Transcripts For CNBC Squawk Box 20120718

committee. yesterday he stopped short of predicting more stimulus for the economy but he did warn of ri risks. >> we are looking very carefully at the economy. trying to judge weather the loss of momentum we've seen repeatedly is enduring. and whether or not the economy is likely to continue to make progress towards lower unemployment and more satisfactory labor market conditions. if those conditions -- if that does not occur, obviously, we have to consider additional steps. we've looked at a range of possible tools. mostly again involving the balance sheet and communication. >> in earnings central we also have a few names to watch this morning. bank of america, honeywell and blackrock are names reporting before the bell. analystses looking for bank of america to report 14 cents a share. intel is reporting after the bell -- intel reported after the bell yesterday earnings beat the street but company is cutting full year revenue saying consumer spending in u.s. and europe is softer than originally thought. >> pc demand. fda approving obesity drug, second new diet pill approved in the last month. that follows a 13-year dry spell due to safety problems with past medicines. you remember what i'm talking about, fen-phen and all the problems we had. this new drug is a controlled release version of two generic drugs, one is phentermine. >> is that the "f" or -- >> "ph." it will be sold under the brand name -- there's no you -- >> is it qsymia. >> there's no "u." it's q-s-y-m-i-a. i need a "u." the other diet drug that's approved, there's a "q" at the end? you need new names that aren't already existing that means butt or something in some other language. so you have to be careful. shares of vivus fell 8% and beavis fell -- remember beavis and butthead -- failed to come out with a decision. after shoushz shares did regain some losses. the president of vivus is scheduled to come on, we'll see if he still does. and csx is posting better than expected earnings after the close. revenues in line. the company says increases in consumer goods segment helped to offset a drop in utility, coal, shipping and we'll have this ceo, ceo michael ward, who will yoin us live at 6:40 eastern. bank of america, in addition to reporting today, is agreeing to pay $375 million to settle a mortgage fraud case which was brought by bond insurer syncora guarantee saying it was duped into insuring mortgage-backed home loans made by infamous countrywide. >> wears mozilla right now? >> somewhere nice and very nice? >> lewis? >> somewhere nice, not as tan, probably. do you remember angelo? he looked like a million bucks of time he came on. >> didn't even need makeup. >> we all got caught up in the hysteria. he was a butcher's son from queens or something. >> built up a great company -- >> i know. >> -- but if you see what happens -- and you have to see if bank of america is still glad it made that purchase. >> because i remember, the total number for bank of america makes the whale's trading losses look like chump change, what they lost on countrywide and at the time they felt like they were doing people a favor. >> they thought they were doing the government a favor, all of us a favor. >> that's what i mean. >> and they may have been. >> they may have done us a favor buyi buying mayor rel lynch. a check on the markets, yesterday we did see higher equity prices. this was only the second time in the last nine sessions stocks have traded higher. this morning there are some red arrows. those dow futures are down by 35 points below fair value. also we've been watching oil prices. they were higher yesterday. closed above $9 for the first time in a month and a half. right now you can see they're down by 45 cents. oil prices pushed higher yesterday, not because of what ben bernanke was saying. he talked about a horrible outlook for the economy. but still a lot of tension out there. with the fed not stepping in and saying when or if it's going to come back with some sort of new plan, that had the market kind of roiling around yesterday. initially futures -- the stocks sold off, but then they stepped back in as we came in towards the close. >> the figure could move the other way, too. if bernanke showed his hand on qe3, oil would go up, you think. >> right, right. >> sometimes i think that's more important -- >> more important than a run? >> i don't know. i watched the dollar. i saw gold was down based on qe3. a lot of things -- the fed is very powerful and what they're doing is definitely all the markets are dislocated or not where they would be. which was so interesting when i watched the bernanke testimony yesterday. just the incredible dismay that any interest rates would be manipulated. >> oh, from libor. >> the incredible dismay. over all their heads that maybe they're talking to the guy that is the master manipulator of all interest rates, and when you don't let market forces set interest rates, there are issues that surface later in terms of bubbles and asset bubbles and merkley, you know. he didn't get into the real issues, though. >> who? bernanke? >> bernanke. did you watch -- >> i did. >> i think he tried really hard to stay back and even keel. he had schumer basically saying at the end of his testimony, get to work, mr. chairman. it's your fault -- >> oh, no, i'm saying about libor. i saw him try to address it but i didn't see a sort of meaningful conversation about what that was all about. >> some of the e-mails -- >> it's not their rights. it's london. they're not the regulators. >> but they have perspective. >> they were pretty sure -- >> the new york fed. >> i like some e-mails they read. not about keeping rates low but i've got a big derivatives position on it. >> that was 2007 and 2008 day they went the opposite direction. let's go across the pond. time for the global markets report. kelly evans, it was your birthday yesterday. today we have another birthday here on the set. >>dy hear it's becky's birthday today? happy birthday? >> happy birthday. >> thank you, kelly. >> what are both of you? are you -- >> cancer. >> we are cancers. because my brother's a leo and that is like next week. >> yeah. it means we're crabby. we like our homes, we like to protect the people we're close to. that's what it means. >> that's nice. well, let me give you guys a sense of what's been happening in trade here overnight. i would like to start by zeroing in on csgn. as you know, this was organized by our top performers in the euro stock. number three for the day is credit suisse, up more than 5%, this after the company said it's going to raise capital. do so, by the way, of contingent convertible capital. 15 billion francs and investors cheering that as the company announces early. let's get a sense of what's happening across the market. next to that was bond. ibex 35 in spain here is now down 0.5%. we started in asia with a bit weaker trade start, keying off the fact that ben bernanke didn't give a lot of clarity on more stimulus so we've struggled to keep more money momentum. down for ibex. paris up a little bit. ftse 100 after stronger data out of the uk. take a look at what's happening across the curve because bonds are the story, as always overnight. the ten-year in germany is at 1.202%. i'll come back to this in one second. ten-year in spain is rising a little bit, 6.827 is the level there. the u.s., of course, well below 1.5%. same thing goes in the uk. i mentioned germany. let's show the whole german curve or part of it. in an auction this morning, the two-year went off without a negative yield, for the fi time. it gives you a sense of the kind of pressures we're seeing across the board. the ten year is at 1.2%. as we move closer, you can see as we go through the seven and five-year, 0.054%. it's not just germany. there are other northern core countries, den mack, netherlands, even finland seeing negative yields. it gives you a sense of what's happening and when ben bernanke takes the stand later today, to listen to what he says about cutting interest rate and excess reserves in terms of pushing people into other safer assets here. we could see more pressure here. back to you. >> thanks, kelly. appreciate that very much. some of the world's most influential investors and thought leaders can be arriving here all morning at delivering alpha conference. joining us, afl-cio director of policy and special counsel. thank you for coming in this early. >> thanks for having me. let me ask you straight up and down. we have some of the biggest investors coming here. i imagine you are frustrated by their success. truth? >> well, i think, andrew, frustrated isn't quite the right word. what i'm frustrated at is the disconnect between the kind of money that's been made by the people who manage workers' money and the kind of money that's been made by workers in their pension funds. that frustrates me. the idea that our money managers would do well when their clients were doing well, that doesn't bother me particularly. as long as, of course, the fees were feasible in a market context. what's troubling about the last decade is that disconnect? >> in other words, where are all the customers' yachts? precisely. >> i have a question. >> sure. >> why has there not been more pushback? if that's the case in terms of -- if you see one group having a lot of success, why -- in the age of walmart, right, or if itsd come down only when things don't work out, why has there not been more pressure from the customer, if you will, the consumer, of all these products. >> it's a