ANDREW ROSS SORKIN: (In progress) -- at this early hour. I'm Andrew Ross Sorkin from The New York Times, and I'm here with the 19th chairwoman of the FDIC, Sheila Bair, for what may be described, if I could, as an exit interview of sorts. We are almost counting down on a month --
SHEILA BAIR: Right.
SORKIN: -- more before you step down.
SORKIN: July 8th is finale.
A couple of just quick reminders. I should say that this meeting is part of the C. Peter McColough Series on International Economics. I should also remind everybody to turn off their cellphones. As a journalist, I should remind you and other journalists that are here that this very happily on the record.
And I should also tell you that there is another meeting on Tuesday, June 14th with Chuck Hagel that starts at 5:30 to 7:00 p.m. So that's all for the advertisements for this morning.
I thought what we would do is spend a little bit of time talking up here and then we will open up and try to turn this into a conversation this morning. And I thought I'd begin by reading a little exchange that I found fascinating a couple of days ago that many of you may have been watching on TV.
There was a Q&A between Jamie Dimon and Ben Bernanke. And Jamie -- I'm hoping you might try to respond to a little bit of this -- Jamie said, quote, "I have a great fear that somebody will write a book that the things we did in the crisis will slow down the recovery." He suggested that, quote, "Most of the bad actors are gone." He said that exotic derivatives are gone. He said that lending standards are higher, banks have more liquidity and capital. And boards and regulators, he said, are tougher.
And now I'm paraphrasing. He went on to say that there are going to be higher capital requirements, and there are 300 new rules coming. And he asked the following, quote, "Has anyone bothered to study the cumulative effect of all these things?" And do you have the fear, as I do -- not me but Jamie Dimon -- that when we look at all this, it will be the reason why banks aren't lending and the unemployment hasn't gotten better. Is this holding us back?
BAIR: All right.
SORKIN: I posit this question to you.
BAIR: (Chuckles.) Well, I hardly know where to start. I think we do need to be careful on regulation. Obviously we need to make sure that regulations are efficient, they're understandable, they present the outcomes that want, they provide the incentives they want.
Yes, we need -- and I think we are, looking at the synergies and the interrelationships among the various rulemakings. There are a lot of rulemakings, and I think in certain areas in particular, and I think a lot of this comes from the derivatives issues. And there you had a market that developed for decades without any regulatory infrastructure at all.
And so, building one now I think is complicated and will take some time -- (inaudible) -- acceptable will take some time, and maybe some staging in that area would be helpful. But on basic things, obvious things like higher capital standards, I say full speed ahead and the higher the better.
You know, banks are not doing a lot of lending now, and the ones that are frankly doing the better job lending are the smaller institutions that have the higher capital level. There's a lot of research that questions or challenges the notion that raising capital requirements really has that much of an impact on lending capability.
And, you know, lending is really just another way of funding your balance sheet, and it's more expensive than debt. But, you know what, it can influence losses in a crisis. And then you have financial institutions, especially large ones, that are too highly leveraged. If you get into a crisis, they don't have that loss absorption capability, so they have to quickly reduce their balance sheet to maintain solvency, and that's what we saw during the crisis.
And just in the depository institutions alone, we had about $900 billion in loan balances fall, and that in about 18 months to two years. We had about 2.5 trillion (dollars) in unused credit lines being pulled. That really didn't do much good for the small business sector. And those are just the insured banks. When the shadow factor went away, there was trillions in the credit availability that was lost because of this leveraging that had to occur.
So we have better regulation. We have better higher capital standards. And we have rules that prevent regulatory arbitrage so we don't have one sector that has regionally higher capital standards and other that does not. I think we do a lot to stabilize the system. And you can never prevent the cycle because we'll always have cycles, but just certainly we can help make sure it's just a normal business cycle as opposed to an economic cataclysm, which is what we almost had in this most recent --
SORKIN: When you look forward, though, when you look at our economy and the challenges that we face --
SORKIN: -- does Jamie Dimon and others in the banking industry have any point? Is there a point that they are making that you think is valid at all when it comes to this idea that somehow some of this regulation could ultimately be an impediment?
BAIR: I don't disagree. I do disagree on capital requirements. I think capital requirements need to be higher. They especially need to be higher for large systemic entities. And I don't think that -- that might have some incremental impact on lending longer term, but right now they're not lending, for a couple of reasons.
They're somewhat risk-averse, And I think, you know, if you can take your cheap funds and invest them in GSE an other very low-risk securities, recapitalize, that may be a safer play than going out and making a small business loan.
I think there's also -- in fairness to the banks, I think there's reduced borrower demand too, but that's what's driving this. We could raise capital requirements by 300 base points in a very short time period, and I think in terms of impact on lending, I don't think it will be there. That's not why loan balances are low.
SORKIN: When you think about increasing --
SORKIN: -- loans, if there was a way to actually push the banks to loan more money --
SORKIN: -- what would you be doing?
BAIR: Well, you can't -- it's always dangerous for regulators to push banks to lend. You can -- we can certainly jawbone them. We've been jawboning them for a long time, and we've been pointing out that the smaller banks have generally had a better record on this, though small bank loan balances were down on the first quarter as well, significantly, and that really worried me because the small banks have to lend to make money. They don't have other ways to produce revenue. So if they're not lending, we have a borrower demand problem.
So I think we can make sure through our examination process that we want prudently written laws. And we understand there is some risk in lending, and you need to take some prudent risk, and we don't discourage that; we encourage that. And we've said that a lot. We've done a small business conference. We've set up a small business hotline for small businesses who feel they've been unfairly denied credit, can call us, and we've had several hundred of those and we've looked into them.
So, I think in terms of making sure the examination policies, the advisory policies are conducive to prudent lending, our public statements or the support we're providing, I think we're pretty much doing as regulators what we can do.
I will say that I think a lot of this is about confidence in the economy, and that's beyond anything that the regulators can do. That's in Congress and the administration's purview. And I do think this broader debate about deficit reduction and how we're going to get our fiscal house in order, whether we are and how we're going to do it. The lack of decision-making on that score is creating uncertainty for businesses more generally. But that is --
SORKIN: Which way do you go on that particular issue, between deficit reduction --
SORKIN: -- and trying to stimulate the economy?
SORKIN: I mean, that is sort of the great debate.
BAIR: Well, I think we need to -- look, I think we need a long-term plan. I think we need some, you know, significant down- payment now to make sure -- to convince people that we are serious about it, but it should be long-term and it should be targeted in its impact.
