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What’s on Charlie Rose: 3/04: Elizabeth Warren and Dick Armey

Elizabeth Warren, Chair, The Congressional Oversight Panel

with Elizabeth Warren
in Current Affairs
on Thursday, March 4, 2010

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CHARLIE ROSE:    Elizabeth Warren is here.       She is the chair of the

Congressional Oversight Panel.        That committee has a broad mandate the

monitor the federal bank bailout and review measures created to prevent a

future economic crisis.

           Its latest report focused on the threat from losses in the commercial

real estate market.     Legislation circulating in Congress this week suggests

that financial reform could be coming.         At the center of those discussions,

the debate on the powers of a new consumer protection agency and where it

might be located.

           I’m pleased to have Elizabeth Warren back at this table.        Welcome.

           ELIZABETH WARREN:      Thank you.

           CHARLIE ROSE:      Tell me what you think about this debate about a

consumer protection agency.        You have a House bill which made an

independent agency, came out of the House Financial Services Committee.

Now you have Dodd and Corker, the two, Democrat and Republican, suggesting

some compromise they may have reached which would put it inside the Federal

Reserve.    What says Professor Warren?

           ELIZABETH WARREN:      Here’s the deal.   Right now, the Fed has the power

actually to do a lot of this.        The Office of the Controller of the

Currency, which is the federal bank regulator, has the power to do a lot of

what this agency would do.        But the truth is they don’t want to do it.

They’re not interested in it.        It’s not what they do.
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         CHARLIE ROSE:     Someone said monetary policy was in the penthouse and

consumer protection was in the basement.

         ELIZABETH WARREN:       In the basement when it’s lucky.

         It’s the stepchild.       It’s the one nobody wants, because -- why do you

go to the Fed?     Because you want to do monetary policy, right?    Why do you

go to the Office on the Controller of the Currency?       Because you love those

banks and want to take care of their profits.


         There’s nobody in Washington who is focused on the economics of the

family, who is focused on these consumer products.

         CHARLIE ROSE:     This is credit cards?

         ELIZABETH WARREN:       Credit cards, mortgages, car loans, check overdraft

fees.   This is all the stuff that you have to do in your daily life to

survive economically.

         And what’s happened is this is an industry where the business model

itself has fundamentally changed.       The way the game used to work -- let’s

start with credit cards.     It’s the easiest way to see it.    Back in 1980,

the credit card agreement for Bank of America, 700 words, would have fit on

that one sheet of paper that you’ve got in front of you.

        Terms are clear.    They kind of figure out well here’s your

creditworthiness and here’s how much we have to charge, we’re a little

worried about inflation, how much it will cost us to monitor it, we’ll make

a little profit.     It works.    Mortgages are set up pretty much the same way,

car loans set up pretty much the same way.
         And what happened over time -- we got rid of usury laws right at

this same point in time -- is that the credit card folks, they were the

real innovators here.      They said we could hold up one or two things in

front of you -- low, low financing, 7.9 percent.      We could hold up free

gifts.     We could hold up a warm and fuzzy relationship.   We’re just the

people to do business with.

         And then put what are called in the trade "revenue enhancers" back

in the fine print, and we can make a lot of money because you won’t figure

out what this product costs.

         So that one page credit card agreement in 1980 has now grown to

about 30 pages.     And it’s not just 30 pages, it’s 30 pages of

incomprehensible text.      The fine print, the "whereas," the "heretofores."

           CHARLIE ROSE:   So nobody was looking after the consumer.

           ELIZABETH WARREN:   Nobody was looking after the consumer, and, indeed,

what happened is credit card companies put the customers in their

crosshairs and made big, big money.