fascinating question, andrew, particularly when you look at alternative segment we're meeting with this morning. i think during the bubble years we saw funds being willing -- essentially chasing alpha, being willing to pay very high fees. 2020 was sort of the floored, if you will in the hope that those money managers would, as the title says this money, deliver alpha. after a lot of people got stuck with beta performance for alpha prices, then there was some squeeze on fees in hedge fund and private equity space after 2008. what we're fundementally stuck here, against the background of poof market performance on a broad base over a long period of time, that funds are, you know, willing to believe that they can beat the market and are willing to pay to sort of indulge that belief at times. >> let me splip this conversation around and indull me for a second. we are macing a huge pension crisis in this country. the return may never be where they need to be. and that ultimately workers may have to take a cut. >> yeah. andrew, i think that kind of gets it backwards in a way. what we're facing in this country is a hij pension crisis fundamentally driven by the failure to fun the funds, put the money in. >> that crisis exists -- there's a group within the public pension fund sector but far more profound in 401(k)s. there's not enough money to provide social security for working americans pretty much across the board. you can't make that up with investment returns but it's not -- it's very unlikely -- i'm sorry, go ahead. >> well, you're right that many pensions are underfunded but you take a look at base return expectations, 7%, 8%. that's incredibly unlikely. some have said, we haven't put in much money or underperformed but you look at the fund made and maybe we need to come on to a new sort of reality where people are working longer, they ne . >> that was the -- i think it's key to understand this question about assumptions about returns. because there's a lot of things said about it that really aren't right. >> which is? >> which is that if you look at assumptions of over eight, those are hard to justify in terms of long-term returns in the capital market. >> assumptions of 7% or 8% are difficult. if you talk to somebody -- especially if you're talking about money that should be invested in treasuries and the 10 and 30-year treasuries are right now. >> i think both those things are not quite right. should pension funds be invested in treasuries? i don't think there's a person in this country that believes their retirement money should be entirely invested. the point of school systems is for xhis of scale and diversification, to be able to invest according to modern portfolio theory and make on a risk-adjusted basis, returns superior to the risk-free rated. if you don't do that, then you're basically -- might as well put the money in the mattress. throwing away the fundamental gains from pooled investment. every american gets their 401(k) statement. we basically encourage individuals to invest according to modern poertd foal yoe theory. individuals are less able to pay those risks than pension funds. pension funds ought to be tying their rates of return to very long-term measures of capital market. >> if you're looking at treasuries at 1.5%, then a good rate of return on other investment classes, might be something closer to 4% or 5%. >> my point is that -- if we were having this conversation in 1999, we would be saying something like, you know, a great benchmark might be 12. that was at the peek of the bull market. at that time funds were 120, 130% of assets. >> today we're at the -- you know, during a period, a long-term bear market in terms of equity and debt. so, we see it this month without undervalued funds. if we were using short-term meertdices -- >> you're making a great case for ail tern -- private. envy aside, i think you would be pleased to are that asset class as a possibility, to help grow people's pensions. we've had a lot of pension plans in that think their stars they have private equity and alternative investments. >> i'm making a case for paying attention to long-term public markets as benchmark. when you look at long term returns on public markets, something in the seven to eight range makes sense. >> admittedly. we've been in a 12-year period -- we also haven't even -- you didn't touch on overpromises the states made in boone times to the public plans. when public employees negotiate with themselves for their pension plans, you get into a met like this. we had john corzine, governor of the state of new jersey, making a speech to the public unions. we're going to get you a great contract clm that's who they were negotiating with, there's no one there to represent taxpayers. that's why we're in this mess. >> don't you think if public employees were participating themselves their plans would be funded? >> no, notally. scott walker, the reforms he brought in, still brought contributions to blow what every person in the state is paying. >> it's not like that. the problem we have in a few states, and you mentioned new jersey, is that employers -- the employers made promises and didn't fund them. workers -- workers -- >> they have a lot of problems. >> certainly the case in new jersey. >> are workers the winners from that? >> i don't think so. >> the employers also solved those problems -- >> in the case of new jersey, i think the last dpooif governors have underfunded the pension plans. >> right. the cases used by people who want to attack public pension friends are primarily new jersey, and california state teacher. in illinois and undernoise, it's all about not making contributions. it tells you a story of the government not living up to a bargain it made with its employees. i think we want governments to live up to the bargains they make. >> slip in a break and we'll continue this conversation and see if there's a grand bargain to be had. >> i think there might be. >> we have an hour. do you think we can get there by 7:00? >> what grand bargain? no. i don't think so. the street reacts to indell, the chip marker's frang cou . intel's full-year revenue warning raising a red flag in the tech sector. craig burger covers the company for fb capital markers, at cnbc headquarters. hello, hello, craig, craig, anybody there? is it empty? >> it is. i'm sitting in your desk. >> not in my chair? >> yes. >> he is. look at that. >> leave something for him on his mouse and keyboard. >> craig, i'm shocked, but pc demand is weak. was it weaker -- we knew that. was it weaker than people even thought for -- will it be weaker than people thought for intel? >> i think it's about as weak as expected. i mean, people have been talking about pc weakness for at least a couple months. we've cut estimates on all our pc-exposed names over the past couple months. intel is one we didn't cut on and they met my expectations. what they're seeing is a lot of strength in servers offsetting weakness in the client pc market. intel cited demand weakness in china and emerging markets as well as europe. and there's also an air pocket in the supply chain ahead of windows 8 production late this year. >> has the company made a successful, at least start on transitioning away from just pcs now? i know there's a lot on intel's plate for trying to respond to the changing marketplace. are they making progress? >> they're making some progress. not tremendous progress. right now they're focusing on ultrabooks which are instant on, you know, souped up notebooks to compete against the apple mac book air. they're not making a ton of progress in handsets and tablets. that's where they need to be focusing with win 8. they may get incremental progress in tablets but it's too early to say. it's really qualcomm and to a lesser degree broad com that own the market in cellular. >> we were just having a conversation about long-term investing. i would have thought 15 years ago or 12 years ago, after watching intel in the '80s and 90s, after watching it go up and split and go up and split and go up and split, finally it got through 22 or 23 and we'll be at 24 today. is it stalling here? has the best days been seen in the latest cycle? we didn't get back to 30. >> this is the world we're living in, joe. it's tough out there, for sure. just when you kind of start to build some recovery momentum, the demand picture weakens again. so, yeah, i mean, this is where they're at. i mean, they're actually executing really, really well in servers and manufacturing. so the estimates are really high. the stock's trading at, you know, a paltry eight or nine times earnings. >> it looked like -- there's a long-term chart we're looking at. and i think '99 was it 60, craig? i think it might have gotten to 60 at one point or -- >> yeah. >> i think it was 60. here we are. go ahead. >> the stock has held up really well compared to other semiconductors. it's a flight to quality -- >> held up to 24. pension plans are not going to fund people's retirement when you invest at 60, 13 years ago, and it's at 24 today. >> agreed. >> just proves your point. or it doesn't prove your point. it's hard to do long-term investing. >> it depends. i think what the intel story is telling us about is not so much intel as your correspondent says, the state of the economy. >> craig, thanks, i appreciate it. when we come back, a former cia interrogator working for hedge funds. duff & phelps finds the sweet spot that powers sound decisions. duff & phelps financial advisory and investment banking services. c'mon, michael! get in the game! 