Street Smart with Carol Massar and Matt Miller

Bloomberg TV

January 21, 2010 4:15 p.m.

Transcript:

Carol Massar: Let's turn to our roundtable to discuss the proposal. Joining us now is Rob Nichols, the president of the Financial Services Forum, whose members would be most affected by the President's plan. And James Galbraith, economic professor at the University of Texas, and former executive director of the Joint Economic Committee Martin Baily, now senior fellow at the Brookings Institution. Welcome gentleman. Great to have you with us. Rob, I want to start with you. Did you and your members see this coming?

Rob Nichols: No, we did not get a heads up. One point I want to start with is we are in agreement with policymakers on the need to modernize our architecture. We have not seen the details and we really need to because a couple of things we are hearing is that they would like to arbitrarily go after institutions at a certain size. That is not what caused the crisis. Our view is less focused the policy response on things that caused the crisis and on things to make it -- if we have a crisis again we have a crisis mechanism. We did not see this coming. Some call this a Glass-Steagall light. Going back is not the right policy response.

Carol Massar: Professor Galbraith do you agree that we are not focusing on the right things?

James Galbraith: I think this move is in the right direction. It sets important principles that size matters, proprietary trading by insured funds, that the financial system needs to be restructured. It is a positive. I do think the President has not yet used the full regulatory authority that he has to make progress on these fronts. I think they could have done substantially more, but I am pleased they are moving in the direction.

Carol Massar: Martin, do you think they're moving in the right direction?

Martin Baily: No, the Administration has done a great job of turning the economy around but this is a move in the wrong direction. Proprietary trading, this was not the reason for the financial crisis. It there were a number of things that caused it, but it was bad banking. I don't think having limits on size is a good idea. I think we need large banks, we have a global economy, and we have to compete against larger banks and other countries, so I would not support a strict limit on size. It is appropriate to say if a financial institution becomes riskier than they did needs different capital requirements. And the individual banks can decide how large they want to be.

Carol Massar: Professor Galbraith, don't we need banks this size in terms of the global market?

James Galbraith: I don't think we do. I don't think there is any compelling argument to have banks with 10% or more of the U.S. deposit base where five groups have a commanding share. Our economy will function better if we have banking institutions that are small enough to manage effectively, small enough to regulate and where we can distinguish between institutions that can appropriately take risks and ones that should not do so if.

Rob Nichols: I fundamentally disagree. It is a strategic advantage to our nation to foster an environment that allows for big institutions. If you're a big company, you need a large globally active institution that has the reach and array of products and size to manage it. And we should foster an environment where small, medium, and large institutions can prosper. And I think a big part is a new supervisory architecture. I am acknowledging the industry contributed to this. There were severe regulatory failures as well. So that’s where we ought to focus our policy on.

Carol Massar: I will give you the first word when we come back. I have to take a commercial break. We will continue our financial round table. We’re talking to Rob, James, and Martin, senior fellow at the Brookings institute. We will be back in two minutes.

COMMERCIAL BREAK

Carol Massar: Back to our roundtable. Martin, take it away.

Martin Baily: One of the important points is it was the government -- the Bush Administration and Obama Administration, that told these banks they have to merge. It said you have to become bigger and put together commercial banks. It has worked pretty well. Things are looking better than they work, but we changed our mind. Now you have to become slower again. That does not make any sense. The other point I would make is having a bank with a lot of different lines of business makes it less risky because it means one part may be in trouble but another part is doing well. It is not making a bank riskier to say it does different activities. If we just have banks that make deposits we will force them to invest in real estate, and you will end up with a risk here banks.

Carol Massar: Rob is that what will happen?

Rob Nichols: We certainly hope not. I could not agree more with Martin. Another observation is three of these large financial holding companies that were created as a result of Graham Leach Bliley -- if you think back one year ago in the middle of the storm, capital market storm, they served as an instrument of stability, at the urging of the regulators,  in helping to absorb some failing institutions. I think there is an important place for these large institutions, and indeed, size can be a risk mitigant. If you are a small institution and you have exposure to one or two asset classes and small geography and something happens, size can be a risk mitigant.

Carol Massar: We have to bring you in here because I am assuming you disagree.

James Galbraith: These institutions largely imploded as a result of the weakness of their own internal management and weakness of regulatory supervision. This is a serious problem in the sector. We are not talking about extreme solutions, but bringing this back to where it was 10 years ago would be a significant improvement. The government took steps in the prices which seemed necessary at the time, which are not conducive to having a functioning financial structure in the long run. Those steps should be unwound. I also think it is not necessary for CitiGroup [unintelligible] just to service a company like Boeing. John Reid who was chair of CitiGroup said today that they could not engage in proprietary trading when he was chairman. You can have significant reform in this sector and the as the administration recognizes this we will start moving toward a better financial structure.

Carol Massar: Rob I got to ask you, the President said that lobbyists are trying to block reform. He says he is ready to fight. How much money will your members spend trying to fight this?

Rob Nichols: All these comments about fighting, but we don't want to fight. We just want sit at the table and have a conversation. We are supportive of reform but we want to come up with the right public policy outcomes that allows for a supervisory architecture that fosters lending and makes us internationally competitive. I understand the President wants to fight us; we don't want to fight him. We want to have a thoughtful public policy dialogue.

Carol Massar: 30 seconds left, and Martin I will give it to you. Do you think this will go through lawmakers?

Martin Baily: I am surprised the President chose to do this now. The Administration had put out a set of proposals. Barney frank's committee put out a plan. That is the way this should work. It should have input from everybody else.

Carol Massar: This will be a hotly debated topic for some time. Thank you all for joining us.