sure you've seen that in the newspapers. the gdp of germany to give you another benchmark is 2.5 trillion euros. germany is not a heading into the country, but they have about 60% debt relative to gdp and the size of their economy. they are not volunteering to take on a lot of the time and death. the great default for the for the infinite great default conveys the impression and actually the accurate impression that something similar -- that's on a smaller scale, but something similar could have been to europe. now, the european banks -- whatever you think about the management -- u.s. thanks lachman tobacco everything to better capital climates and regulatory framework of dodd-frank and i'll certainly
talk plenty about that. all of these i mention are much worse in europe. just as an example to try to get this across to you, when they talk about one of these better, stronger banks in europe because they think at the moment, it is good to talk about the stronger financial institutions, not the weaker ones. deutsche bank at the end of the second quarter had total assets on its balance sheet of about 1.85 trillion euros. it had capital, shareholder equity of 60 billion euros. that is 36, 37 times leveraged. by the way, just for that command, who is the ceo of deutsch and also very important person this time is the chairman of the board of the institute of
international funds. i didn't mean to point when i said international funds. mr. ackerman says the bank is no problem spending itself and so on. but deutsche bank, according to the european -- the stress test they ran or courtney may come in the bank was considered to be well-capitalized thing. by the way it was considered even better it was considered even better it was considered even better it was considered even better it has become nationalized. now how does deutsche look relatively good in terms of the so-called basel capital ratios? beaufort 10%, 12%, how is that consistent with leverage of 37 times? dancer in sure many you know, it is a sudden and calculations are done on the basis and risk
weighted asset. so you take your assets and the risk weighted small, close to zero that reduces the size of your balance sheet for the capital calculation. what is a risk-free asset? in the european context or any context. leading the france of its sovereign debt. if there's one thing you should know, whether you should take away from this talk of you go home and say what did simon johnson say? to say no know, it's very complicated. last night there were enough a lot of numbers. but i do remember one thing he said, one historical fact actually, one thing you should know about sovereign debt. it's not risk-free. the great republic according to my colleague, and reichart and i spent a lot of time covering this, the great republic has been in default on its debt for
about 40% of the time since it became independent in the early 19th century. you can call it a currency union. you can call the calling page, you cannot come it doesn't matter. it is in default for a significant fraction of the time. is sovereign debt. the europeans have built a banking model on the presumption that the banks mostly in with the regulators perhaps, know what is low risk for manila to seduce a low-risk weight and therefore can't run their business prudently while also having a great deal of leverage. ..
minister sitting in the front row that they drew on a well-designed substantial loan from the united states and from the imf, a $45 billion recommended that the europeans put in place the same sort of external financing facility of some kind. now why don't think he was saying europe needs a loan from the united states it is a currency quite different from
mexico, 1994, but there is agreement or a lot of thinking along the lines of a package of support within the year rose known for example banks stopping by italian debt. so i asked the question if it was $45 billion to save the day in 1995, how much is it today? we had good discussion and afterwards a very distinguished former senior, okay, it was paul volcker. [laughter] came up to me and said simon, the number is 1.5 trillion. i said that's great. is that dollars or euros. he said that's a good question. euros. so 1.45 billion in 1995 goes to save the day or helps to save the day. today, it's 1.5 trillion perhaps for euros, $2 trillion.
some friends of mine in a scenario with hedge funds and other former officials came up with the answer you need a 4 trillion euros package to stabilize the markets. this is serious money. bigger than the gdp of germany. perhaps the europeans could construct something around that. a fascinating discussion to talk about and you can follow it on my blog if you want. [laughter] the blog i should say i just plugged it we have no advertising or revenue. during the financial crisis, sorry, the first part of the financial crisis in 2008 someone wrote and said i love your blog but it has the appeal of a hospital emergency ward. [laughter] which i said that is exactly what we are trying to get across. perhaps the europeans can do it with a great deal of subsidy with unconditional generous support of the monthly from the european central bank running to
the italian government. raising the question of course if you were a german taxpayer how much exactly would you be willing to pay to keep the lifestyle to which he's become accustomed. [laughter] [applause] that the european question. i don't know if you are german or italian. german. okay. you can tell us in the question and answer. these are massive shocks to the world economy spreading through the derivatives market that are not transparent, markets that this administration has consistently refused to make transparent. i see in the audience dallas has worked very hard on this point to try to convince for civil treasury the men market should become more transparent. not yet with success i think we should say.