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[ la hi! how are you? between listening to the numbers... ...and listening to your instinct. duff & phelps finds the sweet spot that powers sound decisions. duff & phelps financial advisory and investment banking services. ♪ i don't want to let you down ♪ i don't want to leave this town ♪ good morning and welcome back to "squawk box" here on cnbc. i'm joe kernan along with becky quick. your birthday. and andrew ross sorkin. should we do it every half hour? >> no. >> all right. it's a special when people have birthdays. >> it is. >> there does come a time when you don't want to talk about it. >> like enough already? >> yes. >> 27 years old. >> proud of that. >> you've been at cnbc since you were like 12. >> 17. >> we're in the pierre hotel, heart of new york. andrew walked here. >> i literally -- i don't want to tell you when i woke up. >> very at home. it's the site of today's delivering alpha conference, organized by cnbc and our partners in this institutional investor. among featured speakers, hard to even imagine, holograms -- are all of these people here? >> they're going to be here. >> they're going to be here. unbelievable. are they playing these people or -- >> no, really them. >> the real -- >> wow. i want retina scans. henry kravis, hank paulsen, robert ruben, the new sheriff of wall street, pete bharara will be here as well. the keynote, tim geithner. is he going to be here as well? >> yes. >> you can watch the treasury secretary live right here on "squawk" at 8:30 eastern. fed chairman ben bernanke will be back on capitol hill, part of his two semi-annual humphrey hawkins report. goldman sachs satisfies the fed could ease monetary policy had they meet in september but it's suggestive that a large move is likely to come after the elections. a shipping company owned by blackstone filing a lawsuit against the department of transportation. american petroleum tankers claims discrimination alleging application for financing support is being held up on purpose due to private equity ownership. we can talk to you about that. the lawsuit does not speculate on why a connection would be an issue for the government. and blackrock results just crossed the wire. the company earned $3.10, ex-items, nine cents ahead of estimates. revenues of roughly in line, it looks like this morning. there you go on today's headlines. a former cia interrogator now works for hedge funds and others on wall street. he handles company's statements looking for misinformation and amon javers joins us. >> reporter: phil up houston spent 25 years in the cia as a leading expert on what they called deception detection, or telling when somebody isn't being entirely truthful with you. now he's got a new book out called "spy the lie" and he sells some of his services to private companies, including hedge funds and financial firms, help them understand the people they're dealing with and the lies they may be being told. to put him to the test we had him look at mary thompson's interview a couple weeks ago with jamie dimon. take a look at what houston found. >> reporter: tell us how bad it can get? some estimates say the loss could total $5 billion. >> yeah. i -- i consistently told you i'm not going to tell you. on july 13th i'll tell shareholders what it was in the quarter. >> in that response houston immediately keyed in on how aggressive jamie dimon was in answering mary's question. look at what he found. >> when we start getting close to issues that are really important, really significant, then we as humans often feel compelled to go on the offensive, to try to get you to back off a little bit. and that's what he's trying to do here. he doesn't want to answer this. he doesn't want to pursue it. it makes me wonder, is this loss going to be significantly bigger than they planned or anyone thought. is that a possibility? >> reporter: houston in his book "spy the lie" says other indicators of deceptive behavior can indicate invoking god or overly specific answers. this is just one man's opinion, not at all conclusive but an interesting way to look at how ceos answer questions and we'll be examining some of those throughout the day, including a look at what ben bernanke said in his press conference with reporters. fascinating inside looks here from a former cia analyst's perspective. >> that seems like it was a set-up to have him watching that quote and that comment from jamie dimon. i mean, we knew he wasn't going to answer that number. he said specifically to mary, i told you. i mean, she had to ask the question, but it seems crazy to say, oh, he must be hiding something. we knew he wasn't going to give the numbers until he came out with jpmorgan's earnings they came out with last friday. >> reporter: what houston is looking at right there, not that he refuses to answer but what the refusal to answer psychologically means in his own head. i think what he told us in the interview was that when you see somebody respond with an increased level of aggression, as he did there -- his response to her was much more aggressive in that response than it was for any other answer. that indicates a level of discomfort, houston told us and it's indicated perhaps he was concerned about what the real number would be and not that he was going to -- >> that was a total setup. we knew he wasn't going to answer that question that day. >> and it's one guy -- i had a dream about my mother last night. doesn't mean i'm a freudian nut job. if jamie dimon had been asked -- i mean, one person would interpret something -- if it was the 101st time that day he had been asked, how big is the loss, maybe you respond that day. i don't know. >> reporter: yeah. one. things houston will tell you in pons to exactly that question, you say, how can you just make a judgment based on these tiny indicators. what he does in his analysis is look for what they call clusters of indicators. they're looking for verbal and nonverbal indicators at the same time. if you see within about five second of asking the question, several of these indicators all at once, those red flags go up and that's where they start to bore down. why is he uncomfortable -- >> you know what they need to do is get that seat. you remember the cushion -- i went to the irs and they had the guys there who will bring you in if they think you're lying on your attactaxes, they have a cu tense up and that's a give if you're lying. they need seat cushions, too. >> reporter: the cia can't always use a seat cushion. >> he would have got it out of dimond. >> he used the number $5 billion. >> reporter: what they do here is move from deception detection to what they call illlicitation, strategic interviewing how to get that answer. once you spot indicators, houston says you go to work on that area and ask open-ended but presumptive questions. is there any reason why the loss could be bigger than you said it will be so far? a question like that might start to bring out the answer that you're looking for because you hone in on areas he's exiting discomfort. >> i understand the science of it but i'm not sure using it on jamie dimon on that day wasn't the most appropriate use. >> reporter: fair enough. >> if you look left a lot, apparently you're lying. >> down and -- >> what if you're right-handed or left-handed, then you look the other way? i mean, it's all -- i don't know. >> looking up? >> reporter: you're a skeptic. >> count me as a skeptic. e-mail us at squawk @cnbc.com. it's a great movie where there's 17 different ways you can tell whether someone is lying and christopher walken is interrogating dennis hopper and he keeps looking to see if he's twitching if he knows where his son clarence -- anyway, coming up, the ceo of csx. first, we're in new york so it's fitting we bring you big apple sports news. looks like lin-sanity, one run season on broadway. he's had to do back to houston for rockets. knicks wouldn't match rockets' three-year sorkin-like salary, $25 million, three-year offer for restricted free agent. >> i was given advice.  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[ male announcer ] the citi thankyou visa card. redeem the points you've earned to travel with no restrictions. rewarding you, every step of the way. csx is out with second quarter results and earnings were better than expected. ceo michael ward joins us from jacksonville, florida. i love jacksonville. i love the airport. easy in, easy out. michael, summarize the most interesting things about the quarter. i know there's something about coal shipments that were down. i don't know if you're affected by the global economy, europe, things like that, how it affects us here. what was the most notable about the numbers? >> good morning, joe. i would say there are a couple big movements within the quarter. you're quite right. our utility coal business was certainly impacted by the low natural gas prices. it was down about 37% on the year over year basis. but we saw a strength in other markets. automotive was up 27%. intermodel was up 8%. while our carloads were overall flat f you exclude the impact of utility coal we were up 6% if you look at all our other markets on average. >> hearing that number about coal based on natural gas, that's such a -- that gives us such an insight into what will happen when an alternative like natural gas or some other fuel is that cheap. you can just see the marketplace working. >> well, absolutely. you know, gas prices below $3. and you add to it the very mild winter we had this year, clearly it impacts the