Charles Schwab: Banks need to reduce risk more aggressively

Chairman and CEO on financial crisis,  Dodd-Frank


This is a rush transcript from "Your World," October 16, 2012. This copy may not be in its final form and may be updated.

NEIL CAVUTO, HOST OF "YOUR WORLD": Are any of you Citibank customers or Citigroup, Citicorp, whatever you -- it depends on what region of the country you are and the world on what you call it.

But its chairman, Vikram Pandit, leaving today, abruptly. Some say he quit. Others say he was pushed. Bottom line, he is gone. This guy was famous. In one of the interviews I had with him when he was taking charge right after the meltdown, he wouldn't answer a single question.

Finally, at the end of the interview, I asked him, vanilla or chocolate? And he said, vanilla or chocolate what? I said, vanilla or chocolate ice cream, which did you like? He said swirl.

That told me all I needed to know about Vikram Pandit. A few years later, he is toast.

And Charles Schwab says, not a moment too soon.


CHARLES SCHWAB, FOUNDER, CHAIRMAN & CEO, CHARLES SCHWAB: Well, I think it was probably time for that team to move on. They've had such a difficult time trying to rearrange this massive enterprise, Citicorp. I think they need a fresh team, sort of like what we might want to have coming up in November.

CAVUTO: I like how you work the political stuff into it -- pretty clever. You know, is it just me or was that whole change rather abrupt? Like, you know, right up until you get to the altar -- poof! The bride's not there.

SCHWAB: Well, what happened, of course, I'm sure the board of directors just had it up to their eyeballs in excuses why this thing isn't turning. They've had several years to do that work, and you have leadership that probably doesn't have a sixth sense about the business of banking. It becomes an issue, and so I think it's time for a fresh start.

CAVUTO: How much does the stock price weigh in on stuff like this? The reason why I mention it is because you -- the Citi situation might be unique, but when it comes to battered stocks, not entirely. Look at Bank of America. Look at a host of others that were all part of that meltdown and it came back.

But, if you were to look at their stock, you would begin to wonder, you know, it could happen again. They're just as vulnerable again. Dodd- Frank notwithstanding, man, oh, man, they're hardly standing strong.

SCHWAB: Well, Neil, I don't think they've been building risk into their enterprise or into their balance sheet. I think they've probably taken risk off the table. They just need to do it more aggressively, I think, and get more oriented towards their clients as such and clean up the messes of before. And I think they've been well on their way, but they just need to be -- accelerate those kind of decisions.

CAVUTO: The reason why I mentioned this earlier, your guy, Mitt Romney has talked about the whole financial law -- the Dodd-Frank -- and he's given mixed messages on it, Charles, and I wonder where you think he stands. Would he be for torpedoing it because of all the added regulations and burdens, or fine-tuning it? What do you think?

SCHWAB: I frankly think we in the financial service world believe we need appropriate kinds of regulations. No question about that. But when something like Dodd-Frank has been created, sort of in the mystery of night, it is a huge document. It's vast. It weighs about 10 pounds when I carry it around.

CAVUTO: Does it really?

SCHWAB: Yeah, honestly. And there's 200 more regulations that come out on top of what has already been created. It's created this massive uncertainty for the banking world. Brokerage world and so forth, and I think it needs to just be updated with a thought about how to make things more efficient, but yet make sure our financial institutions clearly are of pristine nature, meaning that they have all the capital that is required. And that's what simply happened, frankly, back in 2008.

These companies got to such high leverage that we just got back to the norms we were at in 2004 or five or six.

CAVUTO: So do you think it could happen again?

SCHWAB: I don't think it's -- no.

CAVUTO: Because the idea is that this law has made that next to impossible. What do you think?

SCHWAB: I frankly don't believe the law even addressed the issues that we're -- that created the big problem. And that was the excess leverage, not only by private institutions like Citicorp or Bear Sterns or companies of that nature -- also by Freddie and Fannie. Those things got to 50 plus times capital ratios --

CAVUTO: And they were left out of everything. They were left out of everything, right?

SCHWAB: Completely outrageous, frankly.

CAVUTO: Yeah. You know, when you -- in a recent editorial in Forbes, you had some interesting insights about how folks who go about choosing account -- going back to how they affect or will potentially adversely affect business, you talk about which candidate will review every line of the tax code and regulation to assess its relevance and complexity, whether it's the financial law or now, the new health care law.

The argument is-- way too much complexity, way too much intricacy, in the end, way too much cost. What do you say?

SCHWAB: Well, I say yes. All of these excess regulations have built in cost, fear of providing credit to clients that might be on the borderline. You want banks to take some risk, but intelligent risk. But right now, we have a period of great fear by business operators. And so our credit expansion has been very subdued, and hence, our small businesses in America have not gotten the credit flows -- I don't think that it's required to get our --

CAVUTO: But do you see any of that changing, Charles? You know, you hear there are trickles of improvement and more lending going on, more businesses getting loans, consumers as well, or is it glacial?

SCHWAB: It is happening. And I think with maybe a change in the attitude that the fear factor will go away and more confidence will come back into our marketplaces. That's what I'm hopeful.

CAVUTO: What do you mean by that, that if a Romney-Ryan ticket were elected, right away the markets would respond, businesses would respond?

SCHWAB: It's just like my great recollection when Reagan came in 1980 -- was elected in, the next ensuing bull market and business considered a very positive thing to have, job creation followed. It was a great time for American business.

CAVUTO: Yeah, but if you remember, Charles, you're a great student of history yourself. Who am I talking to here? It took a couple of years for that to happen, right? I mean, to get out of the recession, to rebound from unemployment that would go still higher. So it wasn't instantaneous. So would you say that a Romney-Ryan ticket, if it were to come to pass, the results could be delayed? In other words, things could get worse before they get better?

SCHWAB: I don't think they'll get any worse. They're pretty bad right now, frankly. I think -- but there will be time that it will take to get additional discipline, and we've been living on this credit card of national debt, and we've got to sort of stop that as quickly as possible. And that will take a slight adjustment. Frankly, there'll probably be a few government jobs that will be trimmed in the process. I think that's good, but I think there'll be other savings that we'll have that will save for the government monies that are being wasted right today.

And I would say one other thing, Neil, on the Romney-Ryan ticket. One of the things that I have been really upset about is how the older people - - the people who've saved 30, 40 years in their savings accounts, their C.D.s, their money market accounts are being paid near zero in terms of interest. It costs the country and seniors about $250 billion a year in lost income. Further, they lose it because their principal gets impacted by inflation.

Even though it's only 2 percent per annum, they've lost 8 percent in the last four years.

CAVUTO: Well, what's the alternative then? You got -- you have a little inflation, but then for that to perk up -- you might be careful what you wish for.

SCHWAB: But Neil, what you need to have in order to get interest rates back to a normal level -- let's say a 3 percent on a savings account, you need to get the economy growing 3, 3.5 percent per annum. That's the only way we'll --

CAVUTO: And how would you do that? How would you do that? The big tax cuts that Romney's envisioning?

SCHWAB: Well, you -- yes. You need to have a pro-business administration, not a negative administration. You have pro-business, and all the pro-business kinds of considerations that will come in that they're planning to install as soon as they're elected.


CAVUTO: But, wait, there is more, as that old Ronco commercial says.

Charles Schwab on Fox Business tonight on whether he would entertain a treasury secretary role in a Romney administration or -- get this -- a Federal Reserve chairman role. Hmm. It gets thicker and thicker, that plot, tonight on Fox Business. You don't have it; you're losing a ton of money because of it.

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