(APPLAUSE)
GOOD MORNING. LET ME WELCOME ALL OF YOU
TO THE 154TH LANDON LECTURE PUBLIC AFFAIRS.
I'M KIRK SCHULTZ, PRESIDENT
OF KANSAS STATE UNIVERSITY.
I'M THRILLED TO BE HERE MAKING THIS
INTRODUCTION TO PARTICIPATE IN THIS IMPORTANT EVENT.
I'M VERY FAMILIAR WITH THE LONG AND SPECTACULAR
HISTORY WITH THE LANDON LECTURE SERIES
AND I'M VERY PLEASED TO BE PART OF IT THIS MORNING.
THE LANDON LECTURES WERE BEGAN IN 1966
BY THE LATE GOVENOR ALF LANDON
AND THE LATE K-STATE PRESIDENT JAMES MCCAIN.
THE GOAL OF THE LANDON LECTURES
IS TO BRING THE MOST PROMINENT
PUBLIC FIGURES TO KANSAS STATE UNIVERSITY
TO DISCUSS THE MOST
PRESSING ISSUES OF THE DAY.
WE'RE VERY PLEASED TODAY TO
WELCOME CHAIRMAN SHEILA BAIR
TO THE LANDON PODIUM TO JOIN 153
PREDECESSORS IN BRINGING HER THOUGHTS AND
OPINIONS ON IMPORTANT PUBLIC ISSUES.
BEFORE INTRODUCING MEMBERS
OF THE PLATFORM PARTY
I'D LIKE TO INTRODUCE SOME
SPECIAL GUESTS IN THE AUDIENCE.
OUR PLATFORM PARTY TODAY,
IS ON MY LEFT:
PROFESSOR MELODY LEHEW, APPAREL AND TEXTILES DESIGN AND
PRESIDENT OF THE FACULTY SENATE.
(APPLAUSE)
MR. DALTON HENRY SENIOR IN AGRICULTURAL
ECONOMICS AND AGRICULTURAL COMMUNICATIONS
AND PRESIDENT OF THE K-STATE STUDENT BODY.
(APPLAUSE)
AND THEN ON MY RIGHT, DR. CHARLES REAGAN DEPUTY
TO THE PRESIDENT CHEIF OF STUFF AND
CHAIRMAN OF THE LANDON LECTURE SERIES.
(APPLAUSE)
MR. ED SEATON, CHAIRMAN OF THE LANDON
PATRONS AND EDITOR AND CHIEF
AND PUBLISHER OF THE MANHATTAN MERCURY
WAS NOT ABLE TO BE WITH US TODAY
AND REGRETS HE WAS NOT ABLE TO
JOIN US FOR THIS LANDON LECTURE.
IT'S CERTAINLY MY HONOR TO INTRODUCE
TO YOU THIS MORNING SHEILA BAIR.
SHE'S THE CHAIRMAN OF THE UNITED STATES
FEDERAL DEPOSIT INSURANCE CORPORATION
OR BETTER KNOWN AS THE F.D.I.C.
SHE WAS APPOINTED TO THE POST
FOR A FIVE-YEAR TERM ON
ON JUNE 26TH, 2006 BY
PRESIDENT GEORGE BUSH.
MRS. BAIR WILL ALSO SERVE AS MEMBER
OF THE F.D.I.C. BOARD OF DIRECTORS
THROUGH JULY OF 2013.
IN 2008, FORBES MAGAZINE RANKED HER AS THE
SECOND MOST POWERFUL WOMEN IN THE WORLD
BEHIND GERMAN CHANCELLOR ANGELA MERKEL.
FORBES DESCRIBED HER F.D.I.C. OFFICE AS,
"THE LAST STOP FOR CAPITAL STARS BANKS AND
THEIR INSURED COSTUMERS BEFORE GOING UNDER."
MRS. BAIR IS A NATIVE OF INDEPENDENCE, KANSAS.
HER FATHER WAS A SURGEON AND
HER MOTHER A NURSE AND HOMEMAKER.
SHE RECEIVED HER BACHELORS DEGREE
FROM THE UNIVERSITY OF KANSAS
AND IN 1978, SHE RECEIVED HER JURIS DOCTOR
FROM THE UNIVERSITY OF KANSAS SCHOOL OF LAW.
MRS. BAIR HAS SERVED AS THE DEAN'S
PROFESSOR FINANCIAL REGLATORY POLICY
AT THE HEISENBERG SCHOOL OF MANAGMENT AT THE
UNIVERSITY OF MASSACHUSETTS AT HAMHERST.
SHE'S BEEN ASSISTANT SECRETARY
FOR FINANCIAL INSTITUTIONS
AT THE U.S. DEPARTMENT OF TREASURY.
SENIOR VICE PRESIDENT OF GOVERNMENT
RELATIONS OF THE NEW YORK STOCK EXCHANGE.
A COMMISSIONER AND ACTING CHAIR OF THE
COMMODITY FUTURES TRADING COMMISSION
AND RESEARCH DIRECTOR DEPUTY,
COUNSEL AND COUNSEL
TO KANSAS REPUBLICAN,
SENATE MAJORITY LEADER ROBERT DOLE.
PLEASE HELP ME TO WELCOME, THE 154TH
LANDON LECTURE CHAIRMAN SHEILA BAIR.
(APPLAUSE)
THANK YOU KIRK, FOR THAT VERY
VERY NICE INTRODUCTION
AND GOOD MORNING TO ALL OF YOU.
IT'S A GREAT JOY TO
BE BACK HOME IN KANSAS.
THERE ARE FEW PLACES ON EARTH
THAT COMPARE WITH KANSAS AND THE
HARD WORKING, STAND UP
PEOPLE WHO LIVE HERE.
WHERE EVER I WORKED OR TRAVELED, I'VE NEVER FORGOTTEN THE BASIC AMERICAN
VALUES OF LIBERTY, OPPORTUNITY, AND COMMON SENSE
THAT I LEARNED WHILE GROWING UP IN INDEPENDENCE.
AND LIKE A LOT OF KANSANS
I WAS TAUGHT TO BE HONEST AND DIRECT.
ALF LANDON, AS WE ALL KNOW,
NEVER PULLED A PUNCH IN POLITICS
WHICH HE ONCE REMARKED WOULD BE A SIN.
HE WAS A THOUGHTFUL PROBLEM SOLVER,
ALWAYS PROMOTING THE COMMON GOOD NOT THE EXPEDIENT.
DESPITE OPPOSITION FROM SOME OF HIS PARTY,
AS GOVENOR IN THE MIDDLE OF THE GREAT DEPRESSION OF THE 1930S
HE EMBRACED MANY PARTS OF
PRESIDENT ROOSEVELT'S NEW DEAL.
AND HE USED HIS COMMON SENSE IN
GETTING AT THE HEART OF THE PROBLEMS
IN HIS OWN STATE BY LOWERING TAXES,
PUSHING FOR UTILITY REGULATION,
PASSING A MORATORIUM ON MORTGAGE FORECLOSURES AND SPONSORING LAWS
TO BOLSTER TROUBLED BANKS.
WE NEED MORE MEN AND
WOMEN IN WASHINGTON WITH THAT
KIND OF COURAGE AND BOLDNESS.
AND I LIKE TO THINK I AM FOLLOWING
IN ALF'S FOOTSTEPS
WE'RE TACKLING THE AFTERMATH OF
A FINANCIAL AND ECONOMIC CRISIS.
THAT HAS DONE AS MUCH IF NOT MORE DAMAGE
TO OUR COUNTRY THAN A KANSAS TORNADO
HOW WILL WE WEATHER THIS CRISIS?
HOW WILL WE PROTECT CONSUMERS FROM THE ABUSIVE PRACTICES
THE PAST FEW YEARS. HOW DO WE STOP
THE EXCESSIVE RISK TAKING?
HOW DO WE KEEP PEOPLE IN THEIR HOMES?
HOW DO WE PREVENT MORE OF THOSE MASSIVE BAILOUTS
OF GIANT FINANCIAL INSTITUIONS?
AS A LIFELONG REPUBLICAN AND MARKET ADVOCATE
IT'S NOT EXACTLY BEEN EASY FOR ME
THE GOVERNMENT HAS BEEN GOING INTO PLACES
WHERE WE DON'T WANT TO BE.
WE'VE BEEN DOING THINGS WE'D RATHER NOT
BE DOING, BUT HAVE HAD LITTLE CHOICE.