colburn. but if you look, we do have a very broad forty foal yportfoli grow 7% despite the fact utility coal was down. >> i would think truckers are more competitive with you right now, with gas -- the gasoline prices went down a little bit, right? are they taking back some market share? >> no, actually, joe, we're seeing -- we're partnering with the trucking companies to do the long haul. >> the intermodel part, yeah. >> the local delivery. our intermodal was up about 8% in the quarter because they still have highway congestion and driver shortages. >> michael, we've heard recently in a few areas, from a few people, including warren buffett that housing has improved recently. have your shipments shown you anything along those lines? >> becky, i think i would agree with mr. buffett. we're seeing some movement upward but from a very low base. it's encouraging to see some growth there. if we look at the overall economy, if you look at purchasing manager's index for the month of june, it was 49.7, slightly below the 50% that would indicate growth. significantly it was down from 53.5% in may. so, i think we're seeing in recent weeks a little more cautiousness in the economy. but i will say, we do expect to see growth, maybe at a more modest level, but we do expect to see growth in the third quarter. >> it was interesting to note your observation about the combination of the auto sector and the coal sector as the big drivers of your business. on the coal side, what do you think about the intense temperatures this summer producing the opposite effect the warm winter produced in terms of coal demand? >> andrew, it probably does help some draw down those inventories somewhat. we've seen some utility companies increasing their take a little bit of late. but they still do have rather large stockpiles. the one interesting development we've seen in the coal market is the growth of export coal, going overseas to europe and asia. that market was up about 40% for us in this current quarter. so, we are seeing coal usage in the remainder of the world actually increase fairly significantly. >> all right. we're going to leave it there, michael ward. we appreciate it. thanks for bringing us your results this morning and then the announcements. we appreciate it. >> thank you, joe. appreciate you having me. when we come back, we have more from our guest host, damon sillers have of the afl-cio. in the next half hour, we have three investing power players with very different areas of expertise. scott kalb ran korea's $40 billion plus sovereign wealth fund. jim leaech and bruce richards manages more than $10 billion for institutional investors, focusing on global credit markets. [ female announcer ] e-trade was founded on the simple belief that bringing you better technology helps make you a better investor. with our revolutionary e-trade 360 dashboard you see exactly where your money is and what it's doing live. our e-trade pro platform offers powerful functionality that's still so usable you'll actually use it. and our mobile apps are the ultimate in wherever whenever investing. no matter what kind of investor you are, you'll find the technology to help you become a better one at e-trade. mom, we need to go the hospital. times are tough right now, son. ♪ [ male announcer ] with doctors trained in the u.s.a., europe, and australia, kpj has been saving overseas patients millions of dollars a year with over 20 specialist hospitals and state-of-the-art equipment. kpj -- saving americans in health care costs. kpj malaysia -- care for life. welcome back, everybody. we are back with our guest host, damon sill verz, the aflcio. he's the director of policy and special counsel. we talked about pension funds, but when you look at what is affecting the american worker today, it's the unemployment picture. 8.2%. a lot of questions about whether this is the new normal. what do you think? >> well, i think if we don't make the right policy choices, it will be the new normal. that's disastrous for our country. the unemployment rate is much higher for young people, much higher in communities of color. it has long-term effects. so if action is not taken to jobs or additional action from the fed, we'll see the impact of this in our country in terms of reduced productivity and reduced income for a generation. >> what about this question of what the fed can or can't do. this was a huge issue yesterday when bernanke went before the hill? chuck schumer pushed him to come up with more action. others said, hold on. is it worth anything? senator bob quicker is asking are you pushing a string at this point, too? >> we know what happens when central banks don't do their job. we've steen that in europe. >> would you say the central bank has not done its job sdm. >> they have done creative things but for that we'd be in a lot of trouble. the fed neetds to be more creative and more targeted because of the pushing on the string issue. >> like what? >> i think the fed did a lot of work to keep the housing markets low cost essentially, low cost credit to the housing markets during 2009 and 2010, but the real place where it makes sense to promote investment now is not so much in housing but infrastructure. the fed needs to think about creative ways to ensure it's more targeted. >> i thought the fed had the options of buying treasuries or buying a mortgage asset, mortgage securities. how would you direct it towards infrastructure? >> the fed has a wide -- the fed can buy a wide range of debt securities. they have to be at fair value, and the trick here is very much to solve the problem you just described. in the housing field they've been buying securities not government issued. they've been buying gse securities. there is room for creativity here to have more targeted impacts because the pushing on the string problem, which is that when the economy is weak, cutting interest rates is not as if effective as it can be. >> what you talk about is more of a fiscal policy congress should deal with in coming up with infrastructure. >> in a crisis like this, the boundary between fiscal and monetary policy is not very well defined. >> we're facing the same thing that europe faces in certain ways. that is, do we spend more, does the government spend more even though eventually the money comes from the private sector? do we spend more to try and engender growth or other the side, and there's an election coming up? get ouft of the way and let the private sector do its job. it's a yin and yang. that was a whole constituency framing this election the government has been too active and we need to get the government owl out of the wail. guys like you want more spending and growth. >> what i want is more jobs, and that's what i want. >> right. there are starkly different ideas about how to do that. >> i think the real debate actually is not so much between people for and against government but between people who want austerity now and growth. the people on both sides of the left/right divide in the two camps. i'm for growth. >> grade the president on employment thus far, given where we are. >> all right. i would give the president in relationship to where he started -- you have to grade people based on where they came in. i think that the president is somewhere in the a minus range. >> a minus range? >> here's why. when he came into office, our labor markets were in free fall. we were losing hundreds of thousands of jobs a month. now, what gets to an a or an a plus, which is what nerdy people like me like to see on report cards is to move from having stopped the bleeding into growth. stopping the bleeding was no small matter. >> i think some people would suggest there's great inflation going on. >> all your degrees are from harvard, and that's where we hear about it. nobody gets less than an a at harvard anymore, do they? >> what i look for a report card is not a minuses or as. >> an a minus is the lowest grade you can get apparently. >> we want to thank you for sharing the hour with us. it's been fun. appreciate it. >> thank you. >> we're going to take a quick break now, when "squawkbox" returns from delivering alpha, we'll do a who's who of the world of investing including the man who ran a sovereign wealth fund, scott kalb. he's join us live on set. the man in the morning, don't miss it treasury secretary tim grooet n geithner. stay tuned for that and a lot more. finchts ♪ ♪ ♪ ♪ [ male announcer ] what's the point of an epa estimated 42 miles per gallon if the miles aren't interesting? the lexus ct hybrid. this is the pursuit of perfection. best-known hedge fund managers and largest investors on the planet. from global opportunities to the hunt for yield, we'll take you inside the minds of some of the brightest wall street names and how you can make money now. "squawkbox," live from the delivering alpha conference begins right now. good morning, everybody. welcome back it to "squawkbox" on cnbc. i'm becky quick, and we are live this morning at the delivering alpha conference, which is hosted by cnbc and institutional investor. we're at the pierre hotel in new york city, and p if you haven't heard this already, there is a great line-up this morning, including some of the best and brightest in the hedge fund industry. it leads up to the start of the delivering alpha conference. treasury secretary tim geithner is the keynote speaker. he makes his comments beginning at 8:30 eastern time. you can see it live on "squawkbox." we've kept an eye on the futures, and we have seen red arrows. at the end of the day we saw gains across