And I think, you know, additional spending for measures that will -- we feel will give us a long-term benefit, like job training, infrastructure. I think those can be justified even now with the deficit problems we have.
What I hope we don't do again -- this is short-term pop stuff. You know, we're trying to stimulate consumer spending in the short term, and that has cost a lot of money and there's been no -- as far as I can tell, not much permanent benefit to it at all.
So I think if you're going to have additional "stimulus spending," quote, unquote, it should be with an eye towards the long term. I think, you know, financial institutions, regulators, government, everybody has gotten into this short-term way of thinking.
That's one of the reasons that we had the crisis. People were looking at making money right now. They weren't looking about whether a year or two years from now, whatever your bet was was going to keep making money. And I think the government has fallen prey to that somewhat as well.
So, stimulus, yes, if we know it's got some long-term benefit to it, but we also -- we need to have a long-range plan that's credible to show that we can get these deficits down and we have the political will to do it.
SORKIN: We'll go back to politics in a moment, but I want to actually just step back and talk a little bit about the banking system still --
SORKIN: -- and focus, as we've talked over the years, about too big to fail --
BAIR: Yeah, we have.
SORKIN: -- and whether this has been solved --
SORKIN: -- and in particular, resolution authority, which you've been very supportive of, and I've written columns very supportive of, but we even talked a couple of weeks ago about one of my great worries, which is that when the proverbial you know what hits the fan and we actually have to use this authority --
SORKIN: -- that it actually doesn't work the way we think it will.
SORKIN: And we've now seen a number of people come out publicly and say, I'm not sure that this is going to work, and actually I'm worried -- not me but others have said -- and I'm worried that this is going to ultimately exacerbate the problem. It's going to create more risk in the system. There could be some political favor trading. I think Ken Griffin --
SORKIN: -- suggested that, you know, that could become a problem.
SORKIN: When you think of the challenges of this new tool that the government has -- probably the only real new tool that the government has, and it's sort of the last backstop, when you think about too big to fail -- what do you worry about?
BAIR: Well, I worry -- I do worry about the political will to exercise it. Actually, I don't. The political favoritism argument I don't worry about, because I know my agency. And this isn't just me; this is at the FDIC institutionally we have standard policies and rules that we follow when banks fail. And they are impartial and we don't show favoritism, and they're transparent. And I think having a Title II process that's built off of that long history will be helpful.
SORKIN: Can you tell everybody what Title II is so that --
BAIR: Title II is the authority -- so, for as long as the FDIC has been around we've always had the ability to seize banks, to protect depositors, and sell their assets. It's called resolution authority. And there's a lot of different tools that are used to resolve banks in a way that gets the banking assets back into the private sector quickly. It is a very -- it's a bankruptcy-like process in terms of claims priority.
So, we did not have this during the crisis outside of insured banks, and a lot of the activity -- most of the activity that was creating the problem was occurring outside of insured banks. So Congress enacted Title II of the Dodd-Frank law that basically says, if there's a systemic impact from the failure of a non-bank, the FDIC can also use the tools basically that they've used for banks for many years to revolve non-bank entities. So that is what Title II is all about.
And Congress itself built in a lot of transparency requirements that will help make sure that there is no favoritism in the resolving of these institutions. I think the process we had before, an ad hoc process, a make it up as you go along process, was -- I think it was -- all those tools were used by the people in charge with integrity. But there was a risk. There's always a risk if you have an ad hoc, you know, program, that favoritism will infiltrate decision-making.
So, having something in place in the statute that requires -- is subject to GA (ph) audit, that, you know, requires reports to Congress, that requires us to maintain a strict priority -- we can differentiate among creditors in unusual circumstances, but we tried to tighten that up even more through our rules.
So I think -- look, anything is subject to political favoritism or abuse. I mean, the bankruptcy process, people have criticized some of that as well. So I can't ever guarantee you that that won't happen. But I know the FDIC I think has a very good track record in that regard.
So that is one that -- I really don't worry about that. I think these very large, complex entities, especially the ones that have multinational operations, will be difficult to resolve. It won't be impossible. If we had to do it now, we could, but it would be messy and it would be expensive.
And that's why the other part of Dodd-Frank and Title I that requires these institutions -- and the burden is put on them, not the FDIC or the Fed. The burden is put on these large institutions to show that they can be resolved in an orderly way, and to demonstrate that to both the FDIC and the Fed, I think -- if they cannot make that showing, then the FDIC and the Fed have the authority to order restructuring or divestiture if they can't make the showing.
SORKIN: So you just said that it was going to be expensive and messy. And --
BAIR: In the short term.
SORKIN: In the short term. And you wrote a paper recently -- or your department wrote a paper recently --
SORKIN: -- around what a resolution of Lehman Brothers would look like --
SORKIN: -- and the fact that you felt that had the tool existed at the time --
SORKIN: -- that you could have resolved Lehman Brothers.
SORKIN: I was hoping you could talk a little bit about that, and also talk about if tomorrow Jamie Dimon --
SORKIN: -- if Jamie Dimon's organization had a cataclysmic problem --
SORKIN: -- what would happen?
BAIR: Right. Also, I think for an institution the size of Lehman, I don't think it would have been messy. For the multi- trillion multinational entities, I think it would be a significant challenge. Now, for a Lehman-sized institution, we really don't think that would have been messy.
And I would encourage you to read the paper. It's on our website. There were ready buyers for Lehman. There were many months when people knew that place was in serious trouble. There was a lot of time for planning. There were buyers that had gone on and already started doing due diligence.
My personal view is that with Lehman Brothers, you probably never would have even gotten to resolution. Another nice thing about our resolution authority is it really provides strong incentives for bank management and bank boards to right their own ship.
You find frequently when these institutions get into trouble, they have an overly optimistic view, if you will, about what their institutions are worth. And, in fact, Lehman Brothers had spurned some suitors early on. And I think there's a lot of analysis, a lot of smart people who are involved in that who told me that they think one of the reasons was that Lehman was expecting some kind of government-arranged deal similar at least, or maybe even better, than what Bear Stearns had gotten.
So, again, with Title II now, this is the process. Congress has said, no more bailouts. So if you don't fix yourself and you go into resolution, your shareholders are going to take losses. They'll probably be completely wiped out. Your sub debt, all your unsecured debt is going to be available for taking the losses attendant with the resolution.