SO I WANT TO TALK TODAY ABOUT HOW STABILITY
OF OUR FINANCIAL SYSTEM
WAS JEOPARDIZED TO THE POINT THAT THE FEDERAL GOVERNMENT WAS FORCED TO INTERVENE IN WAYS THAT WERE UNTHINKABLE, JUST A FEW YEARS AGO
I ALSO WANT TO TALK ABOUT WHAT WE'VE LEARNED
FROM THIS VERY PAINFUL EPISODE
AND WHAT MUST BE CHANGED TO AVOID THESE
PROBLEMS FROM RECURRING IN THE FUTURE.
IT'S HARD TO BELIEVE THAT JUST
A FEW YEARS AGO
ECONOMISTS WERE TOUTING THE GREAT MODERATION,
A PATTERN OF LONG EXPNASIONS
PUNCTUATED BY BRIEF AND MILD RECESSIONS.
INTEREST RATES AND INFLATION WERE LOW.
EASY CREDIT IN THE WAKE OF THE
DOT-COM BUST AND 9/11 TERRORIST ATTACKS
VOID THE DEMAND FOR REAL ESTATE
EASY LENDING STANDARDS LED TO AN INCREASE
IN HOME OWNERSHIP RATES, AND HOME PRICES
ROSE THROUGHOUT MOST OF THE COUNTRY.
FEW HOMEOWNERS DEFAULTED ON THEIR MORTGAGES
AS HOME PRICE APPRECIATION,>
HISTORICALLY LOW INTEREST RATES,
AND RELAXED UNDERWRITING STANDARDS
MADE REFINANCING AN EASY AND ATTRACTIVE OPTION.
FINANCIAL INSTITUTIONS ALSO THRIVED
IN THIS LOW INTEREST RATE AND EASY CREDIT ENVIRONMENT.
THIS WAS TRUE OF BANKS,
AS WELL AS A GROWING SHADOW SECTOR
OF NON-BANK CREDIT PROVIDERS.
FROM JUNE 2004 THROUGH FEBRUARY 2007,
NOT A SINGLE BANK FAILED.
THIS IS THE LONGEST PERIOD WITHOUT A BANK
FAILURE IN FDIC HISTORY.
THE BANKING INDUSTRY POSTED QUARTER AFTER
QUARTER OF RECORD PROFITS.
NON-PERFORMING ASSETS WERE AT HISTORICAL LOWS,
AND US BANK CAPITAL LEVELS WERE STRONG
BOTH HISTORICALLY AND BY COMPARISON TO
THEIR GLOBAL COUNTERPARTS.
UNDERNEATH THIS GOLDEN VENEER,
A HUGE ASSET BUBBLE WAS BUILDING.
IN ORDER TO MAINTAIN EARNINGS GROWTH,
FINANCIAL INSTITUTIONS FOUND
WAYS TO INCREASE LEVERAGE USING
SECURITIZATION AND OFF-BALANCE-SHEET FINANCING.
EXISTING HOME OWNERS WERE EAGER TO TAP
THEIR NEW-FOUND HOME EQUITY;.
OTHERS WERE ANXIOUS TO BECOME HOMEOWNERS
BUT WERE UNABLE TO QUALIFY FOR A TRADITIONAL MORTGAGE.
FINANCIAL INSTITUTIONS CREATED NEW MORTGAGE PRODUCTS
MANY OF WHICH COULD ONLY BE REPAID
IF HOME PRICES CONTINUED TO CLIMB—AND THEREBY
MADE CREDIT AVAILABLE TO EVER-MORE-RISKY
BORROWERS THROUGH UNSUSTAINABLE MORTGAGES.
I STARTED BECOMING CONCERNED ABOUT
PREDATORY LENDING AND SUB-PRIME MORTGAGES
IN 2001 WHEN I WAS ASSISTANT SECRETARY
FOR FINANCIAL INSTITUTIONS OF THE TREASURY DEPARTMENT. SOME LENDERS,
GENERALLY NOT BANKS, WERE OFFERING
MORTGAGE LOANS THAT BORROWERS COULDN'T AFFORD.
THESE SUB-PRIME LOANS WERE FINANCED THROUGH
WALL STREET SECURITIZATION VEHICLES AND
WERE REPLETE WITH EXOTIC FEATURES AND COMPLEX FEES.
WHILE MY CONCERNS WERE CLEARLY JUSTIFIED,
MY WARNINGS DID NOT RESONATE AT THAT TIME,
IN PART BECAUSE RISING HOME PRICES
ENABLED WEAK BORROWERS TO REFINANCE
AND PUSH THEIR PROBLEMS INTO THE FUTURE.
SO EVEN WHERE FEDERAL POWERS EXISTED TO REGULATE
NONBANK MORTGAGE LENDING, THEY
WERE NOT USED APPROPRIATELY. THE WAVE OF
DEFAULTS AND PROBLEM LOANS WOULD NOT
COME UNTIL THE HOUSING PRICE BUBBLE FALTERED.
IN EARLY 2007, AS CHAIRMAN OF THE FDIC,
I BEGAN TO SPEAK LOUDLY, CLEARLY, AND FREQUENTLY
ABOUT THE WAVE OF MORTGAGE PAYMENT PROBLEMS
THAT WOULD HIT THE INDUSTRY.
I HAVE LONG ADVOCATED FOR PRO-ACTIVE AND
SUSTAINABLE LOAN MODIFICATIONS AS A
COST-EFFECTIVE WAY TO DEAL WITH UNAFFORDABLE MORTGAGES.
AS AN ADVOCATE OF MODIFYING MORTGAGES
NO DOUBT ALF LANDON WOULD HAVE AGREED!
MODIFICATIONS CAN HELP LENDERS AND FAMILIES AVOID
THE FINANCIAL AND PERSONAL
LOSSES ASSOCIATED WITH FORECLOSURE.
AS WE HAVE NOW SEEN, THE SUBPRIME MORTGAGE PROBLEM
HAS TURNED INTO A PRIME MORTGAGE
PROBLEM AS THE ECONOMY HAS DECLINED.
FAR TOO MANY FAMILIES ARE NOW FACING
FORECLOSURE BECAUSE OF LOST INCOME FROM THE
ECONOMIC DISTRESS BROUGHT
ABOUT FROM THE SUBPRIME DEBACLE.
THESE DEVELOPMENTS SET THE STAGE FOR WHAT FOLLOWED:
THE WORST FINANCIAL CRISIS SINCE THE GREAT DEPRESSION.
LET ME GO OVER THE DRAMATIC
EVENTS THAT HELPED SHAPED THIS CRISIS
INEVITABLY, THE HOUSING BUBBLE BURST. THE
DECLINE IN HOME PRICES LED TO A LARGE-SCALE
DOWNGRADE IN THE CREDIT RATINGS OF A VARIETY OF COMPLEX
FINANCIAL INSTRUMENTS—CDS, CDOS AND CDOS-SQUARED --
TERMS MOST AMERICANS -- AS WELL AS A FEW
FINANCIAL EXECUTIVES -- HAD NEVER HEARD OF BEFORE.
ULTIMATELY, THE LOSSES FROM THE BURSTING BUBBLE EXPOSED
HOW MUCH RISK HAD BEEN CREATED IN THE FINANCIAL SYSTEM.
AS THE CRISIS UNFOLDED, IT BECAME CLEAR THAT
POTENTIAL LOSSES WOULD BE LARGE AND WOULD
THREATEN THE VIABILITY OF MANY LARGER
FINANCIAL INSTITUTIONS. AS WE ALL KNOW,
ANY TALK OF "THE GREAT MODERATION" ENDED IN 2007.
IN JUNE 2007, BEAR STEARNS ANNOUNCED DEVASTATING
LOSSES FOR TWO OF ITS SUBPRIME HEDGE FUNDS
WHICH HAD BEEN MARKETED AS LOW-RISK INVESTMENTS.
THESE LOSSES PROMPTED A CASCADE OF RATING AGENCY
DOWNGRADES OF SIMILAR INVESTMENTS AND THE FINANCING
THAT HAD BEEN AVAILABLE THROUGH SECURITIZATION AND
STRUCTURED CREDIT MARKETS QUICKLY DRIED UP.
MOUNTING CREDIT LOSSES SHOOK INVESTOR CONFIDENCE
AND FIRMS BECAME UNWILLING TO DO BUSINESS
WITH EACH OTHER IN WAYS THAT PRIOR TO THESE
EVENTS HAD BEEN ROUTINE AND PERCEIVED TO BE LOW RISK.
AS 2008 UNFOLDED, CONDITIONS IN THE MORTGAGE
AND OTHER MARKETS CONTINUED TO DETERIORATE.
MANY NON-BANK MORTGAGE FINANCE COMPANIES
WENT OUT OF BUSINESS. IN MARCH,
BEAR STEARNS WAS ACQUIRED IN A FEDERAL-RESERVE
ASSISTED TRANSACTION BY JPMORGAN CHASE.
