TOPICS > Economy

BNY Mellon’s Kelly: Financial Reforms Could Stifle Economic Recovery

April 22, 2010 at 12:00 AM EST
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As Democrats and Republicans in the Senate prepare to tackle a sweeping bank overhaul, Judy Woodruff talks to Bank of New York Mellon CEO Robert Kelly about how the bill could reshape the country's financial system and his concerns that it would push business to countries whose banks wouldn't have to follow the same rules.
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JUDY WOODRUFF: And now a view from the world of the Wall Street.

It comes from Robert Kelly. He’s chairman and CEO of BNY Mellon, a global financial services firm, formerly known as Bank of New York Mellon. He is also chairman of the Financial Services Forum, a nonpartisan financial policy group comprised of the country’s 19 largest financial institutions.

Mr. Kelly, thank you for being with us.

First off, what is your take on what the president said today and what the administration’s trying to do?

ROBERT KELLY, chairman & CEO, BNY Mellon: Well, hi, Judy. And — and thank you for allowing me to do this today. A real pleasure to be here.

I largely agree with the president, and so do most of my counterparts. We are pro-reform. We think changes do need to be made in the — in reform and regulatory reform in the United States, and we should get it done this year.

And, frankly, in spite of what you’re hearing, we actually agree with 80 percent or 90 percent of the proposals. But we want to make sure we get the details right, so that we don’t have to come back to this three years from now or five years from now and make further changes.

JUDY WOODRUFF: So, when the president says that your sector, the financial sector, is spending millions and millions of dollars to lobby against that, is that right or wrong?

ROBERT KELLY: We are — we are clearly focused on the smaller details to make sure we get this right.

But, when you think about it, when you step back from it, the president said, let’s — let’s be sure that no bank should be too big to fail. We totally agree. Banks should be allowed to fail if they mess up, and they should disappear, and it shouldn’t cost the taxpayers anything.

We actually agree we need a windup authority, so that we don’t have another Lehman-type event, which almost created a complete freeze in the credit cycle. And, ultimately, it could have created a national depression for the nation and around the world.

And we are very supportive, for example, of having a systemic risk council, so that we can think about the larger risks in the economy. And we’re very supportive of strong consumer protections as well. But we’re focused on getting the details right. And I think that’s the right thing to do right now, as we create what is legitimately the biggest changes in financial sector laws in several generations.

JUDY WOODRUFF: Well, let’s talk about just a couple of those details. One, I think, are the capital requirements the administration is talking about, banks having more capital on hand.

It’s my understanding this is an issue for you and others. And I guess the administration’s point is, it was a lack of authority to make sure those capital levels or requirements were there that led to the crisis that the country went through.

ROBERT KELLY: Well, there are proposals that are being made, not just in the United States, but around the world, so that all the major banks in the Western industrialized nations have more capital and have more liquidity — i.e., that’s to say to have more cash hand, so that we can meet the needs of depositors and lenders.

And that’s going to happen. And, on average, I think there were a lot of firms that didn’t have enough capital or enough liquidity. And I am very comfortable that, on average, our industry should have more capital. But the key is, we have to make sure that we do it with international coordination, so that the United States banks are not at a competitive disadvantage to, for example, our European competitors.

JUDY WOODRUFF: But you’re — but you don’t argue with the premise that that was a big part of what led to the problem?

ROBERT KELLY: Well, the single biggest problem that happened in the United States is not being dealt with in this package. The single biggest problem was the residential mortgage product in the United States and the role of Fannie and Freddie in the GSEs.

We have a mortgage system that’s completely broken in the United States, and that’s not scheduled to be dealt with until next year. So, that was the single biggest issue. And that is not on the table at this point.

JUDY WOODRUFF: And the administration…

ROBERT KELLY: But, beyond that, when you step back from it, we — we do agree that, on average, there were a number of banks that didn’t have enough capital or did not have enough cash on hand to be able to deal with the problems.

When you look back to the banks that did fail and the mortgage companies that did fail, they failed mainly because they didn’t have enough cash on hand, and, to a secondary degree, because they didn’t have enough capital to support very large balance sheets. And that should change in the future, and those rules will be changed, and they should be changed.

JUDY WOODRUFF: And, just quickly, another important part of this is the so-called Volcker rule. And that would limit proprietary trading, allowing institutions to trade in their own assets, their own stock, I guess you would call it.