The boards are going to lose their jobs. You're going to lose your job. There's a potential for two years of clawback of any compensation you received two years prior to the failure. It is a very, very harsh process, and I think will give strong incentives for institutional leadership to right themselves.
But Lehman I do not -- there was really one financial -- the FSA in the U.K. that we needed to deal with. They had substantial -- (inaudible) -- operations in the U.K., and that was really what -- when that got cut off, that was really what caused a lot of the problems.
We would have -- and this is -- we've done cross-border resolutions before. They've been with smaller banks, but they've worked very well. And that's because we know we're in these institutions. We reach out to the foreign regulators generally months in advance. We talk to them about their process: We're going to arrange the sale of this institution. What are the regulatory approvals we need to get? What would be needed for your comfort level to approve this sale?
That would have been done in advance. And, again, it was really just one regulator in that context. So I don't think Lehman would have been --
SORKIN: But going to a large organization, you just suggested that it would be messy and it would be expensive --
BAIR: A very large one.
SORKIN: -- very -- and my question is, given that the government now has absolute authority to force the restructuring of a large company, of a large bank, my question actually ultimately is, are some of these institutions of that size and scale --
SORKIN: -- frankly just too big?
BAIR: Right. Well, I think with restructuring it would not be messy, but I think that it's going to take some time to do. But there are other large banks that require what we call subsidiarization, so that in foreign jurisdictions where you have significant operations, you have to organize yourself as a separate legal entity subject to the laws of that jurisdiction. And that would make the resolution much more -- much easier --
SORKIN: But you don't believe that the banks themselves fundamentally are just too big?
BAIR: I think that if they cannot demonstrate that they can be resolved, that they are too big and that they need to be downsized now. And I think that is a tool that both the Fed and the FDIC have, that unless those large banks think that we are serious about using that authority, I think instead of getting credible resolution plans, we're going to get nice paper exercises to sit on the coffee table somewhere.
SORKIN: Do you expect it to be used ever?
BAIR: I hope it will be used, and --
SORKIN: In the restructuring, not the --
BAIR: The restructuring, absolutely, absolutely.
I think -- listen, even from very healthy institutions, this is important for them to rationalize their legal structures with their business lines. This is important risk management, a function that will improve their information systems, will improve their ability to see what's in their organizations. It will improve their ability, if they start getting in system stress, to break off pieces and sell them on an open-bank basis.
So, absolutely, even short of them actually ever failing, just the perspective of improving quality management, having to rationalize these thousands of legal entities into, you know, streamlined group that is aligned with business lines and that are in smaller pieces so it can be sold into the market if needed, I think that is tremendously important.
And, yes, I think it will be used. But, again, I think the political pressure needs to be to use it, not not to use it, because it can be expensive for some of these institutions.
SORKIN: You mentioned political pressure, and you do live in Washington, so I'm hoping that you can give us a little bit of a down- low or maybe some gossip as to where you see the Elizabeth Warren --
BAIR: Oh, golly.
SORKIN: -- situation headed, and the Consumer Protection Agency and its future.
BAIR: Right. Well, you know, I am worried about that. I think -- look, it's important for that new agency to have a presidentially appointed, Senate-confirmed head. There is a lot of legal analysis that shows that it can't use the full extent of its power unless it has a presidentially appointed, Senate-confirmed head.
So I really hope the administration and the Senate can work this out in a way that is -- that really protects the public interest, because if they don't get it worked out, I think we could have a vacuum in some areas of consumer protection, which is of course just the opposite of what we were hoping to achieve with the new bureau.
So, the president gets the right to appoint these people. That's in the Constitution. And the Senate has the role of advice and consent, and that's a very important function too.
But they really need to come together and find, you know, this -- as well as all these other jobs -- find quality people to serve.
And -- but the more -- there's controversy about this, with the Consumer Bureau and anybody else, and people kind of become political footballs or whatever the harder it's going to be to attract quality people for these jobs, and it's very important to have quality people --
SORKIN: Well, let me ask a more pointed question. William Cohan, who wrote the book about Bear Stearns and recently wrote the book about Goldman Sachs, had a column about a week ago that suggested that it was Elizabeth Warren's duty as a citizen of this country to actually get out of the way, that she had become the political football and that there was no way to really move forward with this agency unless she took herself out of the situation.
SORKIN: How do you react to that?
BAIR: Well, you know, I don't think it's -- that's my job to opine on that one way or the other. I think --
SORKIN: I had to try it.
BAIR: I know, you had to -- (laughter). I think the president needs to decide what he wants to do and then to try to advance that in the Senate. And Elizabeth is a very talented person who had a wonderful career prior to this and there's a lot of wonderful things she can do, and there are -- you know, there's a good reservoir of candidates out there, but I think it's important for the president to make a decision on this and to move forward and engage the Senate and hopefully in a way that can move these nominees to confirmation, because at this point it's looking like they're all going to get bogged down and I think that's a very difficult situation for the country right now.
SORKIN: I have a couple of more questions and then I want to open it up. One of which is that one of the questions that I think is -- continues to be asked about this crisis --
SORKIN: -- is about accountability, accountability both from the government from some respects but probably more so on Wall Street. And, you know, the question I repeatedly get asked at every cocktail party I go to or wherever I am is why has nobody gone to jail. Where is the scalp?
And I was curious if you would, actually opine on that issue and whether -- you know, there was a series of articles actually in the New York Times recently that suggested that the government hasn't -- didn't take the right approach early on actually to be able to hold those people accountable. And my question is whether that's the answer or whether there's something else going on.
BAIR: Well, boy, I think the -- we obviously can't put people in jail. I mean, we are certainly being very vigorous in suing directors and officers who we feel did not exercise the appropriate duty of care in running their banks; try to reclaim some of the -- recoup some of the losses we suffered as part of the failed banks. We have an IG that does a lot of bank investigation of bank fraud, and we've turned all this over -- all those cases over to the law enforcement officials, the U.S. attorney offices for appropriate prosecution.
There have been a lot of those, but those have been more localized mortgage broker type operations. So moving on up the chain, I think it's harder -- what did people know? You know, was it just stupidity, was it arrogance, was it laxity or did it cross the line into criminal behavior. And I think those can be hard to --
SORKIN: Well, you've had incredible insight into all of this. Where do you actually come out on all of that?