AND IN JULY, INDYMAC BANK, A LARGE THRIFT
IN CALIFORNIA, FAILED — RESULTING IN
THE MOST COSTLY BANK FAILURE IN FDIC HISTORY.
SOON AFTER, FANNIE MAE AND FREDDIE MAC WERE
WERE FORCED INTO CONSERVATORSHIP,
AND IN SEPTEMBER LEHMAN BROTHERS FILED FOR BANKRUPTCY.
THE INSURANCE GIANT AIG RECEIVED $85 BILLION FROM
THE FEDERAL GOVERNMENT TO AVOID COLLAPSE
AND WOULD EVENTUALLY REQUIRE ANOTHER $100 BILLION.
WAMU BECAME THE LARGEST INSURED DEPOSITORY
INSTITUTION TO FAIL, THOUGH THANKS TO THE FDIC'S
RESOLUTION POWERS, IT WAS SOLD IN A
SEAMLESS TRANSACTION THAT REQUIRED NO SUPPORT
FROM THE GOVERNMENT AND FULLY PROTECTED ALL DEPOSITORS.
LIQUIDITY IN THE INTER-BANK MARKET EVAPORATED.
AND, THE UNITED STATES WAS NOT ALONE IN FACING THIS CRISIS.
IN SEPTEMBER 2007, NORTHERN ROCK, A LARGE MORTGAGE LENDER
IN THE U.K., EXPERIENCED A LIQUIDITY CRISIS
AND A SUBSEQUENT RUN BY DEPOSITORS--
THE FIRST BANK RUN IN THE U.K. IN OVER 100 YEARS.
AND BY THE END OF 2007, NORTHERN ROCK HAD RECEIVED
A HUGE LOAN OF ALMOST £27 BILLION POUNDS
(OR $54 BILLION) FROM THE BANK OF ENGLAND.
BY FEBRUARY 2008, THE U.K. GOVERNMENT WAS
FORCED TO TAKE OWNERSHIP OF NORTHERN ROCK.
AND IN THE FALL OF 2008, SUBSEQUENT BANKING
CRISES SWEPT THROUGH MANY WESTERN
EUROPEAN COUNTRIES AND AGAIN IN THE UK.
IN THE FALL OF 2008, THE U.S. AUTHORITIES TOOK
A SERIES OF INTERNATIONALLY COORDINATED ACTIONS
TO CONTAIN THE DAMAGE FROM THE COLLAPSING FINANCIAL SYSTEM.
THE CONGRESS PASSED THE EMERGENCY ECONOMIC
STABILIZATION ACT IN OCTOBER,
WHICH FUNDED THE U.S. TREASURY'S TEMPORARY
ASSET RELIEF PROGRAM, KNOWN AS TARP.
THE FDIC'S DEPOSIT INSURANCE LIMIT WAS TEMPORARILY
INCREASED TO $250,000, AND TEMPORARY
GUARANTEES WERE INSTITUTED
FOR MONEY MARKET MUTUAL FUNDS.
THE FEDERAL RESERVE OPENED NEW LENDING FACILITIES
TO PROVIDE FUNDING TO A MUCH WIDER RANGE OF
COMPANIES THAN HAVE HISTORICALLY
BEEN ABLE TO BORROW FROM THE FED,
TARGETING FIRMS BURDENED BY LARGE HOLDINGS
OF NOW ILLIQUID MORTGAGE RELATED SECURITIES.
THE FDIC CREATED THE TEMPORARY LIQUIDITY
GUARANTEE PROGRAM TO GUARANTEE BANK AND HOLDING
COMPANY DEBT IN ORDER TO PROVIDE LIQUIDITY.
THE TREASURY INVESTED HUNDREDS OF BILLIONS
IN LARGE INSTITUTIONS TO STABILIZE THEM
AND PROVIDE THEM WITH "FORTRESS" BALANCE SHEETS.
THESE ACTIONS WERE AN UNPRECEDENTED
BROADENING OF THE FEDERAL SAFETY NET.
BUT, GIVEN THE TOOLS AVAILABLE, THEY WERE MOSTLY NECESSARY TO PREVENT MORE
FAILURES OF OTHER LARGE, COMPLEX FINANCIAL INSTITUTIONS
THAT WOULD HAVE CAUSED SEVERE DAMAGE
FOR THE GLOBAL FINANCIAL
SYSTEM AND THE REAL ECONOMY.
CREDIT MARKETS ARE NOW SLOWLY THAWING
AND LIQUIDITY HAS VASTLY IMPROVED WITH SHORT-TERM
CREDIT SPREADS RETURNING TO NORMAL LEVELS.
EQUITY MARKETS HAVE RECOVERED SOMEWHAT,
BUT ARE STILL WELL BELOW THEIR PRE-CRISIS LEVELS.
WITH THE WORST OF THE CRISIS APPARENTLY BEHIND US,
IT'S TIME TO CONSIDER THE FALLOUT FROM THIS CALAMITY.
WHILE GOVERNMENT INTERVENTION HAS BEEN
SUCCESSFUL IN PREVENTING WIDER FAILURES,
IT HAS ALSO INTRODUCED "MORAL HAZARD"
INTO OUR FINANCIAL SYSTEM BY PROVIDING PREVIOUSLY
UNIMAGINABLE AMOUNTS OF TAXPAYER
SUPPORT FOR OPEN INSTITUTIONS.
GOVERNMENT INTERVENTION HAS IN TOO
MANY CASES PROTECTED STOCKHOLDERS,
BONDHOLDERS AND MANAGERS FROM
THE CONSEQUENCES OF THEIR MISTAKES
WE MUST MAKE FUNDAMENTAL CHANGES TO OUR
FINANCIAL REGULATORY SYSTEM TO REDUCE
THIS "MORAL HAZARD" AND TO MAKE SURE
SURE A FINANCIAL CRISIS DOES NOT HAPPEN AGAIN.
REFORMS ARE NEEDED TO CREATE A MORE RESILIENT,
TRANSPARENT, AND BETTER REGULATED FINANCIAL SYSTEM --
ONE THAT COMBINES STRONGER AND MORE EFFECTIVE
REGULATION WITH MARKET DISCIPLINE.
THIS CRISIS GIVES US AN OPPORTUNITY TO
ACHIEVE SIGNIFICANT REGULATORY REFORM.
AND IT IS IMPERATIVE THAT WE MEET
THE CHALLENGE AND NOT SIDESTEP OUR RESPONSIBILITIES
TO ENSURE FINANCIAL STABILITY AND TO
PROTECT THE TAXPAYERS.
WE SIMPLY CANNOT AFFORD
TO MAINTAIN THE STATUS QUO.
SO, WHAT'S TO BE DONE?
FIRST, WE MUST END TOO-BIG-TO-FAIL.
SECOND, WE MUST CLOSE DESTABILIZING
REGULATORY GAPS THAT EXIST AND HAVE MORE
CHECKS AND BALANCES TO MAKE
SURE REGULATORS DO THEIR JOBS.
AND THIRD, WE MUST DO A MUCH MORE TO
PROTECTING THE AMERICAN CONSUMER
WHEN IT COMES TO FINANCIAL PRODUCTS.
TO END "TOO BIG TO FAIL,"
," WE MUST FIND WAYS TO IMPOSE
GREATER MARKET DISCIPLINE ON SYSTEMICALLY
IMPORTANT INSTITUTIONS AND ENSURE THAT NO
FIRM IS TOO BIG OR TOO INTER-
CONNECTED TO FAIL.
AFTER ALL, IN A PROPERLY FUNCTIONING
MARKET ECONOMY THERE WILL BE WINNERS AND LOSERS.
AND WHEN FIRMS -- THROUGH
THEIR OWN MISMANAGEMENT AND EXCESSIVE RISK TAKING --
ARE NO LONGER VIABLE,
THEY OUGHT TO FAIL.
ONE THING WE LEARNED FROM OUR HANDLING
OF THIS CRISIS IS THAT "TOO BIG TO FAIL"
HAS BECOME EXPLICIT,
WHEN IT WAS ONCE IMPLICIT.
BY CONTRAST, SMALL INSTITUTIONS
AND THEIR INVESTORS KNOW THAT THEY CAN
AND WILL BE ALLOWED TO FAIL.
THIS COMPETITIVE DISPARITY MAKES IT MORE
EXPENSIVE FOR SMALL BANKS TO
RAISE CAPITAL AND SECURE FUNDING.
THE FDIC HAS RESOLVED MORE THAN
100 INSTITUTIONS THIS YEAR ALONE.
EVERYONE KNOWS THAT SMALL INSTITUTIONS
ARE NOT "TOO BIG TO FAIL."
