called with a new relationship, the nations throughout the world, a partnership that the 21st century could be called the american and friends century. thank you. >> thank you very much. coming up, a discussion on the u.s. banking industry. and then weather satellite program. the u.s. supreme court will hand down its ruling on the constitutionality of the health care law. we'll be live at the supreme court as the decision comes down and to get reaction. our coverage begins at 10:00 a.m. eastern here on c-span 3.

the house will vote on contempt of congress charges against attorney general eric holder. watch live house coverage on c-span. next, as part our spotlight on magazine series, former merrill lynch and bank of america representative sallie krawcheck joins us. from washington journal this is 50 minutes. we continue with our spotlight on magazine series. today we're going to talk with sallie krawcheck. joining us from new york city. we caught the attention this article that you wrote in the harvard business review. you speak about four ways to fix banks. i wanted to read the first paragraph, and get you to respond to one of the central parts you're making. it's tempting to view the downturn as a closed chapter,

whose primary causes have been resolved. perhaps not perfectly, but fairly, comprehensively, by the dodd frank acts regulation or reregulation of the financial services industry. but big banks continue to have a governance problem, which poses significant risks, not just to them, but potentially to the entire economy during the next downturn. what is the that governance problem you're see something. >> one of the comments i should make -- and paul, thank you for having me this morning. i was smiling as you were reading that, because the comment of -- we view the chapter as closed, it's interesting, because the harvard business review. you write these articles months before they public them. what we've seen since then is the loss of jpmorgan, the $2 billion and probably growing loss at jpmorgan, which i think of as certainly not a disaster versus what we've seen, but a little bit, i think of a dress rehearsal for how the regulatory

reform we've seen to date has worked. and the answer is clearly we continue to have goals. the idea writing the article was not to suggest a whole bunch of new regulation, can you see what's going on with the money fund debate in d.c., how difficult that is. but instead to address the boards. the boards of directors for these banks, and give them some ideas on how they can use the tools at their disposal to work to reduce risk in banks, which i think is -- we all would like, and which, of course, is very much in the interest of this country. >> so you have several ideas that you lay out in the piece, and i want to invite the viewers to phone in with their questions and comments. the ways to fix the banks, our guest is sallie krawcheck, she's written a piece for the harve art business review. our guest is a former ceo for merrill lynch wealth management. but on the screen we can begin

to walk-through the ideas that you put forth. the first one with says pay executives with bonds as well as stock. what do you mean by that, and why is that an important idea, do you think? >> the debate that we've had as a country has really centered on, first of all for causes of the downturn grief. and the debate around compensation has centered around bringing compensation down. so rather than add to that debate or expand on that debate, what i looked at was the form of compensation for executives, and for whatever reason, as we came through the downturn, we immediately went to pay executives more stock. think about it for a second. if you were buying a stock, you are not -- you are looking for up side. you understand you could lose your money on the down side, you're not looking to protect your money. you really are thinking about, how can this company grow? how can it take on risk in order to grow. in other words, in order to look for a stock to go up, you look to take risk.

well, hold on a second, with big banks, are we looking for them to take on more risk or reduce their rising there is a financial instrument, fixed income bonds in which if you invest in those, the most you can get back is 100 cents on your dollar. the most can you get back. in my experience. i ran merrill lynch wealth management, i was a chief financial officer four a large institution, in my experience, the equity investors were all about how fast can you grow, what kind of risk can you take in order to grow. and the fixed income investors were with all about reduce your risk, be very careful. if you take risk and even if you get up side, i only get back 100 cents on the dollar. rather than put more confidence in the stock -- rather than rush to put people in more stock, even holding longer, how about we wait for compensation is up that we're very much looking to

reduce the risk profile of the company and the risk profile of the executives. >> one of the other ideas you have is to pay dividends as a percentage of earnings. speak to that if you could. >> well, i think what we saw -- or know what we saw in the down turn, the corporate executives, once they have a stated dividend level, ten cents per share, a dollar per share, they hate to reduce it, they hate the signalling causes to reduce it. they're not fully -- they don't see the future 100%. and so at inflexion points, they don't see that things are getting a lot worse, they see they're getting a little worse. they say, we keep the dividend stable. what you saw in the down turn was that executives and boards were very slow to take down the dividend. and would have saved an enormous amount of capital if they retained the dividend and wouldn't have had to raise capital and go to the government as quickly as they otherwise did. by having dividends as a percent