BAIR: Well, I think there has not been enough accountability. And accountability can come in a lot of forms, on our -- the cases we bring againsts directors and officers I feel strongly that at first glance, if they're there that we should try to go after those too. I mean, I think there is -- you know, instead of just going after the insurance proceeds. I think you need to have some pain be felt by people. This is in the case of gross negligence, that really drove their institutions and -- that actually ended up costing us a lot of money.
So I think you can -- you know, can have financial pain without sending somebody to jail, and maybe it's appropriate that some people should go to jail too.
SORKIN: Do you think that fraud was a big part of this, though?
BAIR: I think at the origination level I think there was a lot of fraud going on, and I think the question is how much of it begs -- are there larger financial institutions funding this stuff, did they know about it and it was just a matter of looking the other way, not having appropriate controls or did they actually know about that.
And I think that's a very hard question to answer. You know, during the last stages of the boom, with the frenzy, it was just nobody was really looking much at anything. And I -- it wasn't just banks and non-bank lenders, that was investors, too. They were buying the stuff. And you know, if you'd asked more questions you probably could have figured out something was wrong.
But I think a lot people were looking the other way when they shouldn't have. Again, where it transcends to the place of just not doing your job and to, you know, actually knowing about it and aiding it, I think that's clearly criminal behavior and people should go to jail. But it's not clear that higher up that was the case. But I think that's what law enforcement should figure out.
SORKIN: This next question has nothing to do with your department but it does have to do with what I think was the underlying cause ultimately of the crisis, which is housing. And it's one of the things that we haven't really addressed in all of this.
BAIR: Yeah. No, we haven't.
SORKIN: And I know it isn't an FDIC issue per se, though it is in many respects. And I thought if you could be king for a day or queen for the day and offer up a plan.
SORKIN: I know we only have a couple of minutes -- (laughter) -- before we open it up, but what would you do?
BAIR: Well, we actually -- I think there's a -- the market needs to clear, the market needs to clear and there's a lot of distressed property out there, there's a lot of borrowers -- (inaudible) -- they're seriously delinquent on their loans, they're under water. And because the foreclosure process is becoming, you know, dysfunctional I think we've got this overhang now, and there's, you know, increasing litigation and that's going to be -- also be slowing things down.
So we had actually suggested a two-part process and didn't get anywhere with it, but I'll go ahead and share it with you just for fun. (Chuckles.) We had suggested for the banks to set up some type of settlement fund for -- retroactively that would have two pieces, one for those where it just looked like there wasn't -- the appropriate documentation wasn't there. There would be some nominal amount to agree to waive claims.
And then there would also be a separate process for those who actually had been wrongfully foreclosed on, who had qualified for a loan mod and didn't get it, what have you. There would be a separate claims process for review that would have more meaningful compensation. And then going forward we had suggested at what we called the super mod idea, which is a dramatically streamlined mod, kind of a one-time deal.
You know, anybody that was more than say 60 or 90 days delinquent as of a certain day would get their loans written down to below appraised value, say 97 percent, given the chance to either perform on that mortgage. If they performed for a year they can get refinanced on a 30-year fixed with 3 percent equity or to facilitate a short sale or -- but if they couldn't do either one they would get that super mod but in return.
If they couldn't perform -- sell the place or perform on the restructured loan, that they would agree to turn on the keys so you wouldn't have to go through the foreclosure process. So that was what -- it would have been a one-shot thing. There's a lot of moral hazard, obviously, involved with these loan modification programs; we've always acknowledged that. But we think or hope that would have had a good shock to the system, it would have helped clean out a lot of backed-up inventory as well as the people that could afford the mortgage to give them a shot at rehabilitating their mortgage and eventually getting into a 30-year fix.
So that was our suggestion. I think, instead, we're doing much more incremental things. And I know, you know, doing something a little more dramatic can be dis-settling to some but I think we need to do something dramatic. And I've got to tell you, we need to make the modification process simpler, not more complicated. We need to understand that there's a lot of just vacant property out there that we need to be -- figure out how to move out one way or the other.
Unfortunately, a lot of people are just -- they're just in too big of a house, and there need to be other options like Cash for Keys relocation assistance programs. When we would have provided that too as part of the super mod process. So the modification process needs to keep pace with what the problems are. I don't think it has. It's getting more complicated, not less complicated.
I frankly am quite angry with the servicers. I think, you know, we saw this coming for years. We were talking about loan mods in early 2007. We were talking about ramping up your staff, you know, putting assistance in place to do these loan walkouts and we got a lot of happy talk. But at the end of the day, it just wasn't done. And so not only now do we have poor quality servicing, we've got a lot of litigation and legal issues associated with not having the right documents.
When you went to foreclosure, not giving a serviceman or member -- foreclosing a service member, you were legally told you cannot, not doing a loan mod the way FHA told you were supposed to do it. You know, there are legal requirements that they have to adhere to in servicing these loans. They can't just ignore them. And so we've got a real mess on our hands now. And it's going to be expensive unless we have -- we just need to simplify the mods process and we need to get them to start spending more money on surfacing staff and resources. And I'm hoping at least in the short term with these (consentors ?) we can at least get that complicated. But my concern is I think the modification process is going to become more complicated -- (off mic.)
SORKIN: Final question. If you could choose your successor, who would it be?
SORKIN: And I know who's going to be your successor --
SORKIN: -- and it's a tough question but --
SORKIN: -- or even just describe what you think this person should be like?
BAIR: Right. Well, I think -- you know, I think one of the reasons why the FIDC I think has been successful always -- and that includes during this crisis -- is that we really keep our eye on our public mission. And I think some people during the crisis criticized us for being, you know, too FDIC-centric.
But, you know, our job is to protect insured depositors and maintain confidence by people who have deposited their money in banks. That is our job, and we did it very well.
And so when people were asking us to do things that I felt stretched our credibility to be the insurer of deposits --
SORKIN: Is that a euphemism for --
BAIR: -- we said no.
SORKIN: -- (inaudible)?
BAIR: (Laughs.) No. It's just -- it wasn't. It was coming from a lot of different directions. But we did what we thought was right, and we always viewed the issue from protecting insured deposits as our corporate mission. And I think that's what any chairman needs to do. And if they do that, they will be successful.
I think also communicating a lot with the public is important. I think people need to understand what we're doing, why we're doing it. And so we've really made that a priority. That was the advice Bill Seidman gave me when I first came into the FDIC. He said, "You have to actively engage in the media." And he was right. And it's helped us a lot.