the board. that was the second timt of the last nine trading sessions we saw gains. this morning those futures down by about 34 points. >> even though we see the bank of america numbers this morning, 19 cents. we assume they've done some of the math and that is a clean number versus expectations of 14 cents. the net number for a bank that you don't really think of as being that profitable, $2.46 billion. i quickly multiplied by four, and you get somewhere up near $10 billion for profit on a year if it were on that run rate. revenue was 29.97, just p below the 22.87 that analysts were looking for. tier one capital ratio is 13.8%. consumer and banking -- consumer and business banking revenue $7.33 billion. you can see right now the stock is just a little bit lower on that news. that wouldn't move the dow very much, and it is a dow component. consumer real estate services revenue 2.52 billion. bank of america also talking about global banking revenue of $4.29 billion. >> you talk about the tier one capital combo ratio. that was an issue a year ago because they were the lowest tier capital one rating of the three or four or five megabanks that were there. they made movements. >> charge-offs and provision for credit loss $1.77 billion. >> they do say we always look to bank of america because it's one out of every two households has some form of banking for the chief executive officer, brian moynahan, making comments about how it is a challenging global economy. that's what we've heard from all of the ceos we've listened through. they make some improvement in terms of that tier one capital. >> it helps to have an atm around. >> you should on every corner. >> you know why? if you do bank at bank of america, you know the biggest thing you don't want to do is $3. you know what i mean? >> it's gotten up to $3. it wasn't always $3 and. >> if you go to your own, they don't do it. >> just for the charges. >> a buck and buck seven five. >> i take as much as i can, because it's the smallest percentage. >> i know. >> you're lowering your fees. >> you're in manhattan. you can go to chase, and it's free. >> really? >> there's joint rate every corner in manhattan. that's what us new yorkers do. >> that's your reason for raising twins in this cesspool? that's why you're here? you have to walk outside and -- >> we love it here. it's beautiful. it's beautiful at the fira. >> did you take the lincoln tunnel this morning? >> no. that three quarter of a mile stretch can take an hour and a half. >> same thing on the bridge. no traffic, no problems. let's get to other headlines this morning. we've heard from intel with their earnings last night. they had a profit of 54 cents a share. that was 2 cents better than the street was expecting, but the company forecast that current quarterly revenues would come in below what the street expected. intel's forecast is reflecting weakeneni weakening pc sales. ben bernanke is back on capitol hill this morning. bernanke spoke about the ongoing weakness in the u.s. economy in his senate appearance yesterday. steve leisman we'll have more in a moment. also, we get fresh numbers from the u.s. housing market later this morning. economists think that june housing starts register an increase. there's a decline in may, and that number is ut 8:30 eastern time. >> as becky said, fed chairman ben bernankac interview, steve. walk us through mr. bernanke's thoughts. >> there was a lot of mixed reaction to the chairman's comments. he's more downbeat on the economy and his failure to specify when the fed would act. the chairman sees q2 below 2% and projected growth that won't put people back to work. i thought it was significant he didn't say outright he believes the economy will continue on a moderate pace of growth. he quoted the question as saying it back in june. >> we are looking very carefully at the economy trying to judge whether or not the loss of momentum we've seen recently is enduring and whether or not the economy is likely to continue to make progress towards lower unemployment and more satisfactory labor market conditions. if those conditions -- if that does not occur, obviously, we have to consider additional steps. we've looked at a range of possible tools, mostly, again, involving the balance sheet and communication. >> here's a sampling of some of the economic commentary we saw yesterday. the chairman remains frustrated by the pace of recovery, is worried about downside risk and is clearly biased toward more easing. we expect the fed will ease again before year end. steven stanley says i take it as a strong sign the fed is finally succumbing to ease fatigue. i walk away feeling more confident the fomc is not going to pull the trigger on qe3. the consensus they will do so in september and not august. i think the market got a furn around yesterday after he listed the thing the fed could do, the easing options. joe. >> as every head fake and everything he says, it's interesting to watch. twice a year the interplay between the politicians and chairman is always interesting. he keeps his cool. he's very mild-mannered, isn't he, steve? he takes his team with them and never preaches or talks down to them. there's plenty of opportunity to do that and he's very humble. >> isn't it interesting to think about what's going through his head at the time he's asked some questions? >> i was thinking that watching him a couple of times yesterday, steve. >> he never lets on. >> whether schumer says, you know, go back to work, what are the first three things that bernanke is really thinking in his head versus what came out of his mouth? >> i'm just wondering whether it's building up, you know. when you hold it in like that and it's building up, there's nowhere to release it. i'm hoping today at some point he just snaps and like stands up and rants like howard beal. i don't see that happening. >> i think what he was doing, what was probably going through his mind is you guys are going to mess this up in a big way if you don't get your act together, and it is outrageous that you guys are pressing me to do more when you haven't done the most basic job of what it is that you guys have been sent to washington to do. i think that's what's going through his head. when you read the text of what he's saying, you know what? we can do more, but there's a whole lot more -- it's more important that you guys solve this problem that's coming towards the economy at the end of this year. he really emphasizes that, and if you watch the progression and the rhetoric, joe, i think he's gotten more and more strident is what he says. >> does he play xhes or bridge? >> i think he plays both, actually. >> i think he was doing chess moves. i don't think he was thig that. i think he was thinking i move my queen. >> get behind all the pawns. >> what are you assuming intelligence to be of your opponent, becky? that's the problem when you play chess like that? >> your opponents are playing checkers. >> he's playing himself. he wasn't thinking of what he's saying. >> during the testimony? >> yes, he's playing chess with himself. >> all right. stay right there for more on birthday girl -- anyway, mind in the gutter. day two of bernanke testimony. we're joined by john who we saw recently on set. he's a hand some man and so is greg, though. greg is u.s. economics he had for for "the economist." you're on the left. you heard what steve was saying. do you think he's got it basically right? >> yeah. you know, i have to say when you you listen to that testimony, he makes a convincing case how the dme is not turning around. you go back to the press conference he gave at the last meeting about a month or so ago. one of the key reasons he gave is they needed more time to figure out whether the slowdown was a soft one. the testimony was convincing it's not a soft patch. it wasn't just seasonals and so on. the natural question investors are asking is what are you waiting for? the other thing that's intriguing is you see speeches by folked like steven lock hart and sandra who sound very interested in doing more. so to the extent that bernanke was worried about bringing the rest of the competemittee along that obstacle is also dropping away. >> john, greg is making the case that we're slowly moving towards more action. you think so? >> exactly. i totally agree. i think that the question is what has to happen to prevent the fed from doing anything right now? the answer, to me, is the economy. you've heard this from sandy as greg mentioned and you heard it from bernanke yesterday. the economy has to pick up steam, unemployment has to start coming down again. in my mind that's the only way they don't do more. bernanke made very clear yesterday that the status quo, 2%, sub-2% growth and no improvement on unemployment is unacceptable for them, and that's what we're getting. we have to see much better numbers for them not to do something. >> joe, i want to underscore what john is saying and talk about how to read this chairman. there was a lot of commentary right after the speech came out about how he failed to list what the fed was going to do, didn't say definitively that there was easing. i think people are missing the point. with a chairman who is not going to front run his competent, which i think bernanke has shown he will do or won't do compared to greenspan who would drop bombs. with greenspan it was a binary thing, yes or no. that's not true with bernanke. people need to listen to the forecast. the forecast tells what actions to take. when he downgrades this economy and says explicitly they