CNBC Interview - Transcript

Interview

CNBC INTERVIEW WITH REP.S BRAD SHERMAN (D-CA) AND DON MANZULLO (R-IL)

SUBJECT: MARKET REGULATION

INTERVIEWERS: BILL GRIFFETH, MICHELLE CARUSO-CABRERA, DENNIS KNEALE, DONNY DEUTSCHE, SUE HERERA

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MR. GRIFFETH: We also welcome two members of the committee as they -- and I don't believe they've asked their questions yet.

And I apologize, gentlemen, I haven't been able to monitor the whole hearing. But we welcome back Congressman Brad Sherman, the Democrat of California. We also welcome Donald Manzullo, the Republican of Illinois. Thank you both for joining us today.

REP. SHERMAN: Thank you.

REP. MANZULLO: Thank you.

MR. GRIFFETH: Congressman Sherman, what do you make of the proposal from the administration on this regulatory framework?

REP. SHERMAN: Well, there are really two parts. One is to have a systemic regulator. The other is to have a -- really a change to our bankruptcy laws. And I think our bankruptcy laws were probably adequate to take AIG into bankruptcy, where it should have been, either bankruptcy or receivership, many months ago.

There's little excuse for not doing that. That would have saved us tens of billions of dollars and voided the bonuses -- (inaudible). But I think it would be good for Congress to tweak our bankruptcy and receivership laws. What I'm concerned about is a situation where we're called upon to bail out a financial institution or its creditors.

Bankruptcy and receivership means that the company's dead and a federal agency or a bankruptcy court splits up the cadaver. It should not mean, though, that the taxpayers come in and cater the wake.

MR. GRIFFETH: All right. Congressman Manzullo, what do you make of what you're hearing today?

REP. MANZULLO: Well, first of all, I agree 100 percent with what Mr. Sherman said.

MR. GRIFFETH: Wow. How often does that happen?

REP. MANZULLO: Well, it -- actually it does with us. We work on a lot of projects together.

MR. GRIFFETH: (Laughs.) Okay.

REP. MANZULLO: My problem is this. The Fed has already had the authority to, for example, get rid of 327 and 228 mortgages and also to require written proof of a person's income before that person can get a mortgage. So here we have the very powerful Fed, all the powers in place to stop a lot of the bleeding in subprime. They sat back and did nothing. So why create another organization to sit on top plus --

MS. CARUSO-CABRERA: Representative Sherman, we hear that a lot. There's a lot of talk of giving a lot more power to the Federal Reserve when the Federal Reserve already had a lot of power but didn't execute on it. I mean, it's a lot of moral hazard, isn't it, to reward the very institution that many people think failed?

REP. MANZULLO: A moral hazard is a teetotaler with a bottle of beer. So these guys keep on speaking in terms of -- throwing out all types of terms, "systemic risk" -- (inaudible).

The big problem is this. Something happens in the markets; these guys sit back and look at each other and play doodles with each other's noses and eyes on pieces of paper. They have the power already to do something, and they don't do anything.

MR. GRIFFETH: What do you think, Congressman Sherman?

REP. SHERMAN: I --

MR. MANZULLO: (Laughs.)

REP. SHERMAN: Look, if you're not going to involve any of the people and agencies that have some of the blame for where we are now, you'd disqualify just about every agency and every -- everybody in Washington.

MR. GRIFFETH: And us.

REP. SHERMAN: I do think -- the thing that worries me about the Fed is they have this tremendous power under Section 13.3 to loan money to just about anybody on terms that they think are sufficiently secured.

And if they were a regulator -- the more we make them a regulator, the more inclined they're going to be to say, "Well, we don't want anybody to say we screwed up as a regulator, so let's keep the company alive by making it some loans.

MR. DEUTSCH: Congressman, I'm a little slow on this. Help me out here.

REP. SHERMAN: Yeah.

MR. DEUTSCH: If we look at the FDIC model, and we say, "Okay, there are going to capital requirements, liquidity requirements," are we always pretty much going to avoid getting to the cliff at this point if we're regulating as we go?

REP. SHERMAN: What was that again?

MR. DEUTSCH: In effect, if the capital requirements, the liquidity requirements are what they are and we're regulating as we go, aren't we going to avoid getting to the place we're at now?