And I think we've had a few bumps in the road with the media, just like anyone else. But I think, overall, we've had successful relationships because we have been very open and very transparent. I think that's another key to the success of anyone who leads the FDIC.
SORKIN: OK, fair enough.
Why don't we open it up to the audience? I know there's a lot of questions that people have for the chairwoman.
MR. : (Off mic.)
SORKIN: Excuse me?
MR. : You're 10 minutes late.
SORKIN: And I'm 10 minutes late.
SORKIN: So I apologize.
QUESTIONER: For the larger systemically important institutions, or SIFIs, the capital ratio requirement is already moving from 4.5 percent up to 7 percent --
QUESTIONER: -- a major increase. I'm wondering, at what point does the capital ratio requirement that eventually comes out of the Basel rules and the Fed's decision on SIFI buffers get to the point where, A, the larger banks aren't even able to earn their cost of capital? Secondly, and just as importantly, they actually may end up being competitively disadvantaged against foreign banks.
BAIR: Right. Well, I think international agreements are very important on capital standards. And that's not to say that if other countries start diverging and decide to fall back and let the effects of leverage become the standard norm again, I don't think we can and should do that.
We do have agreement on the 7 percent tangible common requirement. I think it was huge to get the Europeans in line with that. And now I think the challenge is going to be to keep the pressure on the EU to move forward. There's some troubling things coming out of the EU right now in terms of their commitment to move forward with Basel III.
In terms of the SIFI surcharge, I think we have a good chance at an agreement that would have 300 basis points for the very large -- in addition to the 7 (percent), 300 basis points for the very largest SIFIs. We have said that we also think there should perhaps be another 100 basis points above that for those who do not have credible resolution plans, just to kind of add an additional financial incentive to get those resolution planning processes in place on an international basis, because I think we're committed here. But again, in the foreign jurisdictions, it's not necessarily -- I'm not sure that's just completely true.
So, you know, I think we need to -- I think that's realistic. I think it may be realistic. But I think we need to be strong advocates. And so I think, to the extent -- I think we're shooting ourselves in the foot if we start saying, "Oh, my gosh, oh, my gosh, you know, we can't have strong capital here because they won't do it over there."
I think our argument should be everybody needs strong capital. And if you live in Europe, you should be asking your regulators and you should be asking your law writers, you know, "What have you done to tame the system? What have you done to protect me from the next cycle?" because the leverage, it wasn't just here. It was global. The leveraging hurt everyone.
And so I think that's -- the pressure should be on them raising their capital, not us retrenching already and say, "Oh, let's give up and keep it low." But I don't think 10 percent is going to -- they're still going to be able to make a nice return on equity at 10 percent. And, you know, there's going to be some tradeoffs. There may be some new normals. But with a higher capital requirement, shareholders are going to have less risk in their investment as well. And so there can be some tradeoff in terms of lower returns.
And, you know, it doesn't bother me, as a deposit insurer, that perhaps the type of investors going in are seeing banks as attractive investments in the future are the ones who want -- you know, they want that steady dividend and don't want the juiced-up returns and don't want the big escalation in share prices, that they're happy, you know, with their steady dividend. And that's the way it used to be, and I wouldn't mind it getting back to that again. I really wouldn't.
SORKIN: Yes, sir.
QUESTIONER: (Off mic) -- sorry. I wonder if there's too much focus on capital and not liquidity. It seems that historically --
QUESTIONER: -- liquidity's been sufficiently more -- significantly more important than capital for banks' survival. In an asset price crash, even if you have 20 percent capital, it's not really going to make a difference. In the last crisis, Lehman is a perfect example. They had capital --
BAIR: They did.
QUESTIONER: -- but the liquidity was absolutely awful. And you could be perceived to have no capital, but as long as you have liquidity, you survive.
QUESTIONER: My grandparents didn't care that I told them Wells Fargo had a lot of capital last time.
QUESTIONER: They just wanted to know if they could get their cash out of their account.
BAIR: Right. Well, I think that's -- I think that's absolutely right. There's a relationship, obviously, for -- the more the market views an institution as not having adequate capital, that will create liquidity pressure on them. But unstable funding structures -- and we had a lot of them going into the crisis -- I don't think have been adequately addressed. And you're right. The focus needs to be as much on that.
We would like to see an increase -- we've done more to lengthen the maturity schedule for most of the -- for the liabilities of most of the major banks. But I think more could be done on that. I would like to see, you know, that we talk more in terms of just, you know, ratios of long-term debt; you know, that "x" percent of your liabilities have to be term debt exceeding a year. There was far too much reliance on short-term financing.
And I think we've made some progress here, more here than in Europe. And ironically, now we have a lot of money-market mutual funds doing, you know, short-term financing with European banks because we've restricted it somewhat here. But there's not enough focus on that.
I think a lot of the liquidity measures that have been talked about now focus on having a lot of really, you know, liquid assets to sell in a crisis or to sell in an emergency situation. That's fine. But at the end of the day, if you still have a lot of short-term liabilities that can -- and for interest-rate risk I'm worried about this too -- that can be priced quickly, you're going to be providing -- you're still having a situation for instability that led to a lot of the failures for banks and non-banks that we saw during the crisis.
So it needs to -- there's a connection. And with higher capital, you will have more stable liquidity. It's because you have more confidence in your institution. But having longer-term funding, I think, is absolutely essential. And we've made progress, but not enough yet.
QUESTIONER: Do you think that we can bring in Ginnie Mae --
SORKIN: Hold on. We have a mic coming to you.
SORKIN: I apologize.
BAIR: There we go.
QUESTIONER: Do you think that we can bring in Ginnie Mae or Fannie Mae and have them perform a useful, safe function?
BAIR: You know, I think that the structure we had was unstable, as we found out. I mean, I think you have -- again, this is the too-big-to-fail phenomenon where you had very large institutions with implied government backstops that are operated as for-profit, privately owned entities. And so the stakeholders have every incentive to encourage higher risk and higher returns, because if they're assuming that the losses will be backed up by the government, they're not going to worry about it so much.
So, going forward, I think it's up to Congress to decide how much they want government involved in mortgage finance. I do think there's a difference between subsidizing mortgage finance and supporting home ownership -- two different things, right? (Laughs.) And so I think they need to look at policies that actually promote home ownership; not a lot of leverage with people who own houses.