see mod operate growth comes and we see there's more fed action. >> steve, just one second. steve, you have been in the camp of no qe3. are you starting to waver? >> i am staying to waiver. the retail report made me more concerned about the economy. hearing the chairman's -- joe, it's hard to find a good story to tell about this economy right now. there was a momentum story in the first quarter that seemed to go a little bit to the second quarter, and things seemed to have stopped and slowed down and i got more pessimistic on the economy and the fed has. i think more and more he's got to find some action to do here. not clear what that action is, though. >> i would just jump in and point out that -- i was going to say two other things that are interesting in the forecast. the other thing he's looking for is some sign of like closure on the european situation, either they get it fixed or the whole thing breaks apart. yet, we have more muddle through. that will weigh on the economy for the next six months. the other striking thing in his testimony was how downbeat he was on business investment. there you can see the impact of that fiscal cliff coming along six months from now. not only does the current picture look weaker than a month ago, but the hopes that the numbers get better from here on in seems to be fading. >> what would the time line be for deciding to do more and when they could do it and when we'd see a positive effect? i'm talking about in a lot of november and the election. do they still have time to be seen as political to do something that can be seen as trying to juice the economy before november? is it already too late for that? >> i think it was very clear to bernanke and to everyone else from yesterday that no matter what he does, he's going to upset one political party or the other. you have chuck schumer saying get to work, mr. chairman. and then you have jim demint saying, i urge caution. no matter what he does, damned if you do, damned if you don't. for me, this september meeting is an important one, because the fed is updating its forecast. we've been talking about how important the forecasts are, and the chairman gives a press conference. if they're going to do something before the election, that's a chance for him to do it with the committee behind him, new forecast behind him, and a chance to explain himself to the public. you know, with greg and steve grilling him on why he took the action that he took. >> thanks. steve, i know we'll hear from you in a bit. i think the president would rather have unemployment come down this month, next month and the month after. that would preclude maybe qe3, but i think he'd rather have that because fed action would be too late, don't you think, steve? >> i think everybody wants unemployment to come down rather than the fed take action, if that's the choice you give everybody. i don't think bernanke wants to act, you know? >> people probably don't want it to come down for november. i hate it to tell you that, receive, but some people actually don't want it to. jim demint or somebody like that. >> i have an interesting interview coming up. bob rubin and hank paulson and delivers alpha. their picture should be bigger. we have a 345 and a little live, and i'll report back to you things they say. we're looking for the middle ground here. is there a way out on the fiscal cliff and a way forward for the u.s. economy? those are the big questions to put to two former treasury secretarieses from two different parties in two different eras. becky. >> we're looking forward to it. see you down near a little bit. >> if you have comments or question about anything you see on "squawk," shoot us an e-mail. also follow us on twitt twittetwitter twitter @squawkcnbc. we're coming back live from the delivering alpha conference in new york right after this. up next, there's been bad news from spain to shanghai, yet the best investors in the world find ways to make money. scott kalb tells us where he's finding opportunity, and future of long-term investing. "squawkbox," live from the delivering alpha conference returns after this. between liste numbers... ...and listening to your instinct duff & phelps finds the sweet spot that powers sound decisions. duff & phelps financial advisory and investment banking services. i don't have to use gas. i am probably going to the gas station about once a month. drive around town all the time doing errands and never ever have to fill up gas in the city. i very rarely put gas in my chevy volt. last time i was at a gas station was about...i would say... two months ago. the last time i went to the gas station must have been about three months ago. i go to the gas station such a small amount that i forget how to put gas in my car. ♪ thbetween black and whitegas answers... ...and 1,000 shades of grey duff & phelps finds the sweet spot that powers sound decisions. duff & phelps financial advisory and investment banking services. here we go. welcome back, everybody, to the delivering alpha conference in new york. while investors are wary of the global economy, our next guest sees a lot of opportunity in europe and america. scott kalb is now an adviser to the $45 billion sovereign wealth fund. welcome, and thank you for coming. before we start off we should let people who don't know in on a little bit of how great a record you have. we were talking about earlier how you can't expect to get 8% over several years pension fund. you had 12% returns from the time you were overseaieing the fund. you went from $19 billion up to $55 billion over that time. this is a huge amount of money, and it's hard to get big returns with big amounts. you've managed to do it. why don't you let us in a little bit on some of the secrets here. where do you sigh opportunities right now? >> i think the -- there's several things you have to do. right now i see the best opportunities actually in real estate, both in europe and in the u.s., and i think also in alternative investments, actually, of a variety of kinds. >> are you talking commercial or residential real estate? >> i think residential real estate looks pretty good. i think commercial also. i think across the board. the bottom line is you have to kind of -- to the extent you have capital that can be afforded to be long-term in the way it looks at the markets, i think you have to try to be countercyclical. you have to lean into risk a little bit when the opportunity presents itself. when things get out of whack because of crazy volatility events, you have to accumulate assets. when things start to blow up, you have to let them go. you can't do that with your rent money or lunch money, but to the extent you have long-term savings, that's what you apply. that's what we had at the kic. during the last ten years, real estate has fallen by about 65% in price. that's mostly residential. bonds have gone up by about 60%. that's over 100% gap over ten years, and during the last 75 years we haven't seen such a gap before. >> quite a coincidence, too. when bonds go up that much, your funding of the real estate is reflective of the all-time lows. if you could buy individual single-family homes and have someone manage them, this is another -- i've heard the smartest people i know say to buy. >> right. i think it's sort of natural. that's where you look. people are still running away from that sector. >> when you say long term, what's long term? >> ten years, 20 years. i think you'll do well on a lot of things over the next five to ten years, but you have to hold those assets for a period of time. i don't know what's going to happen over the next three to five years. >> alternative investments didn't give us anything. >> that's pretty wide. >> that's not really true. >> tell us what you're talking about so i can do something. i can't buy the alternative investment etf, can i? >> no, you can't. i think the public market -- the beta in the public markets is very difficult. equity markets gave us nothing over the last ten years. we are no longer in a buy and hold kind of environment. you've got to be rebalancing your portfolio and you have to take care to protect yourself. what i want to do is if i can, i want to get out of that baitetad get out of that volatility. i need liquidity to do that, but if i have it, i want to go to things like private equity and real estate, hedge funds. i want to go into infrastructure. >> some people would argue that alternativing haes have worked e you leverage up the s&p. if you can leverage on the s&p, you might be in a better place. >> i don't buy it. during my time at the kic, we basically plows a lot of money into those sectors. about 7, $8 billion over a three-year period. we're making returns, you know, in the low double digits across the board in all of those strategies. we were not applying leverage. most of the strategies we're not applying leverage. i think there's returns to be had. you have to use what you can. you know, again, if you've got a short-term orientation and capital you need, you can't afford to do those things. >> you're glad private equity is one of your choices. >> private equity is one of your choices. >> you're glad? >> glad about what? >> is it a positive for society? you're glad there's alternative investment for pension plans and for funding retirement and everything? >> yes. for anybody who has long-term capital available. the environment we're in right now, the way i think about it, it's as if we're -- the u.s. and europe, we're the developed countries, economies. we're like a man that's gorged on debt and we're so obese now we can't fit into our clothes. >> scott, thank you. appreciate it. i don't like that metaphor much, but up next, a reaction to bank of america earnings, and then a new weight loss pill to help us get in our clothes being aproouapprov approved by the fda. only the second one in the past 13 years. we'll speak to the president peter tam about the drug's potential in a little bit. time now for today's aflac trivia question. who is the only american president to serve in the united states senate after his term as president? the answer when cnbc's "squawkbox" continues. man, i'm glad aflac pays cash. aflac! ha! isn't major medical enough? 