REP. SHERMAN: Well, no system is perfect. We do have an FDIC with capital requirements and a reserve, and yet hundreds of banks go under, most of them small, every year. And what I don't want is a circumstance where you have bailout authority in somebody who's the regulator.

MS. HERERA (?): Okay. What we're trying to solve for is not being able to shut down AIG, is that --

MS. CARUSO-CABRERA (?): Right. Exactly.

Congressman Manzullo, so I take it from the comments that you just made on our air that you are not in favor of the plan that Mr. Geithner is putting forward. Is that a correct read, or do you find some things in there that you could agree to and do think would be beneficial?

REP. MANZULLO: Well, here's the problem. He has a plan but can't answer the question about what the plan is about. Congressman Royce asked him the question, what would you do with something the size of GE Capital? He hemmed, hawed; he shuffled his feet. He said, "Well, we'll have to look into that." No, the problem is this, or the issue is this; you look into something that dramatic before you propose the plan.

MR. KNEALE: Congressman Manzullo --

REP. MANZULLO: They're shooting from the hip.

MR. KNEALE: Congressman, isn't it easy to throw rocks? We are in unprecedented territory here. This is a fairly comprehensive plan, and I think Mr. Geithner along the way has said several --

REP. MANZULLO: These people --

MR. KNEALE: Excuse me, Congressman -- has said several times, "You know what? There are still issues to be resolved here." There is no plan. God could put a plan on the table right now, and we are all going to come up with scenarios; well, what if, what if, what if. We are in uncharted, new territory here, sir.

REP. MANZULLO: Excuse me. People threw rocks at my constituents who lost 60 percent of their pension plan at the same time that taxpayers bailed out AIG so they could honor their pension insurance plans. It's the people I represent that are having rocks thrown at them. What we're trying to do is we want some real answers before you change structurally the system we have in place. That's not unreasonable; that's the purpose of the Congress.

REP. SHERMAN: Let me jump here -- in here. I think Geithner's proposal is far more detailed than anything else that's come out of Treasury.

MR. : Thank you.

REP. SHERMAN: I think it's got some good provisions in it. I think we do need to change our bankruptcy and receivership laws to deal with these large financial institutions. And at the same time, I want to make sure that we don't have the taxpayer money put at risk and that the entity that is capable of deciding to do a bailout is not the same entity that's responsible for creating -- for regulating and might be blamed for putting us in a position where the bailout is necessary.

MR. KNEALE: All right. But Congressman Manzullo, it's one thing for a regulatory overhaul to try to protect the financial system from collapse. It's another thing for an overhaul to try to protect an investor from losing money. Which extreme do you think this proposal from Geithner is going toward? Which is it doing more of, protect the system or protect the investor because he can't protect himself?

REP. MANZULLO: Well, the whole purpose is to protect the consumer. I mean, to protect the investor, the person with the 401(k) or the IRA that got caught up in this system now. And unfortunately, it's our constituents that are the victims of it.

MR. KNEALE: But do hedge fund investors deserve to be protected from risk? They're all multimillionaires. They put money into hedge funds at their own risk. Do they --

(Cross talk.)

REP. MANZULLO: You know what? The largest city in my congressional district, $41,000 income per household. That -- that's -- that's the median income for the people that I represent. They're not these real large investors that have thrown away, wasted all kinds of money. But sometimes, when you get people that throw away big money on the top, it comes on down and hits the little guys on the bottom. And that's what's happened to our people.

REP. SHERMAN: Well, "protect" is a broad word. The question is, do we protect them by having good regulation and a system for winding up insolvent institutions? Absolutely. But do we throw taxpayer money into the circumstance? Do we tax the people in my district because a city in his district made a bad investment? I don't think so.

REP. MANZULLO: Or vice versa.

REP. SHERMAN: Or vice versa.

MR. GRIFFETH: Gentlemen, we're grateful for your time.

REP. MANZULLO: Thank you.

MR. GRIFFETH: We love the lively conversations.

REP. MANZULLO: Thank you.

MR. GRIFFETH: Thank you both for joining us today.

REP. MANZULLO: Thank you.

REP. SHERMAN: Thank you.

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