And if they do want to continue to have broader government support for secondary mortgage finance, my sense is that they should do it more along the FDIC model; have a government-run agency that charges premiums for this and prefunds a reserve to take losses if the loans go bad and get away from this hybrid model of, you know, a private-sector entity with a government backstop. You know, whether they're going to do that, I don't know. I think there is some very legitimate role for the government, particularly with low- and moderate-income people.
And so if I was going to continue a U.S. government presence, I would continue it there before I would continue it anyplace. And I think everybody's assuming FHA will continue. But this hybrid model was really -- fed a lot of the problems that we have. And so I hope we do not go back to it. But you can see some of the proposals now are still entertaining this hybrid approach, which I think is not wise.
SORKIN: Yes, sir. Please state your name, if you could.
QUESTIONER: Sure. I'm C.S. Pauley (sp). I'm a lawyer at Allen and Overy's New York office. And I follow a lot of the proposals from your agency, in particular on the securitization and structured finance and derivatives areas, Title 7 and Title 9.
QUESTIONER: I'm curious about your thoughts on a couple of the proposals, the credit risk-retention proposal and the capital and margin rules for non-cleared swaps.
QUESTIONER: Now, my question is, what do you think the role is for securitizations and swaps in the non-cleared market going forward? Do you think they have a role to play, or do you want to see them kind of pushed away?
BAIR: Well, let's start with -- there were a lot of questions in that question. Let's start with the risk-retention rules. You know, my view is I would like to see -- if we could get rid of the (cure ?) and start the standard, I would. I think, you know, regulators -- I'm a regulator. I respect regulation and good, high-quality, vigorous regulation. But there's only so much regulations can accomplish, and financial incentives can be so much more powerful.
And so requiring that institutions who are securitizing loans to take a meaningful 5 percent slice of that, I think, can do a lot to tame underwriting standards in a way that we regulators don't have to get into micromanaging what the standards are.
That was the original proposal in Dodd-Frank -- just 5 percent risk retention. We have it now already for bank securitized loans in a safe harbor rule that the FDIC finalized some time ago. So at the last minute some in the industry got this curium exception into the bill that basically tells the regulators to define what's, you know, the gold standard in mortgages and these are just such great standards that nobody really needs to -- we're just so sure against default that nobody would really need to retain any risk. And we did that and now there's this huge push back on it with the thinking being well, this is going to become the new normal -- you know, not just a small exception but the new normal -- and I think people are right to the extent that it is going to create two-tiered pricing for securitized loans.
So the risk retention loans will probably be some incrementally higher. The week -- it's more like 10 or 15 basis points, not some of the other numbers that people are throwing around. If we could just get rid of it it'd be fine with me, just making sure everybody keeps 5 percent, I would love that; that statute has this direction.
So and that's probably going to be -- I'm talking freely about this because I won't be part of the decision making. Usually you don't comment on things that are out for comment. But since I won't be part of the decision making I'll take a bit of license.
On the margining rules, again, you know, skin in the game is always good -- (chuckles) -- and so I think there's been some controversy about commercial end users for the OTC derivatives products and whether they should have to start putting at margin. The -- I actually think that it is -- look, if a bank was extending those commercial end users credit they would have to have a -- they would have to have some policy for setting a credit exposure, right. So really, what the rule says is that if you -- you need to look at your relationship with this commercial end user and how creditworthy this commercial end user is and set some type of exposure limit. If they go above that, start collecting some margins -- some collateral from them. And that's not different a lot from how we would treat a more traditional credit exposure.
So if it's an insured bank -- an affiliative (ph) insured bank I kind of think maybe we need some prudential standards in there as well. And, again, skin in the game I think is always -- it's a nice disciplining effect on prudence. And if they know they have to take a loss they'll be a little more careful. So I think this has become very controversial and now, you know, again, foreign regulators aren't taking the same approach, and so we're going to have arbitrage and put our guys at a competitive disadvantage so hopefully we can engage with the Europeans on this as well.
But I do think this a philosophical matter. Regulation is good. We need robust regulation. But the more -- a good regulatory framework is one that aligns economic incentives with stable financial practices. And so --and that gets back to equity capital skin in the game by whatever name. It's important in just about any context.
SORKIN: Yes, sir.
QUESTIONER: Jacob Frenkel, JPMorgan.
QUESTIONER: You were talking a lot about the new regulations, and my question is really about the old regulations.
QUESTIONER: More and more studies, especially those from the BIS, show that many of the old regulations are really not fully implemented --
QUESTIONER: -- and that supervision has been lax in many places.
QUESTIONER: And the question is as one focuses on the new regulation whether are we comfortable that we understand why the supervision was so lax and are we now immune against it.
BAIR: Yeah. Well, you know, I testify before Congress a lot and I don't go through a hearing and haven't for the past seven or eight months without being pilloried for being too tough on -- too tough on the banks. So I -- (chuckles) -- so, you know -- you know, you're damned if you do, you're damned if you don't. I think that gets back to my advice for the next FDIC chairman -- just do what you think is right and what's in the interests of, you know, what you need to do your job -- protect depositors and protect the system.
There are a lot of political pressures on regulators not to be vigilant in regulation, especially in good times, and, you know, everybody's making money and what's the problem and why are you bothering us and we get a lot of that -- a lot of it leading up to the crisis.
That's not to put it all on political pressure because one of the reasons Congress made us independent agencies is so we would have some will to stand up to some of that and I don't think we did enough of that in the run-up to the crisis. And I think we've all acknowledged mistakes. I think the Fed realizes now they should have -- they should have done mortgage lending standards and they should have been examining those affiliates of banks too to see what they were doing on mortgage origination.
So we let a lot of capital arbitrage, which we never should have let happen, and that goes for the GSEs too and, you know, the fact that we had lower capital for -- if you made a loan, your capital was high but if you sold off the the loan and bought back the mortgage- backed securities it was a lot lower we just fed the securitization process through capital arbitrage and then since, of course, Fannie and Freddie were only holding 2.45 percent as opposed to the higher 4 percent for the -- for the banks so that kept that gravy train going.
So there were a lot of things that regulators could have done, especially on capital and lending standards, that we didn't do. But I will say, in fairness to the regulators, there was a lot of political pressure not to do anything. And so -- and I'm getting it now too and I don't begrudge the questions. They're right -- we should be asking them. But, you know, how can you raise higher capital? It's going to -- you know, it's going to make it harder for the -- for the banks to make their ROE or, you know, are we -- are we thinking carefully enough about the synergies and then all -- and the relationships among all these regulations. Those are all legitimate questions.