unfortunately. what is the situation in the united states? how we do it is our financial structure to what is coming at us. well, let me ask you this. if goldman sachs what hit a rock, hypothetical, i'm not saying they have or they will but if they were to hit a rock today, friday, who in the room thinks that goldman sachs, a bank with a balance sheet fluctuates around $900 billion -- who thinks goldman sachs would be allowed to fail, an incumbent of any said rescue, any other kind of bailout? could goldman sachs failed like lehman brothers failed with big, and initially at least on noble goal losses for the creditors? could goldman sachs fail?
i asked this question to many audiences and people in the financial sector and far from the financial sector only one person ever raised his hand in new york a big position on goldman. i think it's a new york thing actually. [laughter] i'm not sure if sheila bair talked about this it might have been the finest moment that the fdic. the group requested a bailout, demanded a bailout in the fall of 2009. they said if you let us feel it will be disruptive to the new global economy and have small and medium-sized lenders in the united states. that is a special niche. treasury, to my understanding, wanted to bail them out and the secretary said no and it didn't
happen. see i.t. went bankrupt and restructured its debt. no one i've talked to, i said everyone if you know the country tell me now or after words, i have not found anyone, any evidence that the failure of the cit group destructive markets damaged the customers. nothing. cit group had a balance sheet of $80 billion. the largest financial institutions we let fail without any kind of bailout since the collapse of lehman brothers. 80 billion can fail. 900, 800 billion you just said couldn't fail. why? because goldman sachs is big. goldman sachs is not just big. it's also complex and cross border. the resolution authority in dodd-frank and there's a lot of confusion. i find there's no confusion at all. there is a considerable degree of misrepresentation.
can i see that without it being defamation were is the borderline? there is a great deal of wishful thinking. to be very, very clear. the resolution all authority of dodd-frank gives the fdic working with the fed and the treasury greater power and greater authority to manage the so-called orderly liquidation of the non-bank financial the institutions and banks holding companies. it doesn't apply to a dingley goldman sachs. it isn't a cross border resolution of 40. you can't -- the u.s. congress cannot pass across the border resolution of 40 or create that mechanism. it doesn't have the jurisdiction. there is no cross border authority or mechanism or framework, and at least when i talk to my former colleagues who are working the g20 for various countries, some europeans, people who were the responsible delegates to those summits. i ask them how long until we
have a cross border resolution authority that can handle something like the failure of goldman, a pre-commitment on the part of bankruptcy, authorities and other relevant authorities from other countries? so, you know -- remember when lehman brothers failed we didn't know who would get what, how and when. we still don't completely know, and that's a big part of why we have a global panic. how long until we have a global resolution mechanism? again, my colleagues, the people working on this, working on the g20, the senate say it's never going to happen. not in my professional lifetime, even the youngest student in the room. maybe they are wrong. we will see. there's nothing. we've got nothing. if goldman sachs or bank of america or jpmorgan chase or citigroup or morgan stanley or
on the brink of failure, you're choices are available now, protect the creditors, would inform some conservatorship to the 100% protection or let them fail and take the consequences. and i naturally with you. i think the consequences of goldman sachs failure in this economy with a european financial situation where it is, the consequences would be catastrophic. goldman sachs is too big to fail. this kind of statement sometimes confuses people, because they think i'm somehow representing some creasy left-wing ideology here. well first of all i'm not a lecture in person. i'm the former chief economist of the monetary fund. they have a test that screams
out crazy left-wing people. [laughter] i did very well on that test. [laughter] second, let me quote some of my favorite thinkers on this issue are absolutely from the right. jean farmer, the father of the efficient market view of finance. professor at the university of chicago said on cnbc last year too big to fail is not a market, it's a government subsidy scheme. and he's right. tom, the of doing recently retired president of the fed has nailed this point again and again. and robert is brilliant on this topic. john was kind enough to mention 13 bankers. the intellectual -- which is about regulated capture and state captured brought about by the too big to fail financial institutions and the massive distortion. the intellectual shoulders, the giant on whose intellectual shoulders we stand in that book
is george sigler from the university of chicago. this -- and i say this to every moodie on the right -- i said to peter actually in his thing here i said peter, i think your view that fannie and freddie were central to the crisis of 20007-2008 is exaggerated but there is no question that feeney and freddie behaved badly. they took on excessive risk, the and we too little capital, they lobbied for the right to have even more leverage and they blew themselves up at great cost to the american taxpayer. absolutely correct. no problem -- i have no problem at all with any of that analysis, but i would ask you think about the underlining incentive structure. who are the fannie mae and freddie mac today? who can borrow more cheaply
