morning, it is "washington journal" -- connecting with journalists, policy makers, and public officials. weeknights, congressional hearings and policy forms. every weekend, look for our signature interview programs -- "the communicators," "newsmakers," and "q&a." also, we have a popular prime ministers questions. c coverage of the campaigns for 2010 -- see coverage of the campaigns for 2010. our videos are searchable on the c-span video library. c-span -- greeted by cable, available as a public service. >> this week on c-span's "newsmakers," sheila bair. she is chairman of the fdic. one of the government officials who will be responsible for implementing the new dodd-frank regulation laws and to address -- and to address the mortgage

crisis currently facing our country. here to question her, tom braithwaite of the financial times newspaper. and never solomon of the wall street journal -- of -- deborah solomon of the wall street journal. mr. braithwaite, first question? >> chairman bair. we are in the middle of a foreclosure crisis. to what extent is this a failure of regulation? >> well, i think it's a very good question. um, you know, it turns out this was an issue with large servicers. the banks were the primary supervisor. we have been collecting information that you have not -- we have been collecting information and are fairly confident they have not been been implicated in this. that's because they have small portfolios. it was really a symptom of size. it's very unfortunate. so in our back up policy. -- in our back up supervisory capacity, we're working with our own policy. it is necessary for the

regulators to go ahead. we have been told this is a process issue. that all the information is in the file. the person who needed to sign the affidavit had not been looking at the file. we need to independently verify that and make sure good title is in these files. going forward, this is obviously fully read it and that the -- fully three mediated -- fully remediated and that the adequate staffing is provided so there's full compliance with the state law. foreclosure is a very serious thing. and that, you know, the files are fully documented and it's a good case to move forward. we need to verify that. we know it's a process issue. -- we do not know if it is a process issue or if there is another set of underlying issues. not that anybody should jump to conclusions until we completed our review process. >> you are the primary regulator. this affects the largest banks. you do insure these banks.

>> yes, we do. >> are you concerned of knock on defects for the banks themselves? -- and knock-on -- of knock-on affects for the banks themselves? >> i think, as back up supervisor, we are working with the fcc and the fed. my personal opinion is they have do serious risk and regulatory risk and state has an issue to do their own investigative process. we need to get a full handle on all of these issues. if this is just a process issue, i don't anticipate the exposures to be significant. if it's more fundamental, we will have to deal with that. we need to get all information before we jump to conclusions. i certainly don't think people should be viewing this as a broader problem until we have the facts. >> you're not someone that wants a nationwide moratorium?

have's important to might -- i think if there's any question about whether the touments are appropriate move forward, those should be halted until the files are reviewed for all pertinent information with all files are executed. all those processes need to be in place. once that has occurred, no, some of it is investor-owned property. a lot of it is vacant property. we think the priority should be the owner-occupied homes. we want to make sure all processes have been followed. it may well be the case that 12 to 18 months that payment has -- since the payment has been made. it's necessary to move on with that. it's tragic. i don't like it. but the market has to clear. even if the family can't make a modified payment, something else has to happen. i regret it, but that's the way

it has to work. >> this week, the first step in -- your agency took the first step in terms of writing the rules how creditors and people who lend money to financial institutions will be treated. i am wondering, how does fdic think they will be able to take over? -- in addition the government being able to take over a large- lehman-like facility? will you swoop in on friday and open it up again on monday? how do you make it worse by showing the government can just take over? it could trigger a run on a merrill or lehman or bayer. -- bear. >> those are very good questions. i think part and parcel of the liquidation planning. any bank holding company has to build resolution plans acceptable to us and the fed. -- and any other non-banking

entity. so we should have plans in advance on the shelf. those will be updated and monitored. we are getting up a new office that will be staffed with experts and larger constitutions. -- expert in larger institutions. they are a national operation that will work on an on-going basis. i anticipate the resolution planning will be a continual. -- will be a continual process. we will have a plan on the shelf if something happens. i think with the lehman situation, they are of the size. there was at least one ready buyer for the bulk of lehman, i was told, i wasn't involved in this because of regulatory terms -- regulatory concerns about the credit quality and the need for speed in terms of making decisions and what kind of credit risk would be taken on. i think the faa had been concerned about that and a sale

