Fastexy Exchange|Transcript: Gary Cohn on "Face the Nation," March 19, 2023

The Fastexy Exchangefollowing is a transcript of an interview with Gary Cohn, the former top economic adviser in the Trump White House and now vice chairman of IBM, that aired on "Face the Nation" on Sunday, March 19, 2023.

MARGARET BRENNAN: And we are back now with the former top economic adviser in the Trump administration and currently the vice chairman of IBM, Gary Cohn. Good morning to you. 

GARY COHN: Good morning, Margaret. 

MARGARET BRENNAN: We should also say you also used to run Goldman Sachs many years ago. So that's why I want to talk to you about banking. But first, I want to ask you about the gentleman you used to work for, the 45th president who may be indicted in the coming days. He's called for protests and that's raising concerns about violence. Are you concerned about security and what will happen next?

GARY COHN: Well, I'm anti protest, so I don't think we should be protesting anything. I- I hope that America has learned from what has happened in the past, and I hope whatever happens next week, we just have a very peaceful set of events. You know, when it comes to this, no one is above the law. But there are also maybe some politics involved. So both of these things may be true.

MARGARET BRENNAN: Your own security. Are you concerned?

GARY COHN: No, I'm not.

MARGARET BRENNAN. Living in Manhattan. So on the banking front, a week ago, you said this looked like a simple run on a bank. It's continued, though, to put pressure on other banks. Why should we assume that other banks are better at managing risk than Silicon Valley Bank was?

GARY COHN: Well, Margaret Bank runs are bank runs. When people lose confidence in a bank, deposits go out the door very quickly. Banks are not designed to have deposits go out in massive scale. In fact, banks are designed to take your deposits and reinvest them back in the economy. They give out mortgages, they give out car loans. They give out student loans. They allow you to have your credit cards. So there is not that much liquidity in a bank to allow that to happen. When confidence is gone, people say, look, I will take my money to someplace else where I have more confidence and we are starting to see that run through the system. And there's a contagion effect. You say, okay, one bank has the problem, okay, another bank has. The problem is the bank I'm in, is it safe? And I have any doubt whatsoever that it's not safe. I'm going to move to the safest place I can because it's better safe than sorry when it's your own hard earned dollars.

MARGARET BRENNAN: Let's talk about that contagion risk on the other side of this commercial break. Gary, stay with us. We will be right back.

*COMMERCIAL

MARGARET BRENNAN: Welcome back to Face the Nation. And we continue our conversation now with former Trump economic advisor Gary Cohn. Gary, I want to pick up on where we just left off in terms of stopping the bleeding that continues to be happening for some of these mid-sized banks like First Republic. Is there a white knight? Does this only end when one of the big banks buys it up?

GARY COHN: Margaret, most likely that will be the scenario. At the end of the day the banks that are most qualified and have the most secure and soundest balance sheets they can afford to absorb some of these larger regional banks are the largest banks in America, which in an ironic way is the last thing that the regulatory community and Congress wants to see. But that probably will be the likely outcome.

MARGARET BRENNAN: There were reports that Warren Buffett, the legendary investor, has been talking to the Biden administration. Is that a way around that?

GARY COHN: You know, it could be. But then Warren Buffett would become a bank holding company, and the restrictions on bank holding companies are fairly dramatic. And he would have to understand what that meant to his everyday core business, what he could do, what he couldn't do, and all the regulations and restrictions he would have upon himself after having become a bank holding company. It's not a simple decision.

MARGARET BRENNAN: Well, part of that decision has to also be, you know, is this going to hurt me in the long term? Larry Fink, who, you know, he runs the world's largest asset manager, told investors a few days ago we could see more seizures and shutdowns coming. He said you could see something like the saving and loans crisis in the 80 seconds and the 90s where thousands of lenders just disappeared. Is he overstating it?

GARY COHN: No, I think, Larry, Larry's not overstating it. This is a crisis of confidence right now. To some extent, bank runs are a crisis of confidence. The government has put in place a backstop for the two banks that we know are in trouble. The banking industry itself is trying to help a third bank by putting deposits into that bank. So we know what the remedy is for three banks. But there are thousands of small and regional banks in the United States. This usually just doesn't stop after two. We're going to continue to go and investors and depositors will evaluate each bank and one by one they will start saying which what is the next bank that is least secure that I most likely do not want to have my deposits in.

MARGARET BRENNAN: And you know, the trading world well, that moves like this and moves so fast, it takes a lot longer for Congress to act or do anything.

GARY COHN: Look, these bank runs because of the way they've been digitized and the fact that everyone has online banking or on telephone banking, these bank runs now can happen in minutes. You know, it's not like you're going to the bank anymore and you're standing in line at the front door and you can slow it down. You can't slow down digital banking.

MARGARET BRENNAN: So you have called in an op ed for common sense regulation. You do want Congress to act, you say with smaller bank oversight. You say the role of the board of directors should be evaluated because of what happened at SVB. Apparently, they didn't have a lot of experience on it, that the $250,000 limit on deposit insurance should be raised. Elizabeth Warren hit the same numbers you did two, five and $10 Million. 

GARY COHN: Yeah. 

MARGARET BRENNAN: Doesn't that trickle down to customers and just make their costs go up if- if that kind of insurance extension happens?

GARY COHN: Well, you're right. Former chairman of the SEC, Jay Clayton, myself wrote an op ed where we talked about, look, you have to have a board that has qualifications. They have to understand banking. How can a board oversee a bank that they don't have qualifications and, yes, expand deposit insurance, but you could have tiered pricing. It could be one pricing for deposits below $250,000. And then you could have tiered pricing as your deposits go up and you want them insured, you- it will be more expensive to insure those deposits. But the key here is, Margaret, and this is very important, we need to keep deposits in the US banking system. It's imperative that we keep deposits in the US banking system because that's how we grow our economy by allowing banks to relend those deposits into consumers, to consume, to buy houses, to buy cars, to go to college. There is an alternative. There's a very important alternative that we talked about in our op ed. The alternative is US Treasury bonds or US Treasury bills. They pay a higher rate and they have a tax advantage to them. The horrible outcome would be if people take their money out of banks in the United States and put them into US Treasury obligations. That would have a dramatic impact on slowing down economic growth and slowing down the economy.

MARGARET BRENNAN: The Federal Reserve meets this week. They control interest rates, given the anxiety that's happening. Ken, Jerome Powell, the chairman of the Federal Reserve, go ahead with the hike he has planned. Or are things so bad out there that he can't do what the market expects?

GARY COHN: He's in he's in a tough spot. We still have inflation. We're starting to see some positive signs that inflation is coming down. Inflation hurts consumers as well. I think Jerome Powell is going to need to raise rates 25 basis points this week. And then I think in his statement, in his press conference, he's going to need to talk about how the Fed understands the cumulative effect, the lags effects of interest rates, and that they're going to be acutely aware of watching for the cumulative effects, the lags effects, and they're going to be very data dependent as they move forward. And I think he'll leave himself a lot of room in the forward- in the forward meetings to do whatever they need to do, which may be pause, maybe cut or it may be increased depending on how inflation is going in the United States. 

MARGARET BRENNAN: Because all of this will have an impact on the broader economy.

GARY COHN: All of- all of it. Both the banking side, as well as what the Fed does in policy.

MARGARET BRENNAN: And we know there's political ramifications, too. That's why we pull all the threads together here. Gary, thank you for your analysis. We'll be right back.