because of the implicit government subsidies? now the advantage that goldman were jpmorgan chase or citigroup have is debatable. estimates between the basis points i think at the moment i would go somewhere in the middleware of 50 at this point. it is a big funding advantage in this market. and i know the credit rating agencies have changed their view a little bit on the value of the government support here. and if you believe the assessment of the credit-rating agencies i have a number of bridges i will show you after the show. what does the management of these companies want to do with the funding advantage? what is the vision? its to become bigger, more global. the ceo of citigroup says they would like to rename the image
of walter reston's. some of you can tell by the gray hair those people who were laughing walter built city of the 1970's on the recycling petrodollars exporting countries with the money banks we used to call them that included in city they made loans with that money to latin america, communist poland, communist romania. that wasn't a good idea. [laughter] citigroup blowup in 1982, they've blown themselves up in the past years this is an agreed narrative with the veterans. emerging-market debt and the 1980's the commercial real-estate and several times 2008, 2009 on the residential real estate. anybody who says this crisis happens once every seven years is not read the newspapers. so they want to become more
global what does mr. geithner say, the sector of the treasure, one of the key architects from the administration started thinking about the financial situation including what was done to save the system and reform. what does mr. geithner say with regard to this vision? he told the new republic he thought of this terrific. he said the emerging markets are growing. they are going to need financial services to provide on a globalist basis from the united states. now citigroup when it blew itself out in 1982 was about 3% of u.s. gdp tomalin said. that was a substantial bank in the day. it was bailed out, there's a lot of forbearance as many of you know. when it blew itself out, i'm sorry it ran out of liquidity -- i always get those things confused -- of the end of to those in need, it was about 17%. 17% of u.s. gdp. $2.5 trillion bank when you include all of the off-balance sheet liabilities.
now the bank of scotland, when it blew up at the end of 2008, had a balance sheet that was 1.5 times the size of the u.k. economy. put that in u.s. terms that is 20 trillion-dollar bank. i don't think citibank is right to become, or jpmorgan chase, the current number one guy is going to become a 20 trillion-dollar bank anytime soon. but, i would -- i'm just pointing out to you they can borrow cheaply, they want to get bigger, they have the support in this administration, they have the support of many people on the republican side of politics as well, can come back to that. they have massive subsidies. your subsidies. they will get bigger. you can't deal with them now -- you cannot handle the failure, okay? there's nothing in dodd-frank to
let you handle the failure of these banks. when there are 3 trillion, 4 trillion come 5 trillion-dollar banks, the problem is going to be bigger or smaller. and the incentives, think about the incentives. think about the money. actually, think about the money on both sides of the equation. according to some research on tv to done, the ceos on the top financial institutions between 2002 to 2008 received, in cash salary bonus and stock options they actually exercise, they receive $2.5 billion. that is a large sum of money. within that 2.5 billion it turns out to billion was received by five people, five gentlemen actually. according to the study. hank greenberg of aig built it up to be big and left before the
collapse. sandy lyle, who built city and was also not on the scene when it collapsed. angela mozilo to build countrywide and of course sold to banc of america local is a big part of our current problems we can talk about. number four, dick folde who ran lehman brothers, and number five, jimmy kaine, who ran bear stearns. there's one person missing from the study because this person sold his share after leaving the company come so was not disclosed and the same way, but this sixth person is hank paulson, who built goldman sachs up. goldman sachs was one of the world's best investment banks by the way in 1998. it was a 200 billion-dollar bank, 280 billion in today's money. when it failed, sorry, was saved from a failure by you, the american taxpayer commence a tender, to those in need, allowed by the federal reserve
to convert to a bank holding company and therefore have access to the discount window. at that moment it was a $1.1 trillion bank, and i think the question is what did you get. what is the society get from the nonfinancial sector debt, what did anybody get from that increase in size from 1998 to 2008? we know what hank paulson got. it was hundreds of millions of dollars including a very nice tuck >> because he sold after he became treasury secretary. so five people get $2 billion. what's the cost to you of that crisis? we can talk about the recession, we can talk about the jobs lost, we can talk about the millions of homes, we can talk about all of the disaster around the foreclosure, but i suggest we just focus on the fiscal impact. siskel is the mood of the day in washington right now, so let's talk fiscal. compare the congressional officers forecast from before
the crisis, the early 2008 before the crisis became at its full intensity and after the crisis. now, i should say, i don't think i had a chance to mention this on the panel of the economic devices on the seal the these are not my numbers, these are their numbers although they keep moving in my direction so i don't object to them so these are their numbers. according to the cbo, which forecast that out to 2018, in before the crisis until we can compare the 24 tests before and after. the increase in government debt, federal government debt as a result of the crisis is a percentage of gdp. m let's call that roughly $7 trillion. so, 5 trillion people get $2 billion, that's a pretty good job if you can get it. they walk away it seems with the cash, perhaps the legal cases count but i don't think so. they take 2 billion cash. you get 7 trillion on the national debt.