           CHARLIE ROSE:   Even though you said it’s not about real estate, do you

have a preference where this agency should be?     Should it be standing

alone?     Should it be in the Treasury, or should it be in the Federal


           ELIZABETH WARREN:   Preference, easy -- standing alone.     This agency

should be strong --

           CHARLIE ROSE:   A whole new bureaucracy they say --
       ELIZABETH WARREN:     Blah, blah, blah.   There are seven --

       CHARLIE ROSE:     The Federal Reserve has got the tools to start doing

it tomorrow.     All they need is the mission and the --

        ELIZABETH WARREN:     They had the mission.   We know what they did with

that mission.

      There are seven bureaucracies in Washington right now, including one

at the Fed, one at the OCC, one of the OTF, the FDIC, we go through the

whole list.     There are seven bureaucracies in Washington right now, each of

which owns a piece of consumer financial protection.

      Bloated, inefficient, and either ignored and ineffective, or

captured by the large financial institutions.      A fractured, bloated, overly

fat -- I just don’t know what else to say -- regulatory system is what

we’ve got now.     It works very well for the large financial institutions

because it means no effective regulation.

      What I want is this agency comes with a pair of scissors.       It takes

it out of seven agencies, shrinks it down --

        CHARLIE ROSE:     Puts it in one.   Well, put it in the Federal Reserve.

Take all that, put it in the Federal Reserve, give them the authority, give

them the money, give them the staff, give them whatever they need.

        ELIZABETH WARREN:     You’ve got to have an agency that’s ultimately

independent, whether it’s located within the Fed, within Treasury, the

Department of Agriculture, or whether it sits in its own separate place.

The key is whether or not it is functionally independent -- does it write

its own rules, does it enforce those rules, and does it have access to a

budget that’s independent of the folks who want to smother it.
         CHARLIE ROSE:   So what do you think is going to happen?

         ELIZABETH WARREN:      I don’t know.

         CHARLIE ROSE:   Politics is going to happen.

         ELIZABETH WARREN:      Politic is already happening, Charlie.   Let’s be

clear here where we are.     This is an agency that just makes sense.     It’s

about readable credit cards, it’s about readable mortgages, it’s about

prices that are transparent.      This isn’t liberal or conservative.    The

American Enterprise Institute --

         CHARLIE ROSE:   AEI.

         ELIZABETH WARREN:      Very well respected, very conservative, has put

models, two page mortgage agreements, two page check overdraft agreements

on its Web site.   A consumer agency makes sense to get the market working


         So this is a division of ideology.      This is about bank lobbyists.

This is about people who are paid professionally to stop this agency, their

words, "to kill the agency" so they can protect the revenues for the Wall

Street banks.

         CHARLIE ROSE:   And so do you think Senator Dodd and Senator Corker are

serving the interest of the bank lobby?

         ELIZABETH WARREN:      We’ll know when this bill comes out of Congress.

         CHARLIE ROSE:   The financial reform bill.
         ELIZABETH WARREN:   That’s right.

         CHARLIE ROSE:   Let me just stay with it for a second in a sense that

if you look at it as a part of the overall financial regulation reform,

where do you put its significance?

         ELIZABETH WARREN:   The tip of the spear.

         CHARLIE ROSE:   Tip of the spear?

         ELIZABETH WARREN:   Yes.   And it’s the tip of the spear in two senses

of that word.   It’s the tip of the spear in the sense this is where our

financial crises started, one lousy mortgage at a time, one family who got

fooled, tricked, cheated at a time.

         Then those risks were aggregated, sliced and diced, put into all kinds

of fancy financial instruments, ultimately traded, made billions for the

Wall Street banks.   And then brought the whole system -- so tip of the

spear in terms of where it’s starting.

         But also tip of the spear in whether or not our political system

works.   You know, if you can’t make this work for American families, then

what hope is there for the pieces that are complicated and in which people

with lots of money and lots of power are in --

         CHARLIE ROSE:   So you’re saying unless this is an independent agency

outside which they bring all the powers that are existing everywhere

together and give it jurisdiction, give it power, give it budget, give it -

- that everything else is at risk.