didn't go through. a bankruptcy ensued. we could have worked with the authority to address their concerns. we can hold back the unsecured debt and bad assets and market it and sell it quickly if you have ready buyers. we also, i think, you know, we have the ability to move the institution into a bridge institution. we have the ability to do that -- to continue to fund operations as it wound down, if you couldn't arrange an immediate sale. those tools are in place that we have used with banks. i don't want to underestimate the difficulty of this. it's never going to be, whether bankruptcy or whatever, these are going to be difficult and challenging processes. the tools -- the tools are so far superior to what we had going into the crisis and the a

lot to advance plan, work with international regulators. that's something the fdic can do that a bankruptcy court cannot do. and can go in soon. that is what we do with banks. it's a much more superior process than we had before and a properly imposes losses on shareholders and unsecured creditors. >> on tuesday, there was a huge uproar when it was taken over. do you envision a situation to take over a company by par? >> no. the two limited places that are necessary to continue essential operations is where it maximizes recovery. so, i suppose you could have a situation, for instance, if the institution had a big -- -- a

big derivatives dealer that someone wanted to acquire -- generally collateralize. if you have -- your collateral is going to be marked at market value. -- marked at their value. if you are unsecured, that will be available for lost absorption, too. you may want to maintain those customer relationships. they can pay enough of a premium to cover what we would be covering on the unsecured lost portion. so, that, i think we talked about that a few days ago. it was a mathematical determination. they would be subject to loss. -- subject for loss absorption. and make sure they have adequate collateral. >> chairman bair, are you satisfied with how dodd-frank addressed derivatives? >> i do. i think it is a huge improvement. i think there's a lot of implementation work with capital requirements and try to

mutual -- trying to move a lot of this off both exchanges into this to regulated changes. there's a lot to do to implementation. -- this is the cftc and the ftc. this is the ses. i think they have been good at reaching out to us. they have the read on the derivative pieces of this. i have a lot of confidence in the regulatory process. a lot of it will depend onthe vigor with which we proceed. >> this is c-span's "newsmakers" program. our guest ischairman sheila bair of the fdic. tom braithwaite of the financial times and deborah solomon are hear as our reporters. next question. >> i just like to ask, the -- underdog-frank, the financialn -- under dodd-frank, the

financial stability over sight council was created. this has you sitting aside timothy geithner, i wonder if this includes the credit union, i wonder in times of crisis how this war council will be with all these people around the table. >> right. well, not all of them are voting members. even if they were, i think, there's one lesson i learned during the crisis. people with diverse viewpoints can come together and make a decision and make it quickly. we have done it over and over again with our own process. that is a fairly elaborate process requires a superio majority of the secretary of treasure with the concurrence of the president. those decisions got turned around quickly. when the situation calls for it, it can be addressed.

if the situation is not clear, sometimes a more deliberative process can help. i being with anything, you need a balance. then i'm not worried about. i think if a crisis situation, we can come together. if i have a concern -- it is more about the rulemaking process -- >> it's about the rule-making process and there's a lot of elaborate processes. it's always good. at what point does that facilitate reform? or potentially impede reform? if there's so many people you have to talk about. that's where we have to work to make a performance decision. -- make sure it performs as it should. >> you delayed the rule that deborah wanted because the treasury wanted more time. that is the sort of thing you're talking about. it's not in a position it could be. -- it is not as efficient as it could be. >> we were happy to delay it. we did and proceeded. i think everyone would agree or not. if they have enough time to read it and give us their input.

it worked. >> not perfectly. but we're learning. we required, there had been several weeks worth of staff discussions. i provided ten days to that and we add another week. i was happy to do temperature i -- to do it. i think we will like to develop some standardized procedures to consultation so everyone knows. i think all we hope to get our hands up. if someone has an interest in our rules or whatever. it's incumbent on us to get our hands up and get them in the loop. not this last-minute kind of thing. we need to make sure that doesn't happen -- >> chairman ben bernanke said the people would be amazed at the gap in regulatory oversight. one of the things the fed is going to have to do, is figure out which companies should be determined systemic. in other words, what companies

could cause a broader financial collapse if they were to go down. beyond the seven companies that have already been designated as such. -- beyond companies that have been already designated as such. and i'm curious, to someone who was early to seeing problems develop in the mortgage market, do you see a need to -- these hedge funds, what criteria should be used to determine those firms? >> i don't know to be too definitive, but i think generally speaks, it's about interconnectedness. -- it is more about interconnectedness than it is about sheer size. what would be the broad ramifications? those should be focused on the public interest. credit support -- whether it would be a major disruption if an institution word to get into trouble.