And they want to put limits on the size of what banks — not only on the size of banks, but limits on — on speculative risks. How do you see what they’re trying to do here?

ROBERT KELLY: Well, I do have some concerns about the Volcker rule proposals.

Firstly, I think our country — we are huge a huge country, and we do need large national champions that are well-managed. We need large banks that have very, very sophisticated product capabilities. We have big companies in the United States that want to raise capital in, say, Europe or Asia or China or India, and American banks should be providing that, vs. foreign banks.

I do worry that, if activities are limited from American banks, the Europeans will pick it up. There’s no talk at this point of any of the products or services that we have on the table for potentially disappearing, there’s no talk in Europe, for example, of that happening.

And I would worry a lot about the fact that we are the financial capital of the planet, and I would hate to see — unnecessarily, I would hate to see a situation where we lose a lot of business to foreign banks.

JUDY WOODRUFF: Another…

ROBERT KELLY: And — and, please, Judy, I would — I would also mention, too, that proprietary trading, if you think about the last two or three years, it wasn’t actually at the root of the problem, nor was a lot of the derivatives activity that took place.

JUDY WOODRUFF: Well, it’s interesting you say that, because just heard Larry Summers, who advises the president, talk about the fact that — that there was no ability on the part of the government to regulate derivatives, that they were — that this trading was done in the dark, or he — I think he — as the president put it, in the shadows, which led to so much of — of the crisis in the first place.

ROBERT KELLY: Right.

Well, the derivatives market has been around for a long time. Foreign exchange, for example, has been around for 300 years. Interest rate swaps has been around for 30 years. It’s never been a problem. In fact, it wasn’t a problem down — during the downturn.

But Mr. Summers did point out that credit default swaps were a big problem. And they were. And we need to do a much better job of regulating them and putting them through clearinghouses. But they are only 2 percent or 3 percent of the entire derivatives market.

Having said that, let’s make all of our derivatives more transparent. And I — I am actually supportive of having clearinghouses for derivatives generally, because, overall, it will reduce risk to the economy, as long as it’s just the plain, vanilla type derivatives that is the majority of the activity of the banking system.

JUDY WOODRUFF: Let me — two questions.

One is, I want to clear something up. We are hearing a number of the Republican congressional leadership say that what the administration’s doing is — is basically a big bailout for banks, for institutions like yours. Do you agree with that assessment?

ROBERT KELLY: I don’t think so. I don’t know how it could be, Judy, when we say that no banks should be too big to fail. If banks get in trouble, no matter what their size, they should be allowed to be taken over by a government entity and then slowly wound down, so that they could not infect the rest of the financial system or the global economy.

That is why we need a resolution authority to allow us to be able to take over a Lehman-type business and slowly wind it down and say goodbye to it and sell off the pieces without hurting the country or without costing the taxpayers any money at all.

And no one wants a bailout. And we have never said — and, certainly, I would never support a system whereby the taxpayers should be on the hook for paying for a bank failure. In fact, if you look at what has transpired over the last couple of years, and with all the TARP money that has been given out — we received TARP money — we received $3 billion.

We had it four six months only, and we repaid it as soon as we could. And we provided a very nice return to the taxpayers of about 12 percent.

JUDY WOODRUFF: So, while the Republicans are saying this is a bailout for the banks, too much help for the banks, on the other hand, are you — are you concerned by the president’s language, that the — the language the president’s using?

In essence, do you worry he’s beating up so much on the financial sector, on the work, on the industry that you’re in, that it could hurt the health of your industry and ultimately hurt the health of this economy?

ROBERT KELLY: What I worry more — worry more about than anything else is that we get our country back on its feet and we start creating jobs again.

And we’re just starting to do it. I feel comfortable that we’re not going to have a double-dip recession. But we have got to get the details right here. We have got to get financial reform actually passed. We have got to have a windup authority. That’s absolutely critical.

And I do worry about — there’s a proposal that we should pre-fund a windup authority. That’s $50 billion. And there’s a proposed bank fee of $90 billion. That’s $140 billion.

I worry, if the banks have to start paying out big, big fees over an extended period of time, that that could actually affect our — their ability to lend and their ability to create jobs in this nation.

JUDY WOODRUFF: Bob Kelly, the CEO of BNY Mellon, thank you very much for talking with us. We appreciate it.

ROBERT KELLY: My — my pleasure. Thank you.