8:40 a.m.

View the Video

Transcript:

Carl Quintanilla: Earlier on Squawk, Congressman Paul Kanjorski unveiled a key amendment regarding bank regulation.

Congressman Paul Kanjorski (clip): My amendment is authorizing the government through the council, that will be the council of regulators, to make these determinations and review these highly large in size interconnected, troublesome corporations that could be systemic risks, to be looked at and shaped and controlled so that they don't get too big to fail. So that they are -- even though they can still grow or even though they are large, that if they fail, they won't bring the whole system down.

Carl Quintanilla: Joining us this morning with reaction to the plan, Rob Nichols, the President and COO of The Financial Services Forum along with Cam Fine. Rob, good to have you back. Welcome.

Rob Nichols: Good morning, Carl.

Carl Quintanilla: Interconnected and troublesome. Is he describing your very clients?

Rob Nichols: Well, it would be accurate to say that many of the large banks are members of The Financial Services Forum. We’re very interested, of course, in seeing the amendment that the Congressman is going to unveil today. You know, part of what we're communicating to Members of Congress is that we want to create an environment here, an economic environment where small, medium and large-size institutions have a role to play.

Carl Quintanilla: How large?

Rob Nichols: Well, I think actually just saying a bank of any certain size is too big, I think that's just a misguided principle. there's a very important role that large institutions can play in the United States economy in terms of the size of the loans that they can offer, the array of products, the geographic reach, with great respect, Carl, to the Bank of Englewood Cliffs, they can't serve the needs of a Boeing or a Caterpillar or Microsoft. So the point is we should have -- we should create an environment for institutions small, medium and large and the point that we're also trying to make in our advocacy is what we need is resolution authority so that if we do have an institution that were to, heaven for bid, happen what happened last fall, we have a way to wind it down to resolve it in a way that doesn't cause harm to the broader capital markets or to our overall economy. That’s where the focus ought to be.

Camden Fine: But the bank of Englewood Cliffs should be treated the same way regulatorally as Bank of America. All banks should be subject to the same laws. If Bank of America makes a bad judgment or management is incompetent and they lose a lot of money, the investors should suffer. The investors should not be rewarded. The Bank of Englewood cliffs, if they make a bad decision, their investors are wiped out and sometimes their creditors. Bank of America, their investors were rewarded with my money and are profiting on that stock. And that's got to change in this country. We can never again have a free market in this country until we treat all free market participants equally.

Carl Quintanilla: Would you disagree that big banks have not been given the all clear to get as big as they want because the government will be there in the end?

Rob Nichols: Well, no. I think it actually just comes -- it comes right back to having resolution authority. One thing that Cam and I have talked about before that I think is worth mentioning is we ought to focus on risk. That’s where the focus in terms of having a new supervisory aush texture or world class one ought to be focused on risk. When I listened to Congressman Kanjorski this morning, four or five different occasions he kept saying size, large, size. He kept making that point. Our feeling is small institutions -- unfortunately we've had somewhere in the vicinity of 120 small banks fail this year. Being large can actually be a risk mitigant because you're in more geographic areas a more lines of business. So we shouldn't just focus on size, let's folks on risk.

Camden Fine: It can also be a risk virus because it can spread all over the place. If you look at the four banks that have failed -- or six banks that have failed above $10 billion, that sucked out 50% of the FDIC fund, just six banks. So it can also -- you know, it works until it doesn't. That’s the problem.

Becky Quick: Rob, is there something as too big to fail? These institutions are so large that the government would not let them go down. A lot of these large institutions have only gotten bigger. I guess the question is, is there an inherent government backing for these institutions and should there be? Should they be allowed to be so big that we'll promise to bail them out?

Rob Nichols: That's the debate that's happening right now. Last fall Chairman Bernanke and Secretary Paulson had to make some decisions because they didn't have procedural protocol to take down in a careful way these large institutions. That is one of the most critical elements of the reform debate that's happening right now, which we are very supportive of, extremely supportive of. I think that will address your question, Becky, about whether or not someone is too big to fail.

Joe Kernen: Did they have the mechanism to take -- I know they didn't have it for AIG. They had it for CitiGroup, didn't they? They still didn't do it. It’s too big.