just the fact that the financial institutions that hold their debt, that should not be the criteria. there's too much internalization of risk. that's something we need to deal with now -- -- now on a supervisory basis. >> do you expect this will be a small group of companies? >> i think it's really too soon to tell. i think it's too soon to tell. we're working more. -- we are learning more. since we're only regulate banks, we have authority over bank holding companies as well. the non-banks sector is something we are learning about. i think it will be a learning process for members in making that determination. >> chairman bair. how prevalent do you think your view is? i know it is not for comment right now. what have you heard? >> you know, i think there's a general sense that it's about interconnectedness. they define it in a different way. the financial institutions will take losses. we need to look broadly about

the real economy. what will the impact to the real economy be? so i, that's my view. i'm not going to speak for others. we will review comments and make a decision. it will be a collaborative process. it is a group that decides what a systemic and what is not. it's not driven by individual regulator -- and i think that is as it should be. >> looking back at this crisis. at who point could this have -- at what point could it have been stopped? >> i think in the early 2000s. applying to banks and nonbanks. that was the root of the problem. there were people who were pushing for that. and it didn't happen. they were efforts in congress, -- there were efforts in congress, and that didn't happen either. one of the reasons this happened because of the political push back. everybody was making money. borrowers, too. they were getting cash off re-

fis. there were extracting money. some borrowers were horribly taken advantage of as well. it was difficult as home prices went up and the tremendous amount of volume to take away the punch bowl. the political will was not there. hopefully collectively we will have the will to take away the punch bowl. it will be politically unpopular decision. >> how often are you in contact with ben bernanke? are there stovepipes in place where you cannot communicate about certain things? >> not really, no stovepipes. >> we have lunch and see each other it's meetings. during the basel bank 3 process -- basel iii process, we were seeing each other a lot. he's attending the fsoc meetings. i have a lot of respect for ben.

he has been one of the heroes throughout this crisis and one of the more thoughtful people that we have a around the table. -- have around the table. >> tom. >> um, i want to ask you about something that happens every weekend. go into banks and close them and sell off the assets. how basically a process is this -- how painful a process is this for the communities? and how far through this difficult time are we? there's 130 or so banks closed in this way? >> that's a good question. it's never a happy thing for a bank to be closed. like foreclosure, it's a necessary thing when banks are no longer viable. it doesn't do anyone any good. and we learn through the s&l process. you can keep trying to prop them up and serve regulatory forbearance, but it cost you

more long -- in the long-term. -- it costs you more in the long-term. they become no longer viable. it needs to happen. almost all the resolutions are what we call whole bank with law share. we are able to get them to a healthier bank to protect the deposits and acquire the assets to maintain the relationships. it will be a borrower. we try to provide continuity with loss share transactions. they have worked pretty well. a lot of community banks are being helped. -- are being sold to other community banks. so i think that strategy has worked well for us and it will mute the impact to a community. >> are we through the worst of it? is the pace slowing? >> all the indicators, yes, we're turning the corner this year as we thought we will. they will peak this year.

we had 140 last year. not a whole heck of a lot more and our losses will be lower. the banks being closed are smaller. our losses will be lower. our deposit is still in negative. but improving. it has improved by several billion dollars in the second quarter. banks, we're working through commercial real estate loans and banks are preparing their balance sheets. -- repairing their balance sheets. as they do that, they will be in a stronger position to lend into the economy. yes. i think there are a lot of uncertainties about the economy. we think it will continue to recover. >> just explain the state of this fund. this is obviously what deposit is so concerned about. they want to know they are completely safe -- >> there's a difference between our fund balance, which is a statement of our net worth and our cash balance, which is quite robust. we have about $45 billion cash

in hand. we have substantial authority to borrow from treasury. there's plenty of cash on hand. the reason we have a negative is because we reserve 12 months out. our cash balance is $45 million. >> one of the big questions, can this happen again? we have all these rules as part of dodd-frank. if there's another day of reckoning, the banks can withstand it. the banks are saying, enough is enough. we're not going to lend any moreif you require us to have more reserve. there's recently an agreement to have them hold 70% -- hold more in reserves. how far is too far? the banks write this can have an -- are the bank's right that this can have then overall impact on the economy.