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"squawkbox" is delivering alpha, profit from it. ♪ i'm consolidating my assets. i'm not paying hidden fees or high commissions. i'm making the most of my money. and seven-dollar trades are just the start. i'm with scottrade. i'm with scottrade. i'm with scottrade. and i'm loving every minute of it. [ rodger riney ] at scottrade, we give you commission-free etfs, no-fee iras and more. come see why more investors are saying... i'm with scottrade. welcome back to "squawkbox." we're live from cnbc's institutional investor delivering alpha conference in new york. bank of america earning 19 cents a share for the quarter. revenue was just below consensus. a big earnings miss for stanley black & decker. it had quarterly profit of 1.22 a share. it cut its yearly outlook blaming significant currency head winds. it did raise its quarterly dividend to 49 cents a share it to 41 cent. also, mortgage applications jumping 16.9% last week according to the mortgage bankers association. the increase was driven by refinancing activity as mortgage rates set record lows once again. >> i remember this from last year. >> loud. >> it's loud. >> yeah. >> that's good. that's an active crowd. not a dull, boring place by any means. a lot of chatting. >> the fda -- um almost see the seam in my toupee when i do that. they're aapproving the new drug. it's the second pill aapproved in the past designed to help 78 million obese adults and the one with a single q and no u in the name. joining us is peter tam, president of vivas. thaus for joining us this morning. it's been 13 years. we're making progress on what's an important issue. what we always ask, peter, is the side effect profile. do you need to be careful when you use an obesity drug still at this point? >> yeah. i think it's actually very important for patients to use the drug properly and for physicians to educate patients in terms of how to use the medication. both of these drugs are drugs that have been aapproved by fda and have been ugsed by millions and millions of patients at much, much higher doses. it's actually a -- >> peter, for people that don't know. give us an idea on the mode of action. is it an appetite suppressant? it's not a whole new class of obesity drugs that people continue to work on. it's existing technology, right? >> well, this is a novel proprietary control release combination formulation for treatment of obesity. obesity is a very complex disease in that there are multiple mechanisms that actually control our feeding behavior such as we get hungry. when we're hungry we go look for food. then when we're full we stop eating. those are the two key mechanisms that are controlled by qsymia. it's a combination treatment. the two drugs control hunger as well as improve it so they can stop eating when they're full and they don't seek food as much because they're not as hungry. it's a combination of appetite suppressant and improvement in patient satiiety and that's why it's so effective. >> what will it list as precautions and side effects? any heart-related red flags from worries in the past about obese sfe drugs and the saga of almost any obesity drug? there almost always seems to be something to worry about. >> yes. it is important for patients who are pregnant to not use qsymia. this is an absolute contraindication, so that's an important consideration. some of the side effects are dry mouth, constipation. these are side effects that are mild in nature. again, patients with qsymia can down titrate if it's necessary. >> is there a reason to pick this drug into the market, and what do you think in 2014? what do you expect in terms of a yearly revenue rate? >> we haven't provided revenue guidance. clearly, we believe that the market is driven by efficacy. the product that we have provides on average 10% weight loss. we think that that's going to open up the market, because this is really the first effective combination treatment that are available to patients. again, you know, our job is we want to make sure that doctors are educated about the safe use of qsymia and patients are aware of the safe use instructions of qsymia. that's important to us. >> all right. we appreciate it, peter. thank you for your time this morning, and your stock is going to be a big winner on the open, i would think up $5 or so. thank you. >> thanks a lot. >> coming up, he runs the $117 billion teachers pension fund for our friends to the north. jim leach will join us after the break. later treasury secretary tim geithner's keynote speech. came it right here at 8:30 eastern time. "squawk's" coming right back. the sweet spot that powers sound decisions. duff & phelps financial advisory and investment banking services. in every way, shape, and form. it's my dream vehicle. on a day to day basis, i am not using gas. my round trip is approximately 40 miles to work. head on home, stop at the grocery store, whatever else that i need to do -- still don't have to use gas. i'm never at the gas station unless i want some coffee. it's the best thing ever. as a matter of fact, i'm taking my savings so that i can go to hawaii. ♪ between listening to the so that i numbers...hawaii. ...and listening to your instinct. duff & phelps finds the sweet spot that powers sound decisions. duff & phelps financial advisory and investment banking services. we're live at the delivering alpha conference at the pierre hotel this morning. speaking to some of the world's best and brightest investors. joining us is jim leach, he's president and ceo of the $117 billion ontario teachers pension fund. great to have you with us this morning. we need to know how you do it. i know that was always an interview question if you really want to throw softball, it's how do you do it so well each and every day? in your case you need to be prudent. you need to minimize risk, but you have the onuss on you to do 7 or 8% year after year with little risk. you're able to do it that. >> so far we've been able to do that. we look to the 225 investment professionals we have in toronto who are dedicated to securing the future for the teachers of ontario. >> is it frustrating that buy and hold has been such a mediocre strategy in the past decade? >> well, it hasn't been that bad for us. you know, we just entered into the sale of maple leaf sports and entertainment, for example, as an investment we held for over 17 years. our buy and hold strategy has been working. >> it depends what you buy and hold? >> that's right. >> private equity, alternative investments, hedge funds, all of these things play into trying to invest $117 billion. >> that's correct, really, et cetera. when we got involved in asset classes, they were alternative investments. today they're mainstream. >> yeah, they are. where do you see the most opportunity at this point? has it shifted? are you steady over the last five years? if you were to lie aat the pie and draw where it is, split up the same. you made allocations with it? >> we made some allocation switches and tweaking. prior to 2008 we brought down our allocation to equities. in 2009 we brought it back up again when we saw that values had declined so dramatically in 2008. but it is -- we have to think in a 70-year time horizon. we can't get too distracted by what's going on around us on a day-to-day basis. i think that's important. keep your eye on the long term. again, it is difficult to be a good investor. you have to have conviction, and this is a tough market to have conviction in. >> jim, have you left your asset allocation where it is in terms of equity since you brought it back up in 2008 and nine. >> around 45% at the present time. >> you think relatively speaking stocks are pretty cheap still? >> we have pushed more and more into the private market and less exposed to, you know, stocks trading on stock exchanges. yeah, by and large, we would say that stocks are still fairly well-priced. >> you're in canada, and you've done well with private equity. you know we have an election coming up. are you watching it it from afar? have you watched the controversy between private equity and how it's been held up as kind of poster child for bad behavior? are you bemused or amused? >> all of the above. i think there's lots of confusion around private equity and its role in the economy. our perspective is that it's been very positive. aid to help make the system more efficient and also to improve some companies that maybe got a little fat when they were chugging along on their own. >> jim, you got into the private equity business yourself, meaning the pension fund ifrts does a lot of its own investments, even though they invest alongside some of the other private equity firms. why have you done that, and can other pension funds do the same? >> for two reasons. it's a great deal cheeaper. the standard 2 and 20 model on a fund that makes 20% or 25% is equal it to