         ELIZABETH WARREN:   Give it teeth.
        CHARLIE ROSE:   Give it teeth, OK.   Where is the president on this

consumer agency?

        ELIZABETH WARREN:   The president has been in favor of this consumer

agency since before he was the president.    And I don’t speak for him, but I

will say it’s my understanding that from the beginning he was the one who

advanced the agency within the administration.

        This was not something that Secretary Geithner thought up or that Mr.

Summers thought up.   This is the president of the United States who said "I

want this."   And he has been steadfast in his support.

        CHARLIE ROSE:   So you should feel comfortable then that everything’s

going to be OK.

        ELIZABETH WARREN:   You know, I’m never comfortable.

        CHARLIE ROSE:   There’s something called the vocal rule.

        ELIZABETH WARREN:   Yes.

        CHARLIE ROSE:   There’s also something called the Volcker rule,

suggesting that we have deposit bank, commercial banks, that they shouldn’t

engage in certain kinds of things -- proprietary trading, owning hedge

funds and private equity firms.    Are you in favor of that?

        ELIZABETH WARREN:   I think it’s good.   I think the principle behind

it, that certain kinds of institutions should be barred from certain kinds

of high risk practices actually should be expanded.    So I’m for --

        CHARLIE ROSE:   How would you expand the principle then?
        ELIZABETH WARREN:    Well, the idea behind it is if you’re going to take

deposits, if you’re going to be one of our guaranteed institutions, then

there’s a range of activities.   It’s not just about proprietary trading.

It’s really about a range of interconnected financial activities that have

to be more carefully interested, about defaults and swaps and derivatives.

        We can’t let the banks public the whole game down.    So I think it has

to be a little bigger.

        CHARLIE ROSE:    Interesting -- we are now looking at the situation in

Greece where there is risk of default on debt.    And what’s come into play

are private equity firms looking how they get engaged and also betting on

Euro, and credit default swaps have risen their presence again.

        And the whole notion of bookkeeping, in effect.

        CHARLIE ROSE:    Whether certain firms -- the charge is certain firms

help them cover up the amount of debt they had.

        ELIZABETH WARREN:    Enron taught us a few years back, you remember, in

fact that the books are dirty, that there is one set of books put out in

front for everyone to see, but there are effectively off the book

transactions that nobody can see that reflect the real risks that your

enterprise has taken.

        And we’ve gone straight from Enron to Greece, with lots of stops in

between for large financial institutions.

        But what it really goes back to is how much honesty, how much

transparency are we going to insist on in the financial system?     Everyone

wants to make this stuff really hard.   It’s about credit default swaps and

derivative squares, and so on.   No, it really is about things like
transparency and honesty.       There are some basic --

           CHARLIE ROSE:    So you’re OK with derivatives as long as it’s


           ELIZABETH WARREN:    But that’s harder than it sounds.   You’ve really

got to make these things transparent and you’ve got to make them honest.

They’ve got to be on the books.       You’ve got to reflect on the books of the

business what kind of risks it’s actually taking.

           CHARLIE ROSE:    What else do you want to see in regulatory, in a bill

that’s supposedly looks at how we got where we are in the economic crises

and the recession that we experienced and to make new rules and regulations

that will prevent it from happening again?

           ELIZABETH WARREN:    It’s about the other end of the spectrum.   We

started at families.       The other end is "too big to fail."

           Until we build a chapter 11 system, a resolution authority system,

whatever we want to call this, until we build the part of the legal

structure that permits us as a people to say with real credibility behind

it, "credibility" is the underlying word here -- I don’t care what your

business is.     I don’t care how big you are, I don’t care how intertwined

you are.     If you make bad enough decisions, you can be liquidated.    It’s


           CHARLIE ROSE:    The three people who made the decisions during the Bush

administration, Bernanke, Geithner at the New York Fed, and Paulson at

Treasury, on balance worked 24/7 and did the best they come, and as Warren

Buffett said, I worry if somebody else had been in those jobs.       Then you

had Larry Summers comes in, you have Geithner at Treasury, Bernanke

         Do you believe they did as good a job as a lot of people that have sat

at this table, and said considering the circumstances, they did a good job?