FIRMS THAT THE MARKET BELIEVES ARE TOO
BIG OR TOO INTER-CONNECTED TO FAIL DISTORT OUR SYSTEM.
THESE FIRMS CAN RAISE LARGE AMOUNTS OF
DEBT AND EQUITY AT FAVORABLE TERMS THAT
DO NOT REFLECT THEIR TRUE RISK PROFILE.
WHEN INVESTORS AND CREDITORS BELIEVE
A FIRM IS TOO-BIG-TO-FAIL,
THEY GROW MORE COMPLACENT.
INDEED THEY ARE EVEN MORE LIKELY TO
ENCOURAGE THESE FIRMS TO TAKE ON GREATER RISK,
ADDITIONAL LEVERAGE AND BECOME EVEN LARGER.
INVESTORS AND CREDITORS BELIEVE
AND SO FAR HAVE BEEN PROVEN CORRECT,
THAT THE GOVERNMENT WILL NOT ALLOW THESE
FIRMS TO FAIL FOR FEAR OF MAJOR REPERCUSSIONS
FOR THE BROADER MARKET AND ECONOMY.
THIS CRISIS CLEARLY REVEALED THAT TODAY
FOR NON-BANKS WE HAVE NO PRACTICAL WAY TO ADDRESS THIS PROBLEM.
WE DO NOT HAVE AN EFFECTIVE RESOLUTION
PROCESS FOR HANDLING LARGE,
COMPLEX FINANCIAL FIRMS THAT
BECOME TROUBLED OR ARE FAILING.
THE FDIC'S PROCESS ONLY EXTENDS
TO INSURED DEPOSITORY INSTITUTIONS.
AND WITHOUT THE ABILITY TO CLOSE
AND IMPOSE LOSSES ON SYSTEMIC FIRMS
WHICH GET INTO TROUBLE,
WE RUN THE RISK THAT WE WILL HAVE TO REPEAT
THE COSTLY AND UNPOPULAR
TAXPAYER BAIL-OUTS OF THE PAST YEAR.
FOREMOST ON THE REFORM AGENDA IS THE
NEED FOR A SPECIAL LEGAL AND REGULATORY FRAMEWORK
TO ENSURE THE ORDERLY WIND DOWN OF
SYSTEMICALLY IMPORTANT FINANCIAL FIRMS
WHILE AVOIDING FINANCIAL DISRUPTIONS THAT COULD
DEVASTATE OUR FINANCIAL MARKETS AND ECONOMY.
A RESOLUTION MECHANISM THAT MAKES IT POSSIBLE
TO BREAK-UP AND SELL THE FAILED INSTITUTION
OFFERS THE BEST OPTION.
IT SHOULD BE DESIGNED TO PROTECT THE PUBLIC INTEREST,
PREVENT THE USE OF TAXPAYER FUNDS,
AND PROVIDE CONTINUITY FOR THE FAILED
INSTITUTION'S CRITICAL FINANCIAL FUNCTIONS.
THE FDIC'S AUTHORITY TO RESOLVE FAILING
BANKS AND THRIFTS IS A GOOD MODEL.
THIS IS THE SAME MODEL THAT HAS ALLOWED
ITHE FDIC TO SEAMLESSLY RESOLVE THOUSANDS
OF INSTITUTIONS OVER THE YEARS.
WE PROTECT INSURED DEPOSITORS WHILE
PRESERVING VITAL BANKING FUNCTIONS.
THE FDIC HAS THE AUTHORITY TO MOVE
KEY FUNCTIONS OF THE FAILED BANK
TO A NEWLY CHARTERED BRIDGE BANK.
LOSSES ARE IMPOSED ON MARKET PLAYERS WHO
REAP THE PROFITS IN GOOD TIMES,
BUT WHO ALSO SHOULD BEAR THE LOSSES IN THE CASE
OF FAILURE. SHAREHOLDERS OF THE FAILED BANK
TYPICALLY LOSE ALL OF THEIR INVESTMENT.
CREDITORS GENERALLY LOSE SOME OR
ALL OF THE AMOUNTS OWED THEM.
TOP MANAGEMENT IS REPLACED,
AS ARE OTHER EMPLOYEES WHO CONTRIBUTED
TO THE INSTITUTIONS' FAILURE.
AND THE ASSETS OF THE FAILED INSTITUTION
ARE SOLD TO A STRONGER, BETTER MANAGED BUYER
IF THIS PROCESS IS APPLIED TO SYSTEMICALLY
IMPORTANT FINANCIAL INSTITUTIONS—
WHETHER BANKS OR NON-BANKS —
IT WOULD PREVENT INSTABILITY AND CONTAGION,
WHILE PROMOTING FAIRNESS.
FINANCIAL MARKETS WOULD CONTINUE TO
FUNCTION SMOOTHLY, WHILE THE FIRM'S
OPERATIONS ARE TRANSFERRED OR UNWOUND IN AN ORDERLY FASHION.
THE GOVERNMENT WOULD STEP IN TEMPORARILY
TO PROVIDE WORKING CAPITAL FOR AN ORDERLY WIND DOWN,
INCLUDING PROVIDING NECESSARY FUNDS TO
COMPLETE TRANSACTIONS THAT ARE
IN PROCESS AT THE TIME OF FAILURE.
WE PROPOSE THAT WORKING CAPITAL FOR SUCH
RESOLUTIONS COME FROM A RESERVE WHICH THE
INDUSTRY WOULD FUND IN ADVANCE.
THIS WOULD PROVIDE BETTER PROTECTION FOR TAXPAYERS.
BUILDING THE FUND IN ADVANCE WOULD ALSO HELP PREVENT
THE NEED FOR ASSESSMENTS DURING AN ECONOMIC CRISIS,
AND ASSURE THAT THE FIRM WHICH FAILED
PAID SOMETHING INTO THE FUND.
TO AVOID DOUBLE COUNTING FOR BANKS WHICH
ALREADY PAY DEPOSIT INSURANCE PREMIUMS,
THE ASSESSMENTS SHOULD BE BASED ON ASSETS
HELD OUTSIDE OF INSURED DEPOSITORIES.
ANY COSTS ASSOCIATED WITH THE RESOLUTION
NOT COVERED BY THE FUND WOULD BE RECOUPED
THROUGH ADDITIONAL INDUSTRY ASSESSMENTS.
THIS RESOLUTION MECHANISM WOULD
ADDRESS SYSTEMIC RISK WITHOUT A
TAXPAYER BAILOUT AND WITHOUT THE
NEAR PANIC WE SAW A YEAR AGO.
IT WOULD PROVIDE CLEAR
RULES AND SIGNALS TO THE MARKET.
MOST IMPORTANTLY,
OVER THE LONG RUN,
IT WOULD PROVIDE THE MARKET
DISCIPLINE THAT IS SO CLEARLY LACKING TODAY.
A RESERVE FUNDED IN ADVANCE THROUGH
INDUSTRY ASSESSMENTS WOULD ALSO PROVIDE
ECONOMIC DISINCENTIVES
TO SIZE AND COMPLEXITY.
ANOTHER WAY TO ADDRESS THE RISKS OF SYSTEMIC
INSTITUTIONS IS TO MAKE IT EXPENSIVE TO BE ONE.
INDUSTRY ASSESSMENTS COULD BE RISK BASED,
WITH FIRMS ENGAGING IN HIGHER RISK
ACTIVITIES PAYING SIGNIFICANTLY MORE.
PROPRIETARY TRADING,
COMPLEX STRUCTURED FINANCE,
AND OTHER HIGH RISK ACTIVITIES
WOULD WARRANT HIGHER FEES.
IN ADDITION, SYSTEMIC FIRMS WOULD BE REQUIRED
TO HAVE IN PLACE THEIR OWN LIQUIDATION PLAN --
A LIVING WILL SO TO SPEAK --
WHICH WOULD DEMONSTRATE
THAT THEY COULD BE BROKEN APART
AND SOLD IN AN ORDERLY WAY.
THIS WOULD MEAN GREATER LEGAL AND
FUNCTIONAL SEPARATION OF AFFILIATES WITHIN
THESE LARGE FINANCIAL HOLDING COMPANIES AND
IN PARTICULAR, GREATER AUTONOMY AND
FIREWALLS SURROUNDING INSURED BANKS.