We need to think about them. We need to answer them. Nonetheless, I see a lot of amnesia setting in now. Instead of people thank you for saying this and people saying why aren't you doing more to reform to securitization market, I'm getting well, you know, aren't you going to make it harder for people to get loans. And then so that's really the dynamic that regulators have to deal with on a day- to-day basis and they just need to be strong and stand up to it and do what will really make a long-term stable financial system.
SORKIN: I think there was a question on this side.
QUESTIONER: Herbert Levin. Bob Glauber is the experienced Wall Street operator and also in Washington. In a recent speech in Cambridge he reviewed the various increases in Reserve requirements and other regulations and then observed that this is all fine but it won't really solve the problem -- that the propensity to do it again will remain until CEOs, CFOs --
QUESTIONER: -- and board members go to prison. Prison terms is the only way to really deter people from evading regulations successfully as they've done in the past because the rewards are so great. Do you agree with Bob?
BAIR: Well, I mean -- (laughs) -- I think it should be based on --
QUESTIONER: A more pointed version. Right.
BAIR: Right. (Laughter.) I do not -- if the question is among the senior management of these large institutions do I think there is rampant criminal activity, the answer is no. I don't think that -- I don't think that's true. I think there may be some discreet cases where criminal actions may be warranted.
But at the top I think it was more -- well, also I think you need to differentiate. Not all large financial institutions really were mismanaged going into this crisis. They all have their warts. But I think you need to differentiate among institutions as well and looking at culpability and behavior. I think if you just lump everybody in the same basket that in and of itself dilutes accountability because there were clearly -- as I look back on this there was clearly some institutions and some managers of some institutions that did a lot of really idiotic things and much more so than what we see in the-- (inaudible). So I think -- I think you do need to differentiate and in the criminal --
SORKIN: Do you want to name names maybe after --
BAIR: No I'm not -- (laughter.) That'll be my book, no. (Laughs.)
SORKIN: In the book. All right.
BAIR: So I think you need to differentiate -- that's number one. I don't think there was rampant criminal behavior at the higher levels. I think there was a lot of laxity.
There was some arrogance -- I think too much emphasis on measuring your worth by the size of your bonus and not so much about what your -- you know, what your institution is doing underneath you, and I think in that -- those types of cases financial penalties are appropriate and that's why we're suing a lot of directors and officers. And we can only sue institutes that actually fail. So that's another outcome of the bailout.
We don't use the normal FDIC processes. There's really no way to bring a lawsuit because there was no failure. But I think clawing back people's compensation, going after personal assets -- that can be -- that can instill a lot of accountability as well and that's certainly where we're focused. And so I don't -- you know, I think there's a -- we're all angry. You know, I'm angry still. But, you know, I sometimes worry that we're just criminalizing too much behavior. I think there's -- there is a difference between laxity and shortsightedness and greed and actual criminal behavior and I want to be severe with the former as well but I think, again, suing people for their personal assets, getting financial remediation back I think may be a better course to pursue.
SORKIN: I think we have time for a couple more questions. Yes, sir.
QUESTIONER: I'm Harrison Golden. I wonder whether you agree with the assertion that the government did not have sufficient prerogative to be able to save Lehman Brothers.
BAIR: Yeah. I -- you know, I'm going to take a bye on that one. We really -- we really were -- (laughter) -- so we can -- in our 20/20 hindsight we can go back and tell them -- and I -- and I do think and I would encourage you to read the paper because I think it's a good explanation of how we could have used our Title II tools to resolve Lehman. But I don't -- you know, it was an investment bank. They had -- they actually had a couple of small insured depositories that never failed.
They're actually still in bankruptcy, but we had such a remote -- we really had no role in that. And I don't want to -- there were other people who are much closer to it and I don't want to second guess what their analysis was or the conclusions they reached.
I will say this more generally: A lot of people had to make a lot of very tough decisions in a very short period of time without much information. So whether it was the right decision or the wrong decision, I would say I hope you cut them some slack just as you'll cut me some slack, because we all had to make decisions very quickly.
SORKIN: Thank you.
You had a question and then we'll go over here.
QUESTIONER: Lester Wigler, Morgan Stanley.
You know, barely a weekend goes by that we don't read about banks that have been resolved over the weekend.
QUESTIONER: In your term, has any unifying themes emerged that might indicate a different supervisory structure that might prevent this?
BAIR: Yes. And we are -- we call it our forward-looking CAMELs project. But as we got into the crisis, it was clear that our camels -- or the supervisory rating the bank examiners give banks -- it was static. It was based on whether the bank is making money now, not whether a year from now if the housing market deteriorates, the loans -- the loans, you know, credit quality deteriorates or just rates go up or whatever your average scenario may be, what's going to be happening in the future? And so requiring banks to do more stress testing and scenario planning is very much part of our new project. And also getting our examiners to think in those terms as well.
You know, when the crisis hit, unfortunately, there the supervisory system did not respond until the losses were there. And once the losses start mounting, there's not a lot the examiners can do, other than just stay very close to the institution, ride herd on them to not make any new bad loans and to raise capital and improve management where they need to.
So trying to get ahead of it and saying, you know, look, this is an area that -- you know, this is an area where we think there is some -- the book of economic opinion is that you're going to be seeing some stress here. You need to curtail this, diversify it or whatever. Having those discussions in advance before losses start mounting I think is very important.
We've also, in terms of our insurance premiums that we charge of deposit insurance, we started to try to use more forward-looking metrics. We just finalized that recently. And basically, we did a look back at the institutions that failed -- the large institutions. When I say "fail," I mean needed a lot of government assistance to be stable. What were they doing back in 2001 or 2002; were there early indicators of stress? And we tried to build those metrics into our new large bank pricing model.
So I'm hopeful, again, through insurance we'll have a more forward-looking approach. Because again, the insurance premiums in the system we had pre-crisis were pretty tagged off of CAMELs. And since CAMELs were lagging, what you ended up doing was really raising the banks premium when they were taking all these losses -- exactly. So try to do it while they're still making money and provide the incentives to be less risky is the strategy going forward.
SORKIN: Question over here.
QUESTIONER: Hi. I'm David -- (off mic.) Thanks for the interesting presentation.
QUESTIONER: We are inundated every day with the idea that the banks haven't written down their whole loans, that their commercial real estate is still on the books. That if it were all taken into account, they'd have negative capital and we're heading off a cliff.