         ELIZABETH WARREN:    I think given their worldview that they did a good


         And ultimately -- look, I want to give full credit.    The TARP was

extraordinarily unpopular for very good reasons.    The bailout, bailing out

the banks, bailing out AIG, ultimately bailing out the auto companies -- a

lot of people are unhappy about that.

         CHARLIE ROSE:   And would you have done that?

         ELIZABETH WARREN:    They pulled us back from the abyss.   And I believe


         But there are two central questions.    Did you pull back in a way that

was all about preserving those specific institutions, or did you pull back

in a way that was ultimately about preserving the larger economy, about

thinking about families, about thinking about the cost?

         Let me say this a little differently.    There’s a key part to this on

bailing out the banks.     Here’s what’s always driven me crazy about this

from the beginning.   I understand financing that comes in once a business

is in distress.   We call it post-petition financing in the bankruptcy


         The price for that is that equity gets wiped out, top management loses

their jobs, and the old debt takes a hair cut of some proportion.     To come

in and rescue under those circumstances, I get it, that happens.     That’s

what bankruptcy’s about.     That says the participants in the old one don’t
get it.

          What we did when we rescued these banks is that we left the

shareholders intact, we left their top management intact, we paid their

debt in full.   We came in --

          CHARLIE ROSE:   So we, the U.S. government -- in your judgment -- for

good motivation mostly to save the economy from collapsing, made a bad


          ELIZABETH WARREN:   We were far too generous.

          CHARLIE ROSE:   That’s a bad deal, isn’t it?

          ELIZABETH WARREN:   With those who made --

          CHARLIE ROSE:   So you could have saved the economy without going to

the extent in making the deal you did?

          ELIZABETH WARREN:   I think you could have.

          CHARLIE ROSE:   And within the context of the crisis at the moment and

working around the clock --

          ELIZABETH WARREN:   Come on.     Bankruptcy lawyers work around the clock

all the time.


          CHARLIE ROSE:   So you don’t --

          ELIZABETH WARREN:   I’m sorry.    We do it with lots of financial

           Wiping out shareholders who were the people who invested and who had

profited from all of the mistakes that these companies had made for years

and years and years before that, that’s not hard.      That’s not rocket

science.    That’s just a difference on who gets to sit at the table and who

gets to walk away with money.

           I’m sorry.   That one is not an emergency situation.

           CHARLIE ROSE:   So if you had been in charge of doing this.

           ELIZABETH WARREN:   But I wasn’t.


           CHARLIE ROSE:   I know you weren’t, but you would have done what?    You

would have saved Lehman?

           ELIZABETH WARREN:   You can save the business, what’s moving.    And I

understand why we had to save it for the economy.      You can also send a very

strong signal to the markets, we are going to back up our financial

institution.    But that doesn’t mean.

           CHARLIE ROSE:   Moral hazard here, we are going to back up our

financial institutions.

           ELIZABETH WARREN:   That’s right.   But listen to it, because that is

the key to moral hazard.

           But those who invested in these institutions before this moment have

to -- they got the profits.     They now have to take the pain associated with

           Now that’s going to make our financial institutions notice, solvent

going forward, and now bring in the new investments.           Let’s clean up those

balance sheets and get lending started.

           CHARLIE ROSE:       And you believe that could have been done down the


           ELIZABETH WARREN:        I believe it could have.

           CHARLIE ROSE:       Commercial real estate, what are we looking at.

           ELIZABETH WARREN:        Oh golly -- 2,988 banks that by the terms of their

own regulators are too concentrated in commercial real estate.            These are

the medium size banks.          By the end of this year, half of all commercial

real estate loans will be underwater, and they are coming in ‘11, ‘12 and


           The reason this is such a bad problem anyway -- think about that,

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