Money Funds Remain a Vulnerability – Krawcheck

Former Bank of America (BAC) Wealth Management President Sallie Krawcheck spoke with FOX Business Network’s (FBN) Liz Claman about the United States economy and its weaknesses. Krawcheck said that “money funds remain a vulnerability.” When asked whether we have resolved “too big to fail” and what would happen if JPMorgan Chase (JPM) or Goldman Sachs (GS) failed, she said, “We all should cross our fingers very hard that we don’t have to answer that question… if they were to fail, there would be significant destruction to the economy.” Krawcheck also discussed whether she would serve the President if asked, saying, “I have not been asked….the ability at some point to serve is, I think, a privilege, that everyone should take advantage of if they can.”

On whether she would serve the President if asked:

“Well, I have not been asked. I think the idea of public service for any of us is a great thing to do during the course of one’s career, particularly because this country has been so terrific to me, to you, to all of us. And so the ability at some point to serve is, I think, a privilege, that everyone should take advantage of if they can.”

On what vulnerabilities she sees in the markets:

“No doubt about it, I can point to one pretty quickly, which is money funds, a $2.6 trillion industry, where individual investors believe it’s risk-free and it’s cash. But there is risk backed up by no capital with a stable NAV [Net Asset Value]. What could go wrong? Well, we’ve seen what can go wrong, which is for all of these things, it’s not the good market or the bad market or maybe even a very bad market. It’s a very, very, very bad market where things break. And so money funds remain a vulnerability. Bank capital levels, you know, it’s interesting, we have so many discussions about the details. But we haven’t really stood back and had the discussion of, you know, banks have enough capital to get through what kind of horrible environment….the stress tests are a good step toward it. It’s a good step toward it. I haven’t seen any statistical analyses for — we would have to bail out the banks – or choose to not bail the banks – this many times every hundred years, right, or every 10 years, because those 100-year floods seem to be coming much more often.”

On what would happen if banks like JPMorgan Chase or Goldman Sachs were to fail:

“I think we all should cross our fingers very hard that we don’t have to answer that question, because those institutions are very large. And if they were to fail, there would be significant destruction to the economy, which is why I’ve talked about and really thought about what are the incentives that these senior management teams have. Today, they get paid in equity, which is a risk-encouraging instrument. So we need to, in some cases, go back to first principles. They have enough capital to get through how many tough scenarios; how are we incenting them, how are we judging them.”

On where the systemic risk is that we do not see:

“You worry about all of it because it’s going to be something we don’t expect. Remember the scramble? You had analysts, you felt like they were saying, where the heck is Cyprus? Who the heck is Cyprus? What is a Cyprus? And it’s the stuff that we look to go wrong that you don’t have to worry about, because people are all over it. I’ll tell you, if you go back in time, history has been revised. But there weren’t a lot of people talking about the subprime issue before it happened. In fact, you know, the subprime bankers, research has recently showed, were buying real estate for their personal accounts right before the downturn.”

On whose responsibility it is to propel women into senior management roles:

“It should be everything. The research – and, as you know, I like to call myself a recovering research analyst – the research is very clear, that nothing bad happens when women, people of color, are in senior management roles. In fact, good things happen, return on equities go up, volatility goes down, clients’ focus increases, great things happen when you have more women in senior management roles. The issue is people sort of take the research and have nodded at it politely, put it aside and women have been stalled out for years and years and years now.”

On which of her employers was best at helping women find that path to the top positions:

“You know, the one I would give kudos to is the company in which I really started my career, Sanford Bernstein. You know, how Stephen Colbert says he doesn’t see color? Sanford Bernstein didn’t see gender. they didn’t see color. In fact, they didn’t even really see personality quirks. What they saw were results, very metric oriented organization. And if you were delivering the results in a good, strong, ethical way, you would get ahead. In fact, my first promotion, my first big promotion I got there was when I was pregnant with my daughter. And I kept thinking, do you see I’m pregnant? But they didn’t let all the political stuff or all the I-like-this-person, just what are the numbers, what are the results. Let’s move this person forward.”

On whether it really comes down to running a business as a meritocracy:

“I think it does, but I think it also comes down to — I’ve started to think about this. We all tend to fall back on the we want to put the best person in the job. But what I find is when I’m thinking about the best person, sometimes they look a lot like me. Sometimes they look like a — I want to say young, but let’s go with middle age– Southern female. And it’s harder for me to make that stretch for how someone who’s different from me will do in the job. But yet this diversity leads to better teams so I think the mindset that boards need to drive, CEOs want to drive to get to these higher returns from diversity is not just is it the best person, but are we putting together the best team?”

Courtesy of Fox Business Network

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