of earnings, the dividends will go up when times are good, down when times are bad, providing a natural breaking mechanism that doesn't exist today. >> we'll get to your other points you've written in this piece. our guest is sallie krawcheck in new york. before we go to calls, i want to get your broad thoughts on dodd frank overall, since it became law a couple years back. what do you think? >> it's an enormous ly complex piece of legislation. if you look at the banking industry, it in and of itself is highly complex. and what we're doing is fighting complexity with complexity through this piece of legislation. you see it with the volcker rule, which looks to ban proprietary trading, i haven't gone through the questionnaire myself, in order to determine if a trade is a proprietary trade or not, the bank is betting its own money, which is banned,

there are hundreds of questions that have to be asked per trade. so you've got complexity built on complexity, it is mind-numbing. and it's really, i think, a challenge for regulators and boards and senior executives, to try to deal with this mind-numbing complexity. that's why with this piece, i try to step back and say, what are a few big ideas. if you're trying to chase every last trade, every last business within these institutions, i promise you these banking executives are very bright, they will find new businesses, and get through the loopholes. they're profit seeking individuals. >> what should viewers be thinking about, folks who aren't steeped in all of this, as the country moves forward, as the financial future of the country moves forward, how should they be doing all this? >> well, that's a very broad question. i would say for the viewers,

overall, happily, if you're doing business with the bank, have you your deposits at the bank, you do have the fdic insurance, which has really proven the test of time. assuming you're under the levels at which that cuts off, your money is guaranteed by the u.s. government. so in some ways, from a day to day basis, in terms of the safety of money, this doesn't impact the viewers on a day-to-day basis. however, as we look at the health of the banking industry overall, it's clear that while maybe at the far end where people are saying the banks caused every last bit of this, that may be -- it may be 100% correct, it may not be 1,000 percent correct. this is an area of interest to individuals, because of the fact that the banks can be and are the life blood of the economy, and so their health, their continued functioning is a very important macro issue for

everybody in this country. >> first call for our guests up in new york city, houston texas, dwight democrat, you're on with sally krawcheck, good morning. >> my question is, given the history of the last few years, the last four or five years left, how is it that the trend now has been for getting rid of dodd frank before it even has from what i understand, hasn't totally been able to be implemented, and -- can you explain why a glass ceiling wouldn't help? >> what we're observing between washington looking to regulate, and the industry facing off against d.c. is part of the grand american tradition.

they say, you have your role, these guys have their role, as long as everyone knows their role, we're in good shape. what i see going on here is nothing less than what happens during periods of reregulation, where there's a push and pull. and yes people -- the banking industry has lots of lobbyists. yeah, they sure do. and out of that robust debate, you hope that folks become more informed, arguments are heated and dramatic, but that we come to something that kind of sort of looks like the right place. what's frustrating to me quite frankly is that dodd frank for all of its complexity and scope, and pages did not take care of all of the areas of risk that are are out there, what's frustrating to me, is a proposal by the securities and exchange commission to further regulate money funds. you have your money, cash and deposit. you can have your cash in a money fund. the money funds continue to have

some risk to them. continue to be a soft spot in the financial services industry that is liable to in a terrible downturn to be libel for runs, like the old fashioned bank run. the fact that mary schapiro, who is doing a terrific job down there is not able to reregulate that, when it's clear to me, from my experience, it needs it, is frustrating, because it's sort of the gridlock that occurs. now, in terms of glass siegel, there are many who say that wouldn't have stopped this downturn, lehman brothers was not a bank, fannie and freddie -- bear stearns which is the first one that went under, aig, that didn't fall under glass steigel. if you take a narrow definition, wouldn't have stopped what happened. however, if you broaden it out

to say, let's not be so literal, the real issue is these institutions took on too much risk, quite frankly more risk than they understood. they didn't have enough capital, enough of a cushion in order to absorb the losses when they came through. in other words, they had too much -- you'll hear people talk about too much leverage, that's really the core issue. the core issue is not, are they proprietary trading over here, are they in all these kind of businesses, the real core issue is too much risk, not enough a capital cushion. and the key question today, the glass steigel, volcker rule. all that is are are different ways, different tools for potentially reducing that risk. >> we have nick on the line from pleasantville, california. republican caller, you're on with sallie krawcheck.

