Jan 29 2009

Interview: Financial Criminals Will Pay. Just Ask Senator Shelby

"The Fed is supposed to be the lender of last resort. It looks like in some instances it's the first resort

By Maria Bartiromo

There was a lot of talk during the Presidential campaign about John McCain being the Senate's maverick. But if anyone is his rival as a lone-gun lawmaker unafraid to speak his mind, it is Richard Shelby (R-Ala.). Shelby is a fiscal conservative with a populist streak who began his 22-year career in the Senate as a Democrat. He can exasperate his party's leadership and get under the skin of the corporate executives and Wall Street pooh-bahs who face the Senate Banking Committee, where he is the former chairman and now ranking member. On Jan. 23, the day after he and Senator Charles Schumer (D-N.Y.) introduced legislation to investigate white-collar crimes that may have contributed to America's financial debacle, I talked with Shelby about the bill, the banking crisis, Citigroup (C), Goldman Sachs (GS), and Federal Reserve Chairman Ben Bernanke's quandary.

Senator, yesterday you and Senator Schumer introduced bipartisan legislation that would beef up financial regulation by adding 500 FBI agents, 50 Assistant U.S. Attorneys, and 100 staffers at the SEC. Is your intent not only to increase scrutiny of Wall Street but to go after individuals who may have engaged in criminal behavior related to the financial crisis?

Absolutely. I sincerely believe that there was a lot of fraud in this financial debacle. Mismanagement, true, but a lot of fraud, and I believe the SEC has not done a great job. They were undermanned. What's missing in our financial sector today is trust. There's no trust to speak of between the banks. The banks aren't lending, and if the banks aren't lending, our economy will continue to contract. This is not going to bring all the trust back, but we should go after wrongdoers.

Let me ask you about what's going on in the banking system. On the one hand, lawmakers would like the major banks to lend more, but they're also telling the banks to raise capital. So the banks are saying, how do we do both?

What you're asking is central to where we are. I think the Fed's got some culpability here, not only as the central banker but as the regulator of our largest banks. They didn't do their job. So now the banks are in a quandary. The regulators, and rightfully so, say you have inadequate capital. If you don't have capital, you will fail. We'll have to close you down. On the other hand, you lend money to businesses and individuals in this country to keep the economy going when you have capital. So it's a catch-22 situation. And some of the banks have used the infusion from TARP to shore up their capital, but they're still not loaning money because they are experiencing unprecedented losses.

It's really incredible. In Britain, regulators have taken a 70% stake in RBS [Royal Bank of Scotland] (RBS). Is that something we will see more of in the U.S.?

Oh, I hope not. My philosophy is and will be that we should keep the government out of business, including our financial failures, as much as we can. Right now the only game in town is the U.S. government. That's sad.

Well, Citigroup seems to be on the verge of being nationalized.

Citigroup, during my years on the Banking Committee, has always been a huge, troubled child. Twenty years ago the Fed grew them out of a lot of their troubles, and then they became a conglomerate and got into everything, and look at them today. It's a question of will they survive.

You don't think the government would allow Citigroup to fail, though, do you?

I don't think they would, but they should.

Efforts to restore liquidity to the credit market by bailing out banks haven't worked. Where does that leave us?

It hasn't worked at all. And I'm not sure that the Fed, led by Chairman Bernanke, knows where it's going. I believe they're in uncharted waters. The chairman has basically said that before. They're printing money. The Fed is supposed to be the lender of last resort. It looks like in some instances it's the first resort. I don't know how much more capital they can expend without some serious questions around the world being asked about the health of the Fed and our monetary system.

What about AIG (AIG)? Washington just spent some $140 billion to prop up AIG. A good chunk of that apparently went to the counterparties, significantly Goldman Sachs. Do you think saving Goldman from taking a major hit was part of the rationale for bailing out AIG?

There are a lot of unanswered questions. We don't know where all the money went, what it was used for, who profited from it, who really benefited—because it certainly hasn't benefited the American people yet. So the Inspector General of TARP [Neil Barofsky] is looking at all that, and he told the Banking Committee he's going to report back to us on where every dime went, who benefited, and so forth. And I think it's going to be interesting reading, whether it's Goldman Sachs, conflicts of interest, or an old boys' network, as they used to call it. There was no transparency. There was no accountability.

It has been reported that [Treasury Secretary Timothy] Geithner and [his predecessor Henry] Paulson in many cases orchestrated some of the deals we saw, such as Bank of America (BAC) and Merrill Lynch, and now BofA just fired [former Merrill CEO] John Thain.

I don't know what happened between Bank of America and Merrill Lynch, or John Thain and [BofA CEO] Ken Lewis, but they were obviously losing billions and billions of dollars. Maybe, when Bank of America took over Merrill, they were doing that at the behest of the regulators. Maybe it was too fast. Maybe Bank of America didn't realize what was in Merrill Lynch's portfolio. Maybe they're finding out the hard way.

Some have said that if Geithner hadn't been confirmed, [National Economic Council Director] Larry Summers would have gotten Treasury.

There's been a lot of talk around here about that. But Summers might be waiting for the Fed. You never know.

You mean down the road after Bernanke?

Who knows?