Rob Nichols: Well, no, it's not too big. They made the judgment that they didn't have to. One thing, Joe, one thing that's in fashion right now in Washington on the ten-year anniversary is a conversation were there elements that worked or didn't work. If you look at Bear, if you look at Lehman -- it created financial holding companies. Lehman, country wide, they were not financial holding companies.

Joe Kernen: Right. But if all we need is a mechanism to wind it down for resolution and we did have one for CitiGroup and still didn't use it, then that's not going to solve it.

Rob Nichols: They made the judgment that was not necessary to do.

Carl Quintanilla: Say we get the authority that you're looking for. Can you not couple that with a cap as well?

Rob Nichols: I think an arbitrary cap on size; given the important role that these large institutions play, not only in our own economy but on a global basis, I think just an arbitrary cap on size in our view is misguided.

Becky Quick: But I don't think Kanjorski is talking about an arbitrary cap.

Rob Nichols: We haven't seeped the language. As of last night we haven't seen it.

Camden Fine: There's no size limits in the Kanjorski amendment. But I think also we're missing the point a little bit in that there is concentration risk. You can become so heavily concentrated on a macro level that you can destabilize economies around the world. and I think concentration risk does need to be looked at and does need to be discussed and does need to be recognized, that you can't allow one single institution or three or four institutions to become so heavily concentrated in a given sector that they can control that sector and are bigger than the regulatory authorities that are supposed to control them. That’s in a sense what happened.

Rob Nichols: One point going hand in hand with the idea of creating a new resolution authority is the idea of systemic supervision. Someone looking out at the whole system. That’s another big point of debate right now in Washington. One thing that we think is important is to have the Fed, the Federal Reserve, still have a role in bank supervision.

Camden Fine: So do we.

Rob Nichols: Particularly over the large financial institutions. So we think coupling a new systemic supervision regime coupled with resolution authority is the right answer to this problem. So you have -- you try to help, you know, avoid a crisis like last fall from ever happening again. Then if you do, you have a way to unwind these institutions.

Camden Fine: Believe it or not, Rob and I agree on federal.

Joe Kernen: I don't know. It seems like, you know, instead of being stuck with some people call it a “zombie bank” and the government owns most of it, it's a $4 stock.

Becky Quick: They chose not to shut it down but after $45 billion in taxpayer dollars went there.

Joe Kernen: And even if they have the resolution authority, they don't use it.

Camden Fine: We think they should have taken them into a conservatorship or receivership and slowly unwound that. Much like they did Fannie and Freddie. Take them into conservatorship and have them run -- you know, they wiped out hundreds of bank investments in Fannie and Freddie.

Rob Nichols: It's also hard to talk about one resolution in the context of the very historic turmoil last fall.

Joe Kernen: Did you advise Goldman on their half a billion to the small businesses? Is that enough?

Rob Nichols: 10,000 Small Businesses as well as Chase --

Joe Kernen: You did advise them.

Rob Nichols: No. As well as JPMorgan Chase rolling out their new charity associated with Facebook and Eva Longoria, these are great things. Large institutions not only --

Joe Kernen: Yeah, yeah.

Joe Kernen: It's the day after the $17 billion came out. It’s not a cynical ploy to try to lessen --

Rob Nichols: No. listen, the large institutions as well as the small will be the instrumentality. We are all interested of returning this country back to the path of prosperity, large institutions and small.

Becky Quick: I agree with that. I hate seeing anybody getting beat up for making charitable donations. You don't want other big companies to think oh, if I give a charitable donation --

Joe Kernen: The timing is suspect. I mean we're aware of that.

Camden Fine: Joe, since we have Rob here, this book just came out, "Big Bad Banks."

Joe Kernen: I love that guy, Rusty.

Camden Fine:  Yeah, Rusty wrote "Big Bad Banks." If you want to see what led up to all this concentration and so forth, great read. It’s thin, it's a great read. So I’ll get you a copy of this.

Joe Kernen: If you were china, you'd bury that, wouldn't you.

Joe Kernen: Next --

Becky Quick: Rob, thanks.

Joe Kernen: Thanks, Rob.