now, 7 trillion on the national debt is not cash out of your pocket right away, but down the road, i can assure you you will leave with higher pay in taxes or you or somebody else will be receiving lower social security, lower medicare, or medicaid when your old. medicaid is the ultimate backstop for people who become old and run out of money and need long-term care. all of us face that risk. all of these programs are going to face pressure because of what the banks did. how does that make sense? how is that acceptable, how was that a reasonable choice? surely the politicians are clamoring to change the situation. surely everyone agrees that too big to fail is too big and we can do plenty of other things. we can work on a higher capital requirements and you can follow
the work of the professor from stanford on those issues. you can really sort out and move towards better markets for derivatives. you can talk to dennis kelliher about that. you can make the banks smaller as a part of that policy. if you can talk to me about that. surely the politicians are lining up to take this on because it's an idea that cuts across the right and the left. now the left doesn't like with the to list the abuse of power. the left doesn't like the fact it's not a market. it's a subsidy scheme. it is an insane, inefficient, the interest subsidy scheme. how many politicians do you know who are willing to come out and say too big to fail is simply too big? in the republican primaries, the run-up to those primaries, you
would think this would be an appealing idea for many republicans who think they emphasize the free-market, and i think there are a set of what we might call main street republicans who are very much on this page. the wall street republicans want so much but many of them seem to be aligned with mitt romney. so why not run on exactly this issue. so far won presidential candidate has taken this up, jon huntsman. that's it so far. we will see if others do. and on the left, the obama administration, well, i don't think they are going to go after this issue not after missing so many opportunities, not with mr. geithner still firmly at the treasury department. in 1901 when teddy roosevelt decides to take on the trust using the act which had never been done before, jpmorgan come
the original came to see him in the house. he was behind the securities which the government was pursuing the first of these cases. and jpmorgan said if we've done anything wrong sandy your men to see my men and we will fix it up. thank goodness teddy roosevelt as attorney general said no. we don't want to fix it up. we want to stop it. i would emphasize a shift in the consensus. in 1901 in a room like this fall of people like you everyone was shocked that roosevelt had taken this action it seemed the audit because people to beat to it was good business was more efficient and more modern and roosevelt was just acting out some strange
ideas. in 1911 when the government moved to break up the standard oil into a 35, 36 pieces it wasn't particularly controversial. at that point the consensus shifted, the main street consensus actually i think particularly on the right of american politics interestingly. the consensus has shifted. they understand it's gone too far. the monopoly could be abusive. it's a completely integrated idp three devotee gets this. high school students get this, middle school students get this. i'm still working on the elementary school. [laughter] everybody understands an individual becomes too powerful but it's bad for democracy. that in space systems and other businesses. it's bad for the nonfinancial sector. by the way it's broken up and
they've made money on that. most went on to do very well. it's a great american outcome. it's not the only thing we need to do. it's not the only thing we need to do three or even to the financial system. i'm happy to give you a long list of things that have not been done, opportunities missed and things we should continue to press for the first and foremost, i must insist on one point, too big to fail is simply too big. thank you. [applause] >> you can see why i would enjoy going back to college to have him as my professor. thank you. [laughter] we have time for questions, and
simon has agreed to stay even after three if people want to ask. so please take the advantage of this opportunity we have someone holding microphones and there are lots of other things simon didn't get to paris to make a quick question. on the credit-default swaps of american banks were the numbers that you are seeing in the critical swaps in american banks have issued to backstop the debt i'm not seeing any numbers i believe what trust and that is a part of the problem the lack of transparency in the market. i talk to people in the officials sector whose job is to know these numbers. i know don't think they would tell me if they did know but when i talk to them my feeling as somebody on the other side of the table listed don't know either. that is the profound nature here. i don't think by the way it is the cbs agreed dead or d'italia in debt. what we have seen in many