IN ADDITION, THE LARGEST FIRMS THAT
IMPOSE THE MOST POTENTIAL FOR SYSTEMIC RISK
SHOULD BE SUBJECT TO GREATER OVERSIGHT
HIGHER CAPITAL AND LIQUIDITY REQUIREMENTS,
AND OTHER PRUDENTIAL SAFEGUARDS
OFF-BALANCE-SHEET ASSETS AND CONDUITS,
WHICH TURNED OUT TO BE NOT-SO-REMOTE
FROM THEIR PARENT ORGANIZATIONS IN THE RECENT CRISIS
SHOULD BE COUNTED AND CAPITALIZED
AS ON-BALANCE-SHEET RISKS.
TAKEN TOGETHER, THESE MEASURES WOULD HELP
ENSURE THAT OUR LARGEST AND MOST COMPLEX FIRMS
CAN STAND ON THEIR OWN TWO FEET WITHOUT
RESORT TO AN IMPLICIT OR EXPLICIT GOVERNMENT BACKSTOP.
ONLY BY INSTITUTING A CREDIBLE RESOLUTION
PROCESS AND PENALIZING HIGH RISK ACTIVITY
WILL WE BE ABLE TO LIMIT SYSTEMIC RISK,
AND THE LONG-TERM COMPETITIVE ADVANTAGES
AND PUBLIC SUBSIDY IT GIVES TO THE LARGEST
INSTITUTIONS UNDER THE CURRENT SYSTEM.
WE ALSO NEED BETTER REGULATION
OF SYSTEMIC RISK AND SYSTEMIC INSTITUTIONS.
UNFORTUNATELY, OUR CURRENT SYSTEM HAS
TOO MANY REGULATORY GAPS AND NEEDS MORE
CHECKS AND BALANCES TO MAKE SURE
THAT REGULATORS GET THE JOB DONE.
IN THE RUN-UP TO THE CURRENT CRISIS,
OUR FINANCIAL AND REGULATORY SYSTEMS AND
SUPERVISORY SURVEILLANCE DID NOT IDENTIFY
AND ADDRESS THE BUILD-UP
OF RISK WITHIN THE SYSTEM.
IN SHORT, IT FAILED TO PROVIDE
EFFECTIVE MACRO-PRUDENTIAL OVERSIGHT.
WE NEED TO DEVELOP A MORE EFFECTIVE WAY
TO MONITOR AND PRO-ACTIVELY DEAL
WITH EMERGING RISKS FROM
A SYSTEM-WIDE PERSPECTIVE.
WE NEED TO BE ABLE TO INTEGRATE
INSIGHTS FROM A NUMBER OF DIFFERENT REGULATORY
PERSPECTIVES,INCLUDING BANKS, SECURITIES FIRMS,
HOLDING COMPANIES,AND PERHAPS OTHERS.
FROM THESE DIFFERING PERSPECTIVES WE
MUST ARRIVE AT A HOLISTIC VIEW
OF THE DEVELOPING RISKS TO OUR SYSTEM
WHAT WE NEED IS A SYSTEMIC RISK COUNCIL OF
NATIONAL REGULATORY AGENCIES WITH THE AUTHORITY
AND RESPONSIBILITY TO IDENTIFY, MONITOR, AND
TAKE ACTION TO PREVENT FUTURE SYSTEMIC RISKS.
A SYSTEMIC RISK COUNCIL WOULD PROVIDE AN
APPROPRIATE SYSTEM OF CHECKS AND BALANCES
TO ENSURE THAT DECISIONS REFLECT THE
INTERESTS OF PUBLIC AND PRIVATE STAKEHOLDERS.
IT SHOULD HAVE BROAD AUTHORITY AND RESPONSIBILITY
FOR IDENTIFYING INSTITUTIONS, PRODUCTS,
PRACTICES, SERVICES AND MARKETS THAT
CREATE POTENTIAL SYSTEMIC RISKS.
IT SHOULD HAVE THE AUTHORITY TO STEP IN AND
FILL REGULATORY GAPS WHEN THEY ARE EXPLOITED
IN A WAY THAT THREATENS THE SAFETY
AND SOUNDNESS OF THE FINANCIAL SYSTEM.
AND IT SHOULD HAVE AUTHORITY TO ESTABLISH
AND IMPLEMENT MINIMUM, MANDATORY,
MACRO-PRUDENTIAL STANDARDS FOR SUCH
THINGS AS CAPITAL, LIQUIDITY AND LEVERAGE
WHEN INDIVIDUAL REGULATORS FAIL TO ACT.
CONCENTRATION AND COMPLEXITY OF
THE DERIVATIVES MARKETS WERE YET FURTHER
SOURCES OF RISK IN
THE CURRENT CRISIS.
WHILE THESE MARKETS PERFORM
IMPORTANT RISK-MITIGATION FUNCTIONS,
THEY HAVE ALSO PROVEN TO BE A
MAJOR SOURCE OF CONTAGION DURING THE CRISIS.
LOSSES ON MORTGAGES WERE EXPONENTIALLY
MAGNIFIED BY TRILLIONS OF DOLLARS IN DERIVATIVES
WHOSE VALUES WERE DERIVED FROM THE
PERFORMANCE OF THOSE MORTGAGES.
AND CONCENTRATIONS OF DERIVATIVES EXPOSURES
AMONG CERTAIN DEALERS HELPED CATALYZE SYSTEMIC BREAKDOWN.
WHEN THE MARKET DECIDES A
DERIVATIVES DEALER IS WEAKENING,
OTHER MARKET PARTICIPANTS CAN DEMAND
MORE AND MORE COLLATERAL TO PROTECT THEIR CLAIMS.
AT SOME POINT, THE FIRM CANNOT MEET ADDITIONAL
COLLATERAL DEMANDS AND IT COLLAPSES.
THE RESULTING FIRE SALE OF COLLATERAL
CAN DEPRESS PRICES,
FREEZE MARKET LIQUIDITY, AND LEAD
TO THE COLLAPSE FOR OTHER FIRMS.
DERIVATIVE COUNTERPARTIES HAVE EVERY INTEREST
TO DEMAND MORE COLLATERAL AND SELL IT
AS QUICKLY AS POSSIBLE BEFORE
MARKET PRICES DECLINE.
THE COLLATERAL CALLS GENERATED BY DERIVATIVES
COUNTERPARTY CREDIT RISK MANAGEMENT MIMIC
THE DEPOSITOR RUNS OF THE PAST.
ONE WAY TO REDUCE THESE RISKS WHILE
RETAINING MARKET DISCIPLINE IS TO
MAKE DERIVATIVE COUNTERPARTIES KEEP
SOME "SKIN IN THE GAME" THROUGHOUT THE CYCLE.
UNDER THIS APPROACH, THE RECEIVER
FOR A FAILED INSTITUTION COULD IMPOSE
LOSSES OF UP TO 20% OF THE SECURED CLAIM.
THIS WOULD ENSURE THAT MARKET PARTICIPANTS
ALWAYS HAVE AN INTEREST IN MONITORING
THE FINANCIAL HEALTH OF THEIR COUNTERPARTIES.
IT WOULD ALSO LIMIT THE SUDDEN DEMAND FOR MORE
COLLATERAL BECAUSE THE PROTECTION WOULD BE CAPPED.
STANDARDIZED DERIVATIVES CONTRACTS SHOULD ALSO BE REQUIRED
TO TRADE ON A NATIONALLY REGULATED EXCHANGE
OR THROUGH A REGULATED,
CENTRALIZED COUNTERPARTY SYSTEM.
WHILE WE NEED TO TAKE THESE STEPS TO STRENGTHEN
THE SAFETY AND SOUNDNESS OF THE FINANCIAL SYSTEM,
WE ALSO NEED TO ADDRESS THE HUMAN SIDE.
WE MUST MAKE SURE THAT CONSUMERS HAVE
ACCESS TO FINANCIAL PRODUCTS AND SERVICES THAT ARE
TRANSPARENT, EASY TO UNDERSTAND, AND COMPETITIVELY PRICED.
IMPROVED CONSUMER PROTECTION
ARE IN EVERYONE'S BEST INTEREST.
IT IS IMPORTANT TO UNDERSTAND
THAT MANY OF THE CURRENT PROBLEMS AFFECTING THE SAFETY
AND SOUNDNESS OF THE FINANCIAL SYSTEM WERE CAUSED
BY A LACK OF STRONG, COMPREHENSIVE RULES
AGAINST ABUSIVE PRACTICES IN MORTGAGE LENDING.
LOOKING OVER THE FINANCIAL LANDSCAPE
FOR CONSUMERS OVER THE PAST SEVERAL YEARS,
I DO SEE MANY POSITIVE CHANGES IN TERMS OF TECHNOLOGICAL
INNOVATIONS AND WIDER AVAILABILITY OF CREDIT.
BUT I ALSO SEE TOO MUCH EMPHASIS ON CREDIT
AVAILABILITY AT THE EXPENSE OF PRODUCTS AND
SERVICES THAT HELP BUILD WEALTH.