>> i have a question, i'd like to ask this young lady if she is aware of the house bill that was passed last year. i think it's called the american act hr-4646 that authorizes the banks, financial institution to charge everybody 1% -- it sounds like pittance, but nobody has mentioned this. i keep getting ahold somebody -- >> what does it mean to you? >> i'm sorry. >> what does it mean to you. you brought up this bill,

what -- how did it -- why did it catch your attention? >> because of what it's for. it's for the bank to rip us off more than they are already. >> can you speak to what the caller is referencing? >> i had trouble hearing it. charges 1% for what? >> are you still there? >> i think he said per transaction, but i don't want to quote him. have you heard of this? >> here's what i would say, you are seeing -- one of the things that dodd frank did was took away some of the earnings streams and revenue streams of these financial institutions. if you're an investor today, buying the stock, the financial institutions, the core question for you, which is very, very difficult to answer is, what is the earnings power of these companies going to be going-forward. it's not real clear. but by taking away from the

interchange fees, that these institutions could charge on debit cards, interesting on debit cards, didn't take it away on credit cards, they wiped billions of dollars of revenue away from the banks, from those institutions. by taking proprietary trading, no one discloses how much that is, but it's billions of dollars revenue that are taken away from the banks. what you've seen the institutions do, which is a bit of the old capitalist american way, if we had these raev new streams that have gone away, where can we make those up? what are other places for which we're providing services to individuals and companies that we can make that up. i think jamie dimon, the ceo of jpmorgan said, if we can't charge more for the hamburger, we'll try to charge more for the french fries. what's been fascinating, you've seen the institutions that have tried to charge more. in some cases you've seen a backlash from the public saying, we're not willing to pay for

this, it's a bit of a seesaw that's occurring during this period of volatility as the banks try to figure out how they'll have real businesses. the stock market is saying, guys, your stock price is trading below your intrinsic value. the stock market is telling the banks, we think you're going to bleed value from here for some period of time to come. this is all -- and right now, trying to shake itself out. >> back to your piece, one of the points you're making, one of the ideas on how to fix banks is don't judge managers just by earnings. there's an interesting piece in the wall street journal this morning, about the new pay-equity rules. they talk about being at issue, a rule that could force executives to expose the gap between what they pay their ceo's and their median pay for their employees, a potentially embarrassing figure. but all that in perspective for

us, beginning with your idea about the banks? >> i think the idea is banks earn a lot money or lose a lot of money based on what's happening in the external environment. if the curve is steep and banks are borrowing short and lending long as they say, because of the steepness of the yield curve, they will earn a lot more than if the yield curve is flat. if equity markets go up, they tend to earn a lot more than if markets go down. i've been in the banking industry for more years than i frankly care to share with you. everyone says, it was me, i'm so smart. there really are significant impacts from those external factors for these institutions. earnings can be driven up or down by lots of factors that have nothing to do with what managers do. what's happening in the banking industry right now, and your

viewers are very aware of it, is that a lot of the customers are frustrated with the banks. but aren't leaving because they don't have better opportunities. or because it's too big of a pain, or too complicated. if you have unhappy customers who aren't leaving because of the difficulty of it, if you have everyonings that are being driven from external factors, you have a very weak business model. where innovation from other institutions can come through and take away share. the point i was working to make was, you better be looking at these metrics. the earnings will be going up and down for lots of reasons. you better be looking at the underlying metrics. >> michael is on the line from los angeles. independent caller with sallie krawcheck, up in new york. >> caller: good morning, sallie, how are you doing? >> good monk. >> caller: i once had an article written about me in the harvard

review, it's called the highly motivated black, i've been looking for it since the mid-70s and never able to find it. i do not think the deal made with the banks by the feds to settle the mortgage crisis truly works. some people are doing it, and some people are not. in my research, i have found that bank of america is still up to its same old dirty tricks with mortgages and a lot of other things they're doing. and i was told by a bank of america employee that they actually have people working inside the occ that can hold up any complaints that you make. and i just wanted to tell about you that, and i think people should know that they should

take a look at the occ investigative unit to see what's going on. anyway, sally, thank you, and if you know how i can get ahold of the article written in 1972 about me, called the highly motivated black, i would appreciate it. >> thanks for calling. >> thank you. i don't know how you can get it, but you can go to the website, hbr.org and try a search there. >> louisville, texas is our next call. we have about 30 minutes left if this segment with our guest. we're talking about banks. sallie krawcheck has written an article if the harvard business review about ways to fim the banks, we have dennis, democrat, louisville, go ahead, please. >> caller: yes, i'd like to comment about miss krawcheck's