I wonder if you'd comment on the general state of the U.S. banking system.
BAIR: So I think -- I don't think that's right. I think the system is mending. I think, you know, we've been on top of commercial real estate for several years now. The charge offs are going down, the delinquencies are going down. That's true for all -- pretty much all asset categories.
So the balance sheets are being cleaned up. And there's lot of liquidity and a lot of additional capital has been raised since the crisis. So I think the system is mending.
I actually -- in terms of cleaning up, we have -- that's not what really keeps me up at night. I do worry about a double dip in housing. I do really worry more broadly about the direction of the economy. I worry about sources of revenue going forward, because again -- and this ties to confidence in the economy and borrowers not wanting to borrow or businesses not wanting to borrow, because of the uncertainties of where they think the economy is going. So that's what I worry about more.
I actually think that -- notwithstanding -- I know there's a lot of suspicion that these loans are being held at inflated value and all of that -- I think the -- (inaudible) -- have actually been pretty aggressive. And I've got to tell you, when I got to go the Hill and I got beat up, it's over that that the examiners are making them write down these loans. And that's -- so I think we're doing something right, because we get just relentless criticism on that. But we've defended our examiners. They're taking a balanced approach, but they're doing the right thing.
SORKIN: I think there was a question right, actually, the gentleman behind you.
QUESTIONER: A topic you talk a lot about -- sorry, David Sanger, Moody's.
The community banking system --
BAIR: Mm-hmm. (In acknowledgement.)
QUESTIONER: -- their -- the future -- what's the future of that system? You see, particularly at the small levels, those banks have had pretty significant growth in commercial real estate exposures over really two decades.
QUESTIONER: And certainly, as was noted earlier, there continue to be failures every weekend -- mostly among banks at that level. And they seem to be challenged somewhat in terms of generating business, if they keep going back to commercial real estate.
BAIR: Well, a couple of things: I think yes, there have been a lot of small bank failures. There's a lot of small banks. You know, less than I think 3 percent of small banks have failed during the crisis, representing about 4.5 percent of assets. When you look at the large institutions -- those over 100 billion (dollars) -- and if you define failure by having to need significant government assistance, there's about a third of those that got into trouble.
So I think if you just compare failure rates and stress rates during the crisis, I don't think -- I think it's a fiction that community banks were in the worst shape and still in worse shape and I don't think that's true. Bank failures peaked last year; it's going to be coming down this year. There are still a lot of small bank failures, but these are very, very small banks at this point. The kind of mid-sized, the ones that were going to get into trouble, we worked through most of those.
So I actually think that, you know, their problem now is really more about borrower demand and loan growth in the economy. They do about 40 percent of small business lending for small business loans that are made by banks. So that sector -- when that sector's hurting, it's difficult for them to find loans.
But on the up side, I think, you know, for better or worse, people are really mad at the large banks, so I think they're reclaiming some market share for that. You know, their high touch lending I think is something that people are looking for. They have picked up market share -- the disintegration of the shadow sector and all these third-party mortgage originators had taken away a lot of business away from community banks that did mortgages. They're getting some of that back. They're getting, you know, I think -- and that's good, because that'll help diversify their balance sheets more.
But at the end of the day, I think we need to accept the fact that most community banks are going to be specialty CRE lenders. And if you're going to have community banks, you're going to have to tolerate some level of specialization in that area.
I think CRE concentrations can be managed. CRE is a very broad category of loans. So with good management -- and I think we can look at most of the community banks that manage those concentrations well, what they did right. C&D lending, on the other hand, is toxic. I think -- concentrations of construction and development loans are something that we need to deal with more effectively. And I think that's where we should be focusing in terms of risk on smaller banks balance sheets to make sure we don't get into that wave again. (Inaudible) -- lending as well was very bad for community banks. And I think we need to provide much more regulatory scrutiny on that.
But they've got some positive things. I mean, their business model held up; insured deposits were stable, no liquidity runs -- well, a few, but that was early on in the process. So I think they have some bright spots and I know they're worried about Dodd-Frank, but a lot of Dodd-Frank protects community banks from regulation. So I think, again, if appropriately implemented I think Dodd-Frank will be a help, not a harm to community banks.
I actually think the consumer bureau can help the community banks, because I know Elizabeth and I hope she or whoever will be running that bureau is very focused on simplifying consumer rules and making it easier for consumers to understand, as well as the smaller institutions to comply with. Because you know, the longer and bigger those consumer rules are, the harder they are to comply with, the more expensive, you need compliance departments to figure them out. And that hurts the ability of community banks to diversify into consumer lending. So simplifying those rules is, I think, another thing -- in addition to regulating nonbanks -- is something that the consumer bureau can do that I think actually will help the small banks.
SORKIN: I think we have time for one more question -- a quick one. If we could -- all the way in the cheap seats in the back.
QUESTIONER: Brendan Browne at S&P.
I was curious to get your thoughts on the repeal of reg. Q. Some of the small banks think that this will lead to very aggressive competition for business deposits and that funds could flow into banks that are perceived to be too big to fail.
Do you think they're justified at all in those concerns?
BAIR: You know --
SORKIN: Just define reg. Q for everyone.
BAIR: Yeah. So it used to be that you couldn't pay interest on business accounts. And that was repealed under Dodd-Frank. So now banks will be allowed to pay interest on business accounts. So the large banks are worried that their larger competitors will be paying relatively high -- well, in the environment -- relatively high interest on business accounts and taking those business accounts away from the smaller banks.
And so we've looked at that a lot. I think right now those who want to keep business accounts have provided other goodies. You know, it was like the toaster when you couldn't pay interest on before now accounts, you couldn't pay interest on checking accounts either. I think they found other ways to do it, whether it's through higher rates on a savings account the business might have or lower transaction -- lower cost for transaction servicers -- services. They found a way to get around that ban already.
So I think, actually, just by paying interest it'll make clearer and more transparent what's going on. And so -- and I don't think it'll have competitive impact. But I know they're very worried about it. Again, we've been looking at it. But it's in the law too; I don't see it changing. And so I really think that the angst is overblown and that there will not be a huge competitive impact. But they are worried about it; you're right.
SORKIN: I thank all of you for some tremendous questions.
And I thank you, Chairwoman, for the conversation.
SORKIN: Have a wonderful day, guys. (Applause.)
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