I SEE POORLY REGULATED AND TRAINED MORTGAGE
ORIGINATORS MAKING LOANS TO FAMILIES WHOSE BIGGEST LIFETIME
FINANCIAL COMMITMENT WILL
BE THAT MORTGAGE LOAN.
I SEE COMPLEX, POORLY UNDERSTOOD
MORTGAGE CONTRACTS, ACCOMPANIED BY
INDECIPHERABLE DISCLOSURES
AND MIND NUMBING LEGALESE.
I SEE AN EXPLOSION OF PAYDAY LENDERS
AND CHECK CASHERS CHARGING UNBELIEVABLY HIGH FEES
FOR THE KINDS OF FINANCIAL SERVICES YOU
AND I GET FOR NO OR MINIMAL COST AT OUR LOCAL BANK.
BUT I ALSO SEE SOME BANKS IMBEDDING COMPLEX,
OPAQUE FEE STRUCTURES ON CHECKING
ACCOUNTS AND CREDIT CARDS, TRAPPING ON
UNWARY OR LESS SOPHISTICATED BANK CUSTOMERS.
GIVEN THE IMPORTANCE OF THE
THE CONSUMER TO OUR OVERALL ECONOMY,
IT IS AMAZING TO ME THAT WE HAVEN'T
DONE A BETTER JOB IN PROTECTING THEM.
I THINK WE CAN DO BETTER SO I SUPPORT
THE ESTABLISHMENT OF A NEW AGENCY WHOSE SOLE JOB
WOULD BE TO SET EFFECTIVE, COMMON SENSE
STANDARDS AND PROTECTIONS FOR CONSUMERS
AND I THINK SUCH AN AGENCY WOULD HELP BANKS
AND THE MORE RESPONSIBLE PROVIDERS OF CONSUMER CREDIT,
BY HELPING TO GET THE BAD ELEMENTS OUT OF THE SYSTEM AND
CREATING A MORE EVEN PLAYING FIELD
FOR THOSE WHO ARE TRYING TO DO THE RIGHT THING.
MANY IN THE INDUSTRY ARE WORKING CONSTRUCTIVELY
IN WASHINGTON FOR MEANINGFUL REFORM.
SOME HOWEVER, ARE WORKING
FURIOUSLY AGAINST IT. FEAR IS THEIR TACTIC.
THEY SAY REFORM WOULD STIFLE INNOVATION.
THEY SAY REFORM WOULD IMPEDE
THE ABILITY OF OUR COUNTRY TO GROW AND
COMPETE IN THE GLOBAL ECONOMY.
BUT THESE ARE THE VERY SAME ARGUMENTS
USED TO JUSTIFY DEREGULATION IN THE FIRST PLACE.
SOME WANT TO KEEP THE STATUS QUO. AND, BY IMPLICATION,
THEY WANT TO KEEP THE TAXPAYER ON THE HOOK.
THAT MAKES ME ANGRY.
MY MENTOR AND FORMER BOSS, BOB DOLE,
HAS ALWAYS LIVED HIS LIFE BY HIS FATHER'S VIEW OF THE WORLD AS
"STEWERS VERSUS DOERS."
AND HE WAS A DOER.
THESE "STEWERS" WOULD HAVE US DO NOTHING,
EVEN AFTER MILLIONS IN LOST JOBS AND TRILLIONS IN LOST WEALTH.
I'M A REPUBLICAN. BUT I'LL ALWAYS BE
A REPUBLICAN FROM KANSAS.
SO I BELIEVE AS BOB DOLE BELIEVES THAT
"WHEN IT'S ALL OVER, IT'S NOT WHO YOU WERE-IT'S WHETHER YOU MADE A DIFFERENCE."
I BELIEVE THAT GOVERNMENT HAS A ROLE TO PLAY
IN SETTING BASIC RULES FOR PROTECTING THE COMMON GOOD.
I BELIEVE THAT GOVERNMENT IS A "DOER,"
AND CAN MAKE A DIFFERENCE,
ESPECIALLY IN THE FACE OF
ADVERSITY AND UNFAIRNESS.
SO MY HOPE IS THAT ALF LANDON WAS RIGHT …
THAT THERE ARE SOME INTELLIGENT PEOPLE IN WASHINGTON …
EVEN THOUGH HE KNEW THERE ARE
"MORE OF 'EM IN KANSAS!"
MY HOPE IS THAT THE INTELLIGENT PEOPLE IN
WASHINGTON WILL BE "DOERS" --
WILLING TO TAKE ON THE SPECIAL INTERESTS --
AND WILLING TO DO, WHAT'S RIGHT FOR AMERICA.
THANK YOU VERY MUCH.
(APPLAUSE)
WE DO HAVE SOME TIME FOR A FEW QUESTIONS
AND WE'D LIKE TO ASK ANYBODY WHO'S ASKING QUESTIONS
TO GO TO THE MICROPHONES PLEASE SO
EVERYBODY IN THE AUDIENCE CAN HEAR THOSE
SO PLEASE COME FORWARD
AND ASK AWAY.
FIRST I JUST WANT TO THANK YOU FOR
COMING BACK TO KANSAS AND GIVING THIS LECTURE
I'VE MISSED THE LAST COUPLE BUT,
IT'S GOOD TO COME BACK HERE.
I'M A SOPHOMORE IN ECONOMICS AND
MY NAME IS THOMAS SUMMERS.
WHAT I'M INTERESTED IN IS THIS IMPORTANCE
OF REGULATING RISK TAKING THAT YOU MENTIONED.
IT SEEMS TO ME THAT THESE INTERACTIONS
THE FIRMS GO THROUGH HELP SET PRICES.
IT HELPS TO DETERMINE THE VALUE OF GOODS,
AND WHAT I'M INTERESTED IN IS
ARE YOU CONCERNRED THAT BY IMPOSING LIMITS ON THIS
THAT YOU WILL IN TURN CONSTRAIN THE VALUE ASSESSMENTS
THAT GO ALONG WITH THE PRICE
OF THESE EXCHANGES?
WELL I THINK THAT THE PRICING IS SKEWED NOW
PARTICULARLY IN THE CAPITAL MARKETS
WITH REGARD TO DEBT AND EQUITY FUNDING FOR LARGER
INSTITUTIONS. THAT PRICING MECHANISM
IS OUT OF WACK BECAUSE OF THE
"TOO BIG TO FAIL" IMPLICIT FEDERAL GUARANTEE.
SO I THINK IF YOU GET RID OF THAT,
I THINK THAT WILL HOPEFULLY HELP
REQUIRE THEM TO PAY MORE COMPETITIVE PRICING
FOR THEIR OWN FUNDING.
YOU CAN SEE GROWING DISPARITIES BETWEEN THE FUNDING COST OF
SMALL AND LARGE INSTITUTIONS BECAUSE OF THIS PROBLEM.
I ALSO THINK THAT BASIC PRUDENTIAL STANDARDS LIKE CAPITAL,
APPLIED ACROSS THE BOARD, ARE COMMMON SENSE
RULES THAT TELL ALL FIRMS OF A CERTAIN SIZE
OR IF THEY'RE MAJOR FINANCIAL INTERMEDIARIES
THAT WE DO NOT WANT LEVERAGE ABOVE A CERTAIN LEVEL.
I THINK THAT HELPS CONSTRAIN ASSSET BUBBLES
IN GOOD TIME, IF YOU HAVE CAPITAL WHICH SHOULD
FRANKLY INCREASE IN THE GOOD TIMES
YOU CONSTRAIN THE EASY CREDIT
THAT LED TO ASSET BUBBLES.
AND THEN YOU COULD GIVE THEM SOME ABILITY TO LOWER
THOSE CAPITAL REQUIREMENTS IN BAD TIMES
SO YOU INCREASE THEIR ABILITY TO LEND.
BUT NO, SETTING BASIC RULES, INCLUDING BASIC CAPITAL STANDARDS
THAT APPLY EVENLY, NO, I DON'T THINK THAT
IMPAIRS THE PRICING MECHANISM AT ALL
BUT I THINK IT DOES SERVE AS A GOOD CHECK ON
GREED AND EXCESSIVE LEVERAGE
WHICH REALLY GOT US INTO TROUBLE HERE.
THANK YOU.
FIRST OFF, THANKS FOR SPEAKING. I'M JONATHAN.
I'M A FRESHMAN IN ECONOMICS HERE.
