CNBC Interview - Transcript

Interview

CNBC Interview - Transcript

CNBC Interview With Senator Susan Collins

Subject: Regulatory Reform Interviewers: Lawrence Kudlow, Melissa Francis

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MS. FRANCIS: President Obama is out with his plan to overhaul financial regulation, but do Capitol Hill leaders think it's on the right track?

Joining us for a first on CNBC interview is Maine Republican Senator Susan Collins.

Senator, thanks for joining us.

You introduced your own regulatory reform legislation back in March, and I know you spent five years as Maine's financial regulator. You're calling for a systemic risk counsel similar to the president's, but critics say that pretty much already informally exists and was there, frankly, when we got ourselves into this mess.

How do you respond to that?

SEN. COLLINS: It doesn't exist with the kind of authority that I proposed. The systemic risk counsel that I would like to see would have real authority, all the regulators would be at the table, but under my proposal, there would be an independent chairman who is confirmed by the Senate. The president has proposed that the Treasury Secretary be the chair.

I think you need someone who is independent of the regulators to be the chair and who has real authority to identify regulatory black holes, to force regulatory action, to look across the spectrum of our financial markets to identify high risk policies or products that need to be brought under a regulatory regime.

MR. KUDLOW: Senator Collins, what's the role the FDIC on your counsel? I was reading some of your press releases and talking points and you mentioned a bunch of agencies that would sit on this, but I don't see the one agency that has a lot of experience in closing down failed institutions.

MS. FRANCIS: Larry's favorite.

MR. KUDLOW: And that is the FDIC, and particularly, its chair, Sheila Bair.

SEN. COLLINS: Sheila is terrific and I would be fine having the FDIC as a member of the counsel as well. I actually think that we should give at the FDIC the broader wind down authority that the president has suggested is needed for non-bank financial institutions.

The FDIC has a lot of experience in this area and I think rather than creating a new entity, we should look at giving the FDIC that authority.

MS. FRANCIS: Is it possible, really, though, to regulate these products on Wall Street effectively? I mean I was looking at George Soros' op-ed today in the FT and he was talking about outlawing credit default swaps. To me, that just means that, you know, that traders are not going to use that anymore, they're going to migrate to something else and always arbitrage the opportunity.

It seems like, you know, in order to not touch the stove, they've got to feel like it's a real possibility that they're going to get burned and to me that's failure, a real possibility they're going to lose a lot of money. That's the only way to keep people from taking these gambles. Isn't it?

SEN. COLLINS: Well, I think we have to draw a careful line. We don't want to inhibit innovation that is useful for the market, but on the other hand, we saw from the credit default swap disaster, the growth of this new exotic financial derivative that was not fully disclosed, that wasn't well understood and nobody was looking at the impact on the market as a whole.

So that's what I would see this counsel as doing is identifying a new, high risk derivative or some other financial instrument and taking a look at what the consequences are for the market as a whole. But it is a careful balance that we have to strike because we don't want to hamper useful innovation.

MR. KUDLOW: Senator Collins, Paul Volcker gave a heck of an important speech in China a little while ago and he says the too big to fail syndrome has created moral hazard and we have to tackle that and we're not tackling that in these regulatory issues, and in particular, Ms. Collins, he says that, "taxpayer funded depository insurance for banks means that they shouldn't have proprietary trading and speculative activities." In other words, he's coming very close to saying we should put the wall up again and separate banks out from the trading firms.

Now, no one is really tackling that question. Do you have a thought on that?

SEN. COLLINS: Well, I don't think we're going to bring back the Glass-Steagall Act and re-build that wall, but he is making a good point that firms know that Uncle Sam is going to be there to bail them out, it encourages high risk behavior, excessive leverage and a lot of the practices that have gotten us into trouble in the first place.

What I've suggested is not a limit on how big a institution can be, but having higher capital requirements, more oversight of their leverage ratios, more regulatory scrutiny when they get to that size because I think that he is correct that we are creating a moral hazard here.

MR. KUDLOW: I mean at some point at the end of this discussion, doesn't somebody have to say, one of the top 20 banks can fail? We can close them down.

SEN. COLLINS: Yes.

MS. FRANCIS: That's my point.

MR. KUDLOW: We can close them down, sell the assets off. They have to fail because no one is dealing with this moral hazard issue. I don't care how many bureaucratic layers the best regulatory minds put together, at the end of the day, that is still the problem.

MS. FRANCIS: We erase the lesson of Lehman.

SEN. COLLINS: I agree.

MS. FRANCIS: By letting all these other things happen. All right. Senator Collins, thank you so much for joining us today. We appreciate your insight.

SEN. COLLINS: Thank you.

END.

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