Tuesday, November 10, 2009, 7:05 p.m.

Transcript:

Larry Kudlow: We want to discuss this with you. Here we now have ace, CNBC editor, Charlie Gasparino, the author of the book "Sellout." We welcome Rob Nichols, president and COO of The Financial Services Forum.

Larry Kudlow: Let me go to the too big to fail. Part of it implies if a bank is too big to fail, it's too big. Camden Fine, do you believe that?

Camden Fine: Absolutely. Absolutely. I think if a bank is too big to fail, it's too big to exist. Basically banks like that become wards of the state. It’s state sponsored capitalism. Our association believes every investor and business in America should have the opportunity to fail.

Larry Kudlow: Rob Nichols, I take it you have a different point of view.

Rob Nichols: Good evening, Larry I do, I think large financial institutions can play a very important role in our economy. Obviously the size of loans they can extend. The array of products, the geographical reach, those things are very important, particularly for the large globally active fortune 500 firms. A Boeing and an IBM for example, with great respect to the bank of Englewood Cliffs, they probably can't have their finance needs attended here. But we are in heated agreement on the need to have resolution authority so that no institution can be too big to fail, Larry, but there are some that are too big to fail in a chaotic way. So that's an important thing about the modernization that's unveiled today in Congress.

Larry Kudlow: Charlie, who's right and who's wrong? Is Rob Nichols right or is Cam right?

Charlie Gasparino: They kind of both could be right. I look at it this way.

Larry Kudlow: Charlie is that a copout? They gave us different positions, Charlie.

Charlie Gasparino: Kind of, but here's my point about all of this, if you look at the history of these banks, it wasn't that they were so big, it's that they mixed risk-taking activities with other types of deposit activities and they kind of combined it. When you combine those two activities together, Larry, it caused the crisis. Its trading sort of infected its deposit base. And I don't –

Larry Kudlow: Does this bill deal with that?

Charlie Gasparino: That’s the real concept here. We have combined risk taking activities with mom and pop activities, banking and mortgage lending. That’s what poses big systemic risk to our system. Then when you do that, they're all big to fail. Then the whole system goes down the drain.

Larry Kudlow: There's a lot in this Christopher Dodd stuff. Much like Barney Frank, but not exactly, but much like Barney Frank, he's shall we say relieving the Federal Reserve of its bank regulatory and supervision responsibilities for the most part, okay? He’s also taken out emergency Fed lending powers. Now, I want to ask the two gentlemen, first of all, let me go to Cam Fine. Agency for financial stability, all right? That is a new thing that Dodd is setting up. It’s going to measure and evaluate systemic risk. And it's going to tell banks really what assets, what products, what businesses, and it could conceivably even preempt them. I want to get your take. Is this a political takeover of Wall Street? The head of this agency would be appointed by the President and confirmed by the Senate. It would remove the authority from the independent regulators like the Federal Reserve and the FDIC. I want to go around. Does this, would it recollect or is this going to be a Washington political takeover of the banks? With crony capitalism? With political favors?

Camden Fine: I don't think it's a political takeover of the banks by Washington. I think that we do need a strong systemic risk regulator. We need a regulator with real teeth that can bring the systemically dangerous firms to heel, and that's the purpose of that portion of the Dodd bill. Then the Administration has made proposals to --

Larry Kudlow: So Cam, I don't mean to interrupt, but Charlie is going to jump in. We're all going to jump in. Camden, look, I think with all respect, you like this idea. The big banks are going to be affected. This is going to put the screws to rob Nichols' members, is it not?

Camden Fine: No it’s going to bring oversight to Rob Nichols’ members. If this financial crisis were the Titanic, the community banks were the third-class passengers and there were no lifeboats for us. There were plenty of lifeboats for Rob's members. We think everybody should get --

Larry Kudlow: That's fair enough.

Larry Kudlow: Rob, We think a lot of Main Street people were very angry at the fact that you were the first in the lifeboat. How do you react to Cam? I'm going to read it again. “Agency for financial stability.” And it's going to have a lot of power to tell your members, first of all, what kind of capital they should hold, second of all, what kind of products they should do. Third of all, what kind of assets, risky assets or not, Rob. This could really put the screws to your members.

Rob Nichols: Directly to your question, Larry, I see value -- our members see value in having a risk council. I'm still reading the Dodd bill. It's over 1,100 pages long. I'm not quite done yet, but I'm getting through it, I’m getting through it. But I’ll say two things, we see the value of a risk council, bringing the regulators together to collaborate, to communicate and talk about risk. We think that's sensible. We do think, though, that the Federal Reserve should keep the banking supervisory authorities, and a point -- wait, Larry, a point to my friend -- a point to my friend Cam Fine who does a very good job of representing his member's interests, small doesn't necessarily suggest less risk.