previous crises called contingent is other assets, price of other assets booked on the long term capital management in september and october of 1998 was not actually its exposure to the emerging markets it was the effect on the other class of security they bet on the prices converging which the model said they should for sure, almost for sure. one of my favorite quotes from the 2007 episode of the financial crisis is the technical guy quote in the newspaper saying our models are good apart from the events that happen once every 10,000 years and we have had three of those this week. [laughter] >> yes, in the back. microphone over there. >> there was a lot of commentary in the fall to those in the the
u.s. government should actually nationalize the biggest banks, the banks that were too big to fail. what would you suggest going forward? was it why is they did not nationalize even the largest banks? we did in some sense nationalize aig and we are still working through that, but what prescription would you provide the too big to fail as a desirable force? >> that's a good question to the it's a very fair question. look, if my choice is global calamity or on savory bailout, and i believe that is the choice, i'm going to just bailout and i think i work pretty hard to make sure that's not the choice i face or other people face. if we are doing the bailout, the key point for me in devotee is what are you doing to the credit
shareholders should be wiped out. that is best practice. you can go talk to them if you don't believe me. management should be fired. understand in the book that required more was being fired by steve ratner in the spring of 2000 - the same moment the bankers were meeting with president obama and getting very different treatment and i asked some become a senior obama administration official who will remain nameless white didn't you fire or change the board of directors of citigroup and this gentleman said they took the view of the disturbed a hair on
the head of a single director that would have worsened the crisis and deepened the recession. i don't believe that and we rode our book in part to go through that at a technical level that you can react to it and tell us if we are wrong but that is the belief if that is where we are going forward that is a very bad place to be and i think we need to move away from that to a situation where nobody is too big to fail. i'm not saying we should encourage. we should have high capital requirements. it's a standard fact of banking banks don't care about this bill over as the externality they will pay themselves on the unadjusted risk basis and to do that they want a lot of leverage. they don't care so much about the downside if you get a guarantee they care even less but even after their guarantees
there should be capital requirements, but the kind of thing we are seeing right now in the united states bank of america being allowed to move its merrill lynch derivatives to the fdic insured bank i'm sure sheila bair covered that in her remarks. it's not just ridiculous or economics. i was at a boston fed conference and have the chance to talk to the management of the record. who approved this exception? the fdic has to go along with it. people who are close with six of the said pressed for it. we are increasing the taxpayer subsidy, helping it get bigger? pushing us more towards the kind of point we get to make the decision that we protect the credit or not and if you don't protect the credit of goldman sachs, goldman sachs or anybody else hypothetically in trouble
now, what happens? with the scale of complexity and openness we have to steadily. it's a time bomb. we must defused the bomb and to get smaller. everything that we have done, with all due respect to people who have worked hard on dodd-frank and people did, i know. but honestly, the net effect of the bailout what has happened subsequently, despite the legislation, despite in some points it is worse, the situation is worse than it was before to those and seven. the figures are distorted. if given the to to address as the cycle changes gets bigger. they absolutely do not have enough capital to withstand the shock. if the had enough capital, the bank -- of bank of america, if merrill lynch had enough capital to withstand the shock now coming to them, they wouldn't need the 23 a exception to its case closed. that's the smoking gun.
>> any other questions? yes. over there. we've got a microphone. >> how big is too big to fail? do you have a number in mind as the size it should be an investment bank? >> that's another good question. our data on this is pretty limited. the group failed at a tense moment. it was $80 billion. i don't know if that's the limit or not. people who study the economies of the scope say there's no social benefits above 100 billion of total assets so the burden of proof should be the other way the burden of scale but jaime dimond for examples proposing. we know what the costs are. we can see those but what are the benefits?