THE AUSTRIAN SCHOOL OF ECONOMICS,
AND MORE SPECIFICALLY MURRAY ROTHBARD
TALKED A LOT ABOUT HOW THE FDIC WOULD
STRUGGLE TO EXIST AS AN INUSRANCE ORGANIZATION
BECAUSE REALLY IT'S TRYING TO INSURE,
LIKE TRYING TO INSURE A HOUSE THAT'S ALREADY ON FIRE
BECAUSE THE FRACTIONAL RESERVE BANKING SYSTEM
INHERENTLY, THE BANKS OWE MORE MONEY AT ALL TIMES
THAN THEY ALREADY HAVE IN THEIR RESERVES AT THAT TIME.
SO INHERENTLY, THEY CAN NEVER PAY OUT WHAT THEY OWE.
I THINK THAT FACT HAS SHOWN TO BE TRUE
THAT THE FDIC HAS BEGUN TO RUN VERY LOW
ON RESOURCES AND IS NEARING ALMOST BANKRUPTCY ITSELF.
SO FIRST, HOW WOULD YOU JUSTIFY THE PLACE OF THE FDIC
AS AN INSURANCE CORPORATION IN THAT AREA? AND SECONDLY,
IF THE FDIC WAS TO RUN OUT OF ITS RESOURCES RIGHT NOW
WHERE IS IT LOOKING FOR MORE MONEY IN THE FUTURE?
WOULD IT GO TO THE FEDERAL RESERVE?
WOULD IT INCREASE INSURANCE PREMIUMS?
OR LOOK FOR CONGERSS TO RAISE TAXES?
WELL, THIS IS A DEBATE THAT OCCURED BACK
IN 1933 WHEN THE FDIC WAS CREATED.
AND I THINK THE BALANCE WAS, IS THAT, PEOPLE NEEDED
TO KNOW IT WAS SAFE TO PUT THIER MONEY IN BANKS.
SO EVEN THOUGH THERE IS SOME SKEWING OF MARKET
INCENTIVES THROUGH DEPOSIT INSURANCE
I THINK THE BENEFITS OF HAVING DEPOSIT INSURANCE
FOR THE AVERAGE BANK CUSTOMER TO KNOW
THAT THEIR MONEY IS SAFE
AND ALSO PROVIDING STABILITY OF FUNDING TO BANKS
AS INTERMEDIARES WHO TAKE THE DEPOSITS AND MAKE LOANS
JUSTIFIES THE INCRAMENTAL MORAL HAZARD CREATED
WE ARE REQUIRED TO KEEP OUR OWN RESERVES
THAT ARE SET BY STATUTE TO FLUCTUATE WITHIN A RANGE OF 1.15-1.5.
THAT HAPPENED IN 2006, PRIOR TO THAT TIME
THERE WAS A STATUTORY RESERVE RATIO OF 1.25.
AND THAT WAS TOO LOW, FRANKLY, WHAT I THINK WE'RE
DEALING WITH NOW IS TOO LOW.
I CAME TO THE FDIC IN 2006, WITHIN 2 WEEKS
WE'D PUT OUT RULES TO RAISE PREMIUMS.
BUT CONGRESS HAD NOT GIVEN US THE AUTHORITY
TO DO THAT UNTIL EARLIER IN 2006
UNDER THE OLD STATUTORY REGIME, IF A BANK
HAD A HIGH SUPERVISORY RATING,
WHICH IS OVER 95% OF ALL BANKS, YOU
COULDN'T CHARGE THEM ANY PREMIUMS
SO LONG AS THE RESERVE WAS ABOVE 1.25.
SO WE TRIED VERY QUICKLY TO START BUILDING UP THE RESERVES
WHILE IT WAS STILL GOOD TIMES IN 2006,
SO WE WOULD HAVE SOME CUSHION.
BUT THERE JUST WASN'T ENOUGH TIME TO BUILD IT UP.
I DO THINK GOING FORWARD ONE OF THE REFORMS
I WOULD LIKE TO SEE IF TO GIVE THE FDIC MORE
FLEXIBILITY TO RAISE THE PREMIUM IN GOOD TIMES
I MEAN I WOULDN'T NECESSARILY, I MEAN YOU HEAR A LOT OF WALL STREET GUYS SAY BANKS
ARE INHERENTLY INSOLVENT, WELL, IT'S TRUE
OBVIOUSLY IF THEY TAKE DEPOSITS AND MAKE LOANS,
AND THEY HOLD THOSE LOANS TO MATURITY, RIGHT?
SO IF YOU HAD TO IMMEDIATELY LIQUIDATE ALL THOSE LOANS
WHICH WOULD NOT ALLOW YOU TO CAPTURE THE
INTRINSIC VALUE OF THOSE LOANS
SURE, THERE WOULD BE A SIGNIFICANT SHORTFALL.
BUT THAT'S NOT WHAT WE DO WHEN A BANK FAILS,
WE TYPICALLY TRANSFER THE WHOLE BANK,
THE FRANCHISE WITH THE DEPOSITS
AND THE LOANS TO A HEALTHIER BANK.
AS AN INQUIRER, WE PROVIDES SOME LAWSUREON THOSE
LOANS TO HELP US CAPTURE THE INTRINSIC VALUE
OF THOSE LOANS IE-NOT THE LIQUIDATION VALUE,
BUT WHAT THEIR ACTUAL VALUE WILL BE IN TERMS OF THE RETURN
THEY GENERATE VS. THE LOSSES THEY PROJECTED TO GENERATE.
AND SO IT ACTUALLY WORKS PRETTY WELL FOR US.
AND IT'S NOT, FOR INSTANCE, WAMU WHEN IT WAS RESOLVED LAST YEAR
THERE WAS NOT A COST. MOST OF THESE INSTITUTIONS
THERE IS-IT VARIES. AGAIN I THINK OVERALL,
THE SYSTEM THAT WE HAVE, EVEN THOUGH THERE ARE LOSSES
WHEN BANKS FAIL, THAT IS ABSORBED BY INSURANCE PREMIUMS
THAT ARE PAID BY BANKS. AND I THINK THE
COUNTER IS THAT IT PROVIDES STABILITY- I DON'T EVEN
WANT TO THINK WHAT WOULD'VE HAPPENED TO US LAST YEAR
IF THERE HADN'T BEEN DEPOSIT INSURANCE BECAUSE IN OCTOBER
THAT WAS THE ONLY THING THAT WAS STABLE AT THAT POINT.
AND THOSE INSURED DEPOSITS STAYED IN THOSE
BANKS TO PROVIDE CREDIT.
WE ARE HAVING STRESS ON OUR INDUSTRY FUNDED RESERVES.
WE'VE DONE A SPECIAL ASSESSMENT.
WE'VE RAISED PREMIUMS.
WE'RE ASKING BANKS TO PREPAY THEIR ASSESSMENTS OVER THE NEXT 3 YEARS,
BEFORE THE END OF THE YEAR, WHICH WILL BRING ABOUT
45 BILLION DOLLARS IN CASH.
OUR PROECTIONS ARE THAT THAT SHOULD BE AMPLE
TO COVER WHAT OUR PROJECTED LOSSES ARE.
AGAIN, A LOT OF IT TURNS ON THE ECONOMY.
WE'RE STILL MAKING SOME PRETTY PESSIMISTIC ASSUMPTIONS
ABOUT THE ECONOMY AND WE THINK THIS WILL GET
US THROUGH THIS WITHOUT HAVING TO BORROW FROM TREASURY
BUT THE AVERAGE DEPOSITOR SHOULD UNDERSTAND
WE ARE FULL FAITH IN CREDIT. WE ARE THE GOVERNMENT.
WE HAVE WIDE AUTHORITY TO BORROW FROM TREASURY,
UP TO 500 BILLION DOLLARS IF WE NEEDED TO-IMMEDIATELY.
I THINK WITH THE CONCURRENCE OF THE FED AND THE
TREASURY. I THINK THE IMPORTANT POINT IS FOR INSURED DEPOSITORS-
THEY DON'T HAVE ANYTHING TO WORRY ABOUT.
THE GOVERNMENT-WE'RE FULL FAITH IN CREDIT.
THERE'S AN ABSOLUTE GUARANTEE. NOBODY'S EVER
LOST A PENNY OF THEIR INSURED DEPOSIT, AND NEVER WILL.
BUT WE HAVEN'T HAD TO BORROW FROM TAXPAYERS,
AND I HOPE WE'LL BE ABLE TO AVOID THAT.
THANK YOU.
THANKS FOR COMING TO KANSAS STATE UNIVERSITY.
MY NAME IS ANDREW (INAUDIBLE), GRADUATED '05-POLITICAL SCIENCE, GEOGRAPHY.
BASICALLY, I COMPLETELY AGREE WITH YOU, WITHOUT
THE FDIC WE WOULD HAVE BEEN IN A VERY BAD PLACE.