comment about glass steigel would not have kept this financial problem from happening. yes, it would have. everybody in the united states that is in the business world knows that we need a separation between the commercial bank and the commercial business. you can't have an investment bank on the same footing as a commercial bank. investment bank was separated by glass steigel. the other thing that would help banks is put all the banksters in jail, and have you seen anybody -- any one of them go to jail? that would be a big incentive for banks to not do what they're doing. >> sallie? >> well, i think we would agree that the downturn wouldn't have occurred or would have been less

than it was if the banking institutions had taken on less risk. the rest of the discussion is really about what the best way is to reduce that risk overall. whether that be a reinstatement of glass steigel, whether that be the dodd/frank act, which is what that is looking to do. be it what i'm talking about in the piece, which cen gauging boards through the tools at their disposal. i think we would agree at the primary issue of how much should the banks have, how much of a capital cushion is an important -- was a hugely important factor into the downturn, and was an important factor for us to think about going-forward. that's why i think this jp morgan $2 billion loss, it sounds like a huge number, it is. this he have $128 billion of tangible equity to absorb it, so that's -- they are fully able to

absorb it, the market mechanisms work the way they're supposed to work, which is the shareholders felt an impact from it. the stock went down. the government didn't have to come in, what it does for us, it provides us a little bit of a dress rehearsal, a small scale dress rehearsal for how the reregulation that's taken place so far is working. and what worried me about it was quite frankly not the size of the loss. what worried me about it was these institutions are so complex, it was the press that told jpmorgan they had the loss. the ceo who is bright, smart, dynamic, engage d anywhere, he wasn't aware of this. and whatever his reports were that were coming up to him said, no, it's -- the quote was, it's the tempest in a tea pot.

it took them weeks to figure this out. what worries me about that is not the size of it, which is really handleable, but the complexity of the institutions, and by the way, when we talk about the volcker rule, you can't do proprietary trading. we went into a week's long national discussion about whether this is a proprietary trade or not. what matters is, they didn't know they had that loss, they had to track it down. >> there is a fourth point to your piece, give the board scrutiny to booming businesses too. you're talking about booming businesses. >> if you think about the time of the board, the boards are not full time, in my experience, and i've been to lots of board meetings, they cop in and

focus -- they have all the regulatory stuff they have to do, they have all the governance stuff they have to do, and then they spend their time focusing on the businesses that are in trouble it's human nature. what are we going to do to improve it. are we going to cut expenses, how many people are we going to fire? how are we going to get this back to profitability. and the banking industry, on the trading sides, on the institutional sides, there's very few barriers to entry. companies can come and go, therefore, if there are businesses in that part of the banking company that are earning very high returns, you need to take a look at those. there's not any particular reason those should persist, the reasons given are we're smarter, where do we get it better, they're innovative, lots of

reasons, some of them may be the right reason, it may be at your bank you have way smarter people than other institutions have. another reason for it, you're taking on too much risk, you don't understand what you're doing, you're skirting too close to the edge of regulation, and in some cases you're breaking some laws. and i've seen that happen bef e before. i can't tell you the number of times where the return on this business was too high and not sustainable. in the jpmorgan loss we're talking about, if you read the stories that were coming out about it, what you read was, they hadn't taken a close look at it because it was doing so well. jamie dimon, a very engaged chief executive had let it run its course because the returns on it were very good. the recommendation for the banks is rejigger your time, and dig into those ones that are looking

good, and make sure there's a reason for it. the next issue, the next big issue that occurs, will be the returns to that used to be very good. >> we turn to twitter, there's a question here comparing the u.s. banks with european banks. are our banks in better shape compared to european banks, thanks to dodd frank? can you compare and contrast is it. >> well, it's always been a bit of a challenge to compare and contrast. there are different accounting standards between the two. but our institutions did raise capital. so again that capital cushion that can absorb losses during the 2007, 2008, 2009 time frame, they went out and raised capital in very tough market environments, at prices they didn't want to raise, in some cases, kicked -- brought kicking and screaming. the government put in place

t.a.r.p. which shored them up, and they've been paid back. if you look at where they started to where they are today, they are quite a bit stronger. despite the moody's ratings downgrade, which we can talk about. they are stronger. the european banks are several steps behind. and, in fact, not only have they been less well capitalized in the u.s. institutions, but you have the issues going on with the euro over there, and the nervousness about the grexic. if that happens, there will be a domino effect around the globe, but impact the european banks well before it will impact the u.s. banks. >> you mentioned the downgrade, how about speaking to that for a moment? >> sure. it's interesting, the debate that has occu