and i've gone through the work of the bank settlements and i talk to the new york fed about their work, i've made fun. there is no compelling evidence, i can't find people in the sector who can explain to the war will even come out in public and say why they need mega banks at that scale. now the amendment to the daughter frank legislation said a hard size cap, would have set a cap on the largest banks to% of gdp for the risky investment banks, this is total assets, 4% of gdp for the relatively boring retail banks and that would push them back to where the war in the mid 1990's. the largest six banks now have assets more than 60% of gdp. the same banks back to the
mid-1990s had assets and 15 to 17% of gdp. it got bigger. we got no benefit out of that. so the amendment close middle sensible proposal and got 33 votes on the floor of the senate. bad news is 33 votes in the senate doesn't get you very much. so it's not going to happen. it doesn't matter what i think should be. it's not going to happen. there's not going to be anything like this. the banks are going to remain to be to fail and we are all going to live with the consequences. by the way there is something beyond to big to fail. i try to go out on an encouraging positive note that this is not it. [laughter] there is something beyond too big to fail, too big to save. what happened to ireland? this is an incredible story.
ireland was considered to be fiscally prudent for the last decade. the the genuine economic miracle until 2000 and made a commercial high realistic mode. three banks began to times the size of the irish economy when they blew themselves up the cost and in direct to the irish government was more than 100% of gdp to they go from fiscally prudent supposedly by everybody in the credit markets to bankrupt essentially and having to borrow from the imf. the banks will ruin you literally. fiscally unless you stop them. yeah, it's economics, but economics are the simplest most direct incentives. if people follow the money they will build bigger banks, the banks will be more dangerous,
they will be highly leveraged and they will blow themselves up and then you have the choice. do you save them, do you save yourself at a great cost or do you step back to liquidate which is very tempting and in many ways a social thing to do. but that can lead to the global conflict. don't go there. it's not necessary. >> we have some questions on the other side. yes. >> i know that you are advocating that it's too big to fail but it's hard to determine the size is why couldn't we have a tax on the bank and that would be an incentive to push them to a smaller size of 2 trillion than a lot of taxes that will convince them every day that this should reduce their assets
and return more profits to the shareholder. >> jon huntsman proposed that in "the wall street journal" this week and i support if i think if you can do it with taxes if you can have a tax on the size perhaps the tax on leverage above a certain scale the idea would be to remove the subsidy they have the can borrow more cheaply than the other banks it's harder to do directly or only through a tax where we have a tax but we also have some sensible quantitative limits that we debate on what we can agree on what we can do it for capital requirements and differential so if you get a bigger you need to have a larger capital plan that how are we doing by the way on the capitol requirements on basil iii a remember the compliance many of
them. the leverage isn't quite so bad in the united states, but but didn't like bank of america was highly leveraged, 17, 18 times leverage. it's not enough capital. jean farmer, again, a chicago, says we should have capital 40 to 40%, not 10%, not risk weighted. i agree. capital clement to be clear there's a lot of confusion on this just saying we want banks to be funded with more equity relative to the debt some say they have to hold more capital. it's completely the wrong verb there is no holding involved. capital was not involved on the asset side of anyone's balance sheet, it is a liability. equity funding. it is a buffer against losses so let's do it with differential capital requirements and how do they react to the capitol
requirements? yes, exactly, they are outraged. it's unbelievable you are going to destroy the economy. the threats that you hear from them are serious and these are big banks you should take them seriously when people threaten you. [laughter] you should think about why they are big and why you want them to be big but i would go for the quantitative size. if somebody came to you and said look good news on a invented the one device that will protect all perlstein against failure i think he would say that's great, let's use it, but let's have the other systems in place, too just in case your system doesn't work. >> i think we had one more question. >> are you aware of any too big to fail institutions that are organized as a partnership? the reason i think that might be a relevant issue is that sure
they've done a lot of cities dhaka with his personal assets or not on the line as it would be under a partnership model the and you have to wonder if that would have the effect the managers wouldn't want to grow beyond the two big to manage size at that point. when wall street moved away from the partnership model to what we have now to the public corporations and to much less skin in the game as the management things changed i don't think we can live bacteria devotee to conduct the partnership era matured absolutely right just to reinforce the point on the incentives on the money. who made the big money on the last cycle it wasn't people who were incidental to what happened the 546 characters are central to the story with a walk away
when it's all said and done in personal wealth we walk away with a great deal of problems and much to pay and it is that in balance we have to confront so a good point about the partnerships and the incentives for not going to be able to go back, not to go back to that. >> do we have time for one more? >> we are going to have to -- it is running a little late unfortunately but maybe to come up and asks women afterwards. please have him join me in thanking simon. [applause] you are always very thought-provoking and enlightening and unfortunately very sobering. thank you and we hope to have you back soon. would you like to see something? >> just a couple quick points. first of those who signed up