AND THAT'S THE ONLY THING I CAN REALLY SUPPORT FROM THE 1930'S
MAYBE THE HOOVER DAM, THERE'S ABOUT 2 THINGS I CAN SUPPORT,
AND THAT'S ONE OF THEM. I WAS WORKING AS A
FINANCIAL ADVISOR AND GOT TALKING TO PEOPLE AND THE ONLY
THEY COULD SAY WAS WE HAVE FDIC INSURANCE.
THAT IS THE DIFFERENCE FROM THE 30'S TO TODAY.
THAT'S THE THE BIG HUGE DIFFERENCE.
I DO WANT TO THANK YOU FOR BEING CALM.
THERE'S NOT VERY MANY LEADERS IN WASHINGTON
THAT HAVE BEEN CALM.
THEY'VE CAUSED MOST OF THE PROBLEMS.
THE BUSINESS LEADERSHIP WAS NOT LEADERSHIP.
THEY'RE ASKING FOR BAILOUTS AND THEN THE POLITICAL
ELITES THEY ALL CAVED TO THAT PRESSURE.
IT'S REALLY FRUSTRATING. THERE'S NOT TOO MANY PEOPLE-
LARRY KUDLOW, YOU THAT HAVEN'T CAME
CAME OUT AND SAID "OH MY GOSH,
THE WHOLE THING'S GOING TO FALL APART."
NOW WHEN YOU SAY, "NEAR PANIC OF LAST YEAR,"
I KIND'VE LAUGH AT THAT. IT WAS A PANIC,
BY ANY DEFINITION OF THE WORD. THE FDIC
IS OUR SAFETY NET.
BUT THAT'S ALL WE NEED. HONESTLY, I DONT' KNOW
THAT WE NEED ANYTHING ELSE.
THE FDIC, IF YOU WANT TO HAVE A SAFE PLACE
TO PUT YOUR MONEY, IT'S THE FDIC.
LEAVE EVERYTHING ELSE. LET PEOPLE TAKE RISK.
LET THEM GET BURNED BY RISK. THAT'S CAPITALISM.
THAT'S WHY WE'RE AMERICA. THAT'S WHY WE'RE
BETTER THAN THE OTHER COUNTRIES.
WE DON'T WANT TO BE MORE LIKE CHINA, WE DON'T WANT
TO BE MORE LIKE EUROPE.
WE DON'T WANT TO DO THOSE THINGS.
WE NEED TO JUST DO WHAT WE DO,
WHAT WE'VE DONE FOR 200 YEARS,
WHICH IS LET PEOPLE TAKE RISK.
AND IF IT WORKS, THEN THEY GET REWARDED FOR IT.
IF IT DOESN'T WORK, YOU DON'T BAIL THEM OUT.
I DON'T KNOW WHAT ELSE TO SAY.
OKAY, WELL I AGREE WITH YOU (LAUGHTER).
WELL, I THINK THAT'S RIGHT, AGAIN, WE WANT
A RESOLUATION MECHANISM
THAT ACTUALLY WORKS SO THAT WE CAN IMPOSE
IF ONE OF THESE INSTITUIONS GETS INTO TROUBLE.
THEY ARE PUT INTO RECEIVERSHIP AND THEIR SHAREHOLDERS AND
CREDITORS TAKE THE LOSSES, NOT THE GOVERNMENT.
WE ABSOLUTELY THINK THAT'S IMPORTANT FOR THE
PROPER FUNCTIONING OF THE MARKETS.
WE'LL GO BACK OVER HERE NOW.
AGAIN, THANK YOU FOR COMING. I HAVE
A VERY SHORT QUESTION.
YOU PROPOSED A NEW...(APPLAUSE>)
(LAUGHTER)
YOU PROPOSED A NEW CONSUMER PROTECTION AGENCY.
DO YOU FEEL THIS AGENCY SHOULD ELIMINATE
CASH, CHECKING AND PAYDAY LENDING
OR SUBPRIME MORTGAGES?
NO, I DON'T THINK IT SHOULD ELIMINATE THEM.
BUT I THINK THERE NEEDS TO BE BETTER REGULATION
BETTER UNDERSTANDING OF THE PRICES MAY APPEAR AS
YOU REIMPEDE ON THOSE TYPES OF FINANCIAL SERVICES.
AND BETTER ABILITY TO COMPARE, FRANKLY,
ACROSS FINANCIAL SERVICE PROVIDERS.
WE HAVE A VERY ELABORATE FRAMEWORK FOR REGULATING
INSURED DEPOSITORY INSTITUTIONS.
BUT OUTSIDE OF THAT, AT LEAST ON CONSUMER CREDIT, THE
NON-BANK PROVIDERS THERE'S JUST REALLY NOT
MUCH OVERSIGHT AT ALL. SO I THINK IT
WOULD HELP LEVEL THE REGULARTORY PLAYING FIELD
FOR THERE TO BE A MORE SYMMETRICAL EVEN
REGULATION AND ALSO THE DISCLOSURES THAT REFLECT
WHAT'S THE DIFFERENCE BETWEEN GETTING A
PAY DAY LOAN OR DRAWING A (INAUDIBLE) LINE IN A CREDIT CARD?
THAT WE COULD HAVE A REGULATOR THAT'S LOOKING AT IT
CROSS SECTORS AND PROVIDING MORE MEANINGFUL DISCLOSURES
FOR CONSUMERS SO THEY COULD MAKE MORE INTELLIGENT CHOICES.
I'M NOT SAYING PUT THEM OUT OF BUSINESS.
NO NOT AT ALL, BUT I DO THINK THERE CAN BE BETTER REGULATION,
BETTER OVERSIGHT TO MAKE SURE THAT THE
DISCLOSURES THAT ARE REQUIRED ARE BEING MADE AND THAT
THEY ARE MEANINGFUL TO CONSUMERS
SO THEY CAN MAKE INTELLIGENT DECISIONS.
THANK YOU.
HI, I HAVE A QUESTION OF TERMINOLOGY.
WHEN AN ASSEST IS NO LONGER LIQUID,
WHAT IS IT? IT DOESN'T SEEM LIKE IT'S SOLID.
SO SOMEHTING EVANESCENT AND FLEETING?
AS ELUSIVE AS THIN AIR, PERHAPS ITS GASEOUS?
I'VE ALWAYS WONDERED. THANK YOU.
WELL IF IT'S A LOAN, THAT'S WHY THERE ARE DIFFERENT RULES
FOR BANK LOANS THAT ARE HELD TO MATURITY.
YOU DON'T HAVE TO MARKET TO MARKET
BECAUSE THE BANK HAS NO INTENTION OF SELLING THAT LOAN
THEY'RE GOING TO KEEP IT ON THEIR BOOKS, AND THEY'RE
GOING TO SERVICE IT AND COLLECT THE INCOME
THAT COMES FROM IT AND THEY'LL DEAL WITH THE WORK OUT,
IF THERE'S A LOSS. SO LIQUIDIATION
VALUE REALLY IS IRRELEVANT IF THE LOAN IS
GOING TO BE HELD TO MATURITY.
SO YOU DON'T HAVE TO GET INTO THIS TYPE OF
EVALUATION ISSUES. NOW THERE ARE
VAST FEES NOW TALKING ABOUT REQUIRING EVERYTHING
TO BE MARKED TO MARKET, EVEN LOANS THAT
BANKS HOLD IN PORTFOLIO. THAT TROUBLES ME GREATLY,
I THINK THESE LOANS ARE IDIOSYNCRATIC IN
TERMS OF THEIR CREDIT QUALITY. THERE IS NO LIQUID
MARKET FOR A WHOLE LOAN THE WAY THERE IS
FOR INSTANCE, FOR A COMMODITY OR SECURITY
AND I'M AFRAID IF WE STARTED TRYING TO FORCE BANKS TO MARK THOSE
WITH SOME THEORETICAL LIQUIDATION VALUES
AND THE MARKET SEIZES UP, AND THERE IS NO MARKET
YOU'RE GONNA HAVE VERY VERY LOW EVALUATIONS
AND THEN WHEN IT'S HAPPY TIMES-THE WAY IT WAS IN 2004-05
YOU'RE GOING TO HAVE HIGHLY INFLATED VALUES
FOR BANK LOANS, YOUR QUESTION KIND OF LEADS TO WHY
WE LET BANKS HOLD THESE LOANS, KEEP THAT BOOK
WITH RESERVES PROJECTED FOR POJECTED LOAN LOSSES
DEDUCTED AGAINST THEM. BUT WE DON'T REQUIRE
THAT THEY BE MARKED.
THANK YOU.
LET'S THANK OUR SPEAKER ONE LAST TIME.
(APPLAUSE)