>> the u.s. banks have been making this argument. if you deduct all the instruments they are still about 6%. you're talking about -- granted their assets are going to grow. but, over time, they can deal with that problem by selling those bad assets off. going from 6% to 7% is not a lot. basel gives them 9hyears =-- -- basel gives them nine years. i do not think they need that long. our estimates are within a few years of retained earnings, they can get to easily get to above

7%. so, i don't buy that. you know, you can retain earnings. you can decrease your bonuses. a lot of things to do to conserve. a lot of things to do to build capital without cutting back on lending. the place is a wash it cash. -- awash with cash. whether it's 7%, 8%. there's still plenty of lending capacity. to get that going better. we need better borrowed demand and that's going to dependent depend on confidence in the community. i think needs to be tightening -- linda needs -- lending and needs to be tightening up of credit standards. we have shifted too far in the other direction now. the smaller banks have stayed stable and picked up a little bit. the large banks that you see -- the large banks keep seeing decreases quarter after quarter. i hope we see a bump up in the third quarter -- >> do you think we need to go higher? -- higher than even the basel

accord? >> i do think for very large institutions, i think it should be higher than 7% -- >> do you have a number in mind? >> i don't. i don't. it's the federal reserve board's call. the u.s. has been unified with the international community there needs to be a larger style -- a higher charge for the very large, systemic entities because of the external rifts they create. whether we will get an agreement with the international community, i don't know. we're not on the fsb. i think we so anonymity here. -- i do think we have unanimity here in the u.s. >> chairman sheila bair is our guest of the fdic. our guest reporters, we have time for one more question each. .om braithwaite >> the $700 billion. doesn't seem like it's going to cost much. does this change the philosophy

now? does this mean people will say, well, we can get our money back if we do something a bit more on the open? >> we don't know what the final price tag is going to be. i think fanny and freddie need to be put to the equation. and nobody will be happier than me, their process projections if t.a.r.p. -- the loss projections come to fruition. that would be very good news. the moral hazard created by this whole process. the political disillusionment. and to the institutions stabilize them, have been very damaging to our financial system, to market discipline in our financial system, and to frankly how the profit will use the financial system. the government and the regulatory agencies. you know, i guess i would say,

we should never have to do this again. i would also have to say -- there are a lot of businesses as small banks and other types of businesses that could survive if the government backs them up until they get in their feet. is that the way free market is supposed to work? if we embrace that as a policy, that's our market base system -- we lose a lot of our market- based system. and that's a road i don't think we should go down -- >> there's a lot of anger. do you think wall street is to blame for this? do you think it's helpful to have it sort of antagonistic relationship between washington and the banks for better or worse really drive the financials? >> i think antagonistic relationship never helpful in any context. >> i think you should be careful of painting everybody with a broad brush. there are small banks that did high risk taking not smart

things and other banks that manage well. painting with the same brush is not helpful. in terms of customers of financial institutions, they should decide for themselves. if they are not being treated well, they should go down the street. that's one of reasons why it's important to have a diverse banking sector with smaller institutions so people have a choice. and, so no, i think we need to focus on issues and personalities. but clearly they were some of -- with the large institutions there was excessive risk taking because of their size and had a much more dramatic impact. >> finally, chairman bair, the courts have gotten involved. -- involved in a lot of the mortgage decisions being made. is that frustrating for you? >> i don't. i don't think. i think it's a state-driven process. laws are what they should be. since we regulate banks, it's really not something we view adversely.

it's, so, i think where there's a judicial process for foreclosure, that's what banks need to follow. whether national or state charted banks. -- state chartered banks. if they were rules not followed, that needs to be fully remediated before they move forward. >> sheila bair. chairman of the fdic. thank you for being on "newsmakers". we will be right back with our guest reporters. we're here with tom braithwaite and deborah solomon. what do you hear? >> i think it was interesting her views on what's systemic. that is obviously going to have a huge impact on the firm's ability to operate under the cloak of darkness. she's really seems to see interconnectedness as the linchpin. a lot of other folks would say asset size or how many counterparties they have. she's looking at, and another folks seem to be looking, if the firm goes down, where do the

tentacles expand to. that determines whether the company is systemic or if they have counter parties in europe and in asian. -- not whether they manage $25 billion in assets or whether they have counterparties in europe and in asia. it's really how far do their tentacles spread into the financial sector. >> in today's world. isn't everything interconnected? how do you write regulations that address that? >> that's a huge issue. so many firms are interconnected. a hedge fund that does a lot of swaps with participants around the county, they would have a -- around the country, that could have the bigger impact because people start calling their positions, they would be unable to make good on their decisions. -- on some of their positions. you could see a lehman-like situation developed there. i can guarantee there's going to be a lot of lobbying. be a lot of lobbying.