Larry Kudlow: Oh.

Rob Nichols: It's been very unfortunate --

Larry Kudlow: As in commercial mortgages?

Rob Nichols: Somewhere in the vicinity of 120 small bank failures this year... so the point is we need effective regulation for big, medium and small institutions. We should create an environment for big, medium and small financial institutions. They all have their place to play.

Charlie Gasparino: Do you really trust bureaucrats figuring out this sort of stuff? I mean, do you really trust this -- let me tell you something. There have been bureaucrats who looked at risk for the last 30 years. And they' been screwing it up every time. You tell me a separate agency appointed by politicians, that that agency is going to look at risk and be able to save us? I just don't buy it. Larry, the best medicine here, as you know, is basically to let certain banks fail, and listen, last year, they probably -- last year they probably couldn't let them fail because if they did, it would all go down the drain together. But as you know, I wrote my book, they could have started in 1998 letting some of these guys fail and that would have been the best medicine. I just don't think bureaucrats catch anybody. Listen to it this way, it's not a perfect personality, but it's close. Bernie Madoff was examined by the SEC eight times. Somehow we got caught in the bureaucratic net, and guess what; eight times the SEC let him go.

Larry Kudlow: All right, so now Rob Nichols, here's another one for you. The Treasury Department is part of this new regulatory structure and as I understand it -- and like you, I have not read the bill. Probably unlike you, I may never read the bill, you're going to explain the bill to me, and I'll try to do the best I can with The Wall Street Journal and other important media outlets. But the Treasury Department will have the authority Rob to look at your large bank members and determine whether they're too big to fail, and determine whether they're faltering. This is what Charlie Gasparino is referring to. They're not going to be counselors. They're not going to be visitors to you and your gang. They're going to tell you what you can and cannot do, my friend.

Rob Nichols: It's a tricky, complicated issue. That's why we're trying to be part of this process as Congress moves forward on this legislation. That's why one of the ideas, in terms of coming up with a more effective, more enhanced supervisory architecture, having the Federal Reserve take control along with a risk council so you have checks and balances, but Larry, it goes back to checks and balances.

Charlie Gasparino: Think about how corrupting this is. The Administration is going to have the ability to go to the banks and regulate them. You tell me this isn't going to be a wind fall for whoever is in power for campaign contributions? I mean, this is insane. This has the potential for unprecedented -- the biggest scam in history.

Larry Kudlow: Unprecedented government control.

Larry Kudlow: Go ahead; you're going to defend this thing, Cam Fine, aren't you?

Camden Fine: No, no. We don't believe the Treasury should be involved in bank supervision either. We endorse the Federal Reserve to still hold its supervisory power, and we believe a mix between a council of regulators and the federal reserves should be the systemic risk supervisor. I don't like the Treasury involved in this any more than anybody else.

Larry Kudlow: Fair enough. I have two minutes here. We have the acquittal here today, really the first acquittal of Ralph Cioffi and Matt Tannin. They were acquitted by what The Wall Street Journal is describing as a blue collar jury. And I think that's a heck of a thing because in this country you can still get a fair trial. Your quick thought? I want to involve everybody in this.

Charlie Gasparino: My quick thought was this is, they were main characters in my books. They were the first thing to blow up when the sub prime crisis started, but here's the thing, you should not be putting people in jail for bad investments. The e-mails they had, they didn't contradict their public statements now have put these guys in jail. And this jury had a lot of common sense and they saw that.

Larry Kudlow: You're basically leaning in agreement with this?

Charlie Gasparino: I've always been. I’ve always been dubious of this case and these charges.

Larry Kudlow: You know, Rob Nichols, the government seemed to take out of context a lot of e-mails. This is the government's favorite thing now. The fact is that these two guys were amongst themselves puzzling through. This was a year before the financial meltdown. They were trying to figure out whether the decline of the prices of those securities was permanent or just a temporary thing in the marketplace, rob. What do you make of this? Was this a good decision that could help hedge fund guys to help them have a discussion?

Rob Nichols: I don't know enough of the details to comment, but the first time in my life, I might associate my comments with Charlie Gasparino.

Larry Kudlow: Really? You have Rob Nichols on your team tonight.

Charlie Gasparino: He's smarter than I thought.

Larry Kudlow: Cam Fine, was this acquittal a good thing for markets and investors?

Camden Fine: The jury thought so, and I agree with Charlie.

Larry Kudlow: Well, a clean sweep. Charlie Gasparino.

Charlie Gasparino: I can't believe it. I have everybody agreeing with me, the first time in history. Maybe they'll buy my book now.

Larry Kudlow: We're going to buy it and commit it to memory.