about num and that's a lot of money. secondly, over 20 years we built a private equity team that is as good as the others. our private equity return since we started in the business in 1990 is in excess of 20%. >> what's the absolute maximum that a state pension plan or retirement plan should assume it can deliver from the maximum? there's still some that are at 8. >> we use a discount rate of just over 5%, and we think that's realistic. >> oh, boy. you got a lot of underfunded pension plans don't we? >> joe deere at cap plipers swa stories about how we'd look. >> you said joe dear i thought you were talking to me a secretary. i thought this guy is a really, really nice man. jim, dear, thank you for coming in. it's been wonderful and really nice. bank of america is out with second quarter earnings this morning. anthony of raymond james is standing by on the "squawk" news line with more on the numbers. looks like they beat on the bottom line and missed on the top line and did it by cutting expenses which sounds like a good thing. i also worry about the long term in terms of the revenue numbers. anthony? >> positive operating leverage. that's the key here. you know, you can reduce expenses and you can reduce revenues as long as your expenses come down more, you get positive operating leverage. the revenue line was actually within $6 million of our estimate and annualizes out to an $88 billion revenue base. certainly it means the company can earn $2 a share somewhere down the road. >> do we finally think that they have their act together? is this the turning point here? >> capital ratio -- >> say that again. >> the basil 3 capital ratio went above 8%. they reduced long-term debt and paid down high-cost debt. it clearly looks like the fundamentals of this company have clearly turned the corner. >> and, anthony, when you think about merrill lynch, that's always been the big question, it's now contributing positively. curious what you think they ultimately do with it? >> mel had a relatively good quarter considering the market-related revenue in general was weak this quarter. i think they keep it. you know, is there a potential to spin it off? certainly. but it fits in the core business nice. when we project earnings two to three years down the road, the merrill component is much lower percentage of total revenue. we have core traditional banking revenue at about 70% of total revenue. so the new b of a down the road will look much more like a traditional bank even with merrill lynch. >> we'll leave it there. thank you for joining us this morning. >> when we come back, we have a rare interview with the man who oversees more than $10 billion of capital on behalf of institutional investors. the ceo and founding partner of marathon asset management, bruce richards, will join us right after this. >> still to come, we kick off the delivering alpha conference with keynote speaker and treasury secretary timothy geithner. his speech and interview with larry kudlow is just ahead right here on "squawkbox." tdd# 1-800-345-2550 the spx is on my radar. tdd# 1-800-345-2550 we're hitting new highs. tdd# 1-800-345-2550 and i'm on top of it all with charles schwab. tdd# 1-800-345-2550 tdd# 1-800-345-2550 i use streetsmart edge and its tools like... tdd# 1-800-345-2550 screener plus - i can custom build my own screens tdd# 1-800-345-2550 or use predefined ones. tdd# 1-800-345-2550 and i can trade wherever i want, tdd# 1-800-345-2550 whenever i want. tdd# 1-800-345-2550 the kicker? tdd# 1-800-345-2550 i pay $8.95 a trade. tdd# 1-800-345-2550 that's a deal in any language. tdd# 1-800-345-2550 open an account tdd# 1-800-345-2550 and trade up to 6 months tdd# 1-800-345-2550 commission-free. tdd# 1-800-345-2550 call 1-866-393-6174. welcome back this morning. we have the world's best power brokers and profit makers at cnbc's delivering alpha conference in new york. some of us are calling it davos on the hudson, and we could call it sun valley on the island maybe or something like that. in any event -- >> it's impossible to hype it. >> it's impossible to hype it too much, because look who is here. >> it's impossible to hype it. >> you have hank paulson and tim geithner and henry kravis here. we have bruce richards here. he's the founding partner and co-managing director of asset management. we're talking about where people see opportunities globally given what seems to be a very tough environment. where are you seeing things right now? >> it's a tough call because we're in this financial depression we're in. in the last year and a half they rally 29%. i think the treasuries have the interest. the worst risk reward of any asset class currently is a high duration and low yield. i think we're supportive of equities, but with the softening in the economy recently, the weakness in earnings it's become more challenging. we see the best opportunities in credit, specifical aally in high-yield bonds and credit. this is a zero rate environment, and given the pension liabilities that are structured out there, the corporate and public plans, anything that is above 6%, 7% yields is something that people meet with a huge amount of demand. >> you like europe i'm told. >> we like europe from the perspective we like distressed assets for distressed investors. we think the best opportunity today is what's coming out of europe. >> is that new for you? is just the past month or two where you say i think there's a bottom here? >> i don't think it's a bottom yet. i think the best is yet to come. there's a sovereign crisis unfolding, and we have more to see there. there's a banking crisis, and we need to sell down $2 trillion in assets. those noncore assets represent a good opportunity to buy. >> the best is yet to come. that's a real sick way to put it through. >> you know, it's not a sick wake to put it. >> you're looking for better deals which means things get worse for the continent so you get better deals. >> i think the recession just started in europe. it's forthcoming throughout the course of the year. throughout the course of the year, you see default rates for corporate european companies to start to tick off around 3%, 4% now. i believe they go to 8% to 10%. there's an opportunity to be able to buy it. >> for a distressed guy you use it in a crazy way, yes. >> the better opportunities in buying stress is not now but later this year. >> if you take that view of europe and layer on what some view as the fiscal cliff and other issues here, what do you pre district court we' predict we'll see? >> not a whole lot has changed this year. we're growing faster than 1.8% earlier in year. >> i'm scared to hear the best is yet to come here. >> if you look at what the cbo has to say, the fiscal cliff at the beginning of the year, they say it could be 4.5% gdp. we're growing just under 2%, a 4.5% drag will lead us to a recession. i believe our u.s. and administration or next administration, whatever the case is, will find a way to kick the can down the road and so defer that debt. i don't believe we'll be in a recession this time next year. i believe we'll be growing this time next year. >> we've been talking politics naul morning in some respect about this. >> we've talked about bain and alternative asset management. we haven't talked about bain per se, but i'm sure about sort of the image of your industry right now. >> i think the industry is going through, you know, certain focus points, and the focus point is absolute returns. the hedge fund industry used to be known for absolute returns, making 10%, 15%, 20% returns in up markets and down mashrkets. in the last two, three years, hedge fund managers have struggled to make money. so i think the focus of the industry is really about quality of returns as opposed to the politics of it all. >> bruce richards, thank you for joining us this morning. >> thank you. >> still to come this morning, his fund has close to $3 billion in assets and he specializes in spinoffs. richard per of perry capital will join us at the up top of the hour. stick around. "squawk" will be back. >> more fok from the delivering alpha conference from the pierre hotel in new york, including keynote speaker treasury secretary timothy geithner live with larry kudlow at 8:30 a.m. eastern. "squawkbox" is delivering alpha. profit from it. he why is the sleep number store such a great place for couples? the sleep number bed offers couples the ability to have unique support for their individual bodies. we have a left and a right 'cause you can each control your individual side. i can adjust mine to my liking and she can do the same. oh yeah. you can have it your way and i'll have it mine. now, save $500 on our exceptional p6 bed set. and hurry in for the final closeout of our 2011 flexfit adjustable base. only at the sleep number store, where queen mattresses start at just $699. this hour, the first ever television interview with richard perry of perry capital. he's a hedge fund rheavyweight with 24 years of skin in the game. treasury secretary timothy geithner will kick off the conference at 8:30 a.m. eastern. the third hour of "squawkbox" starts right now. hi, how are you? >> welcome back. larry legend is on the set. it's a special edition of "squawkbox." first in business worldwide. i'm joe kernan along with becky quick and andrew ross sore ren. we've coming to you live from the delivering alpha conference. it's the gathering of the best-known hedge funds, managers and largest investors. let's begin with the top story. bank of america reporting second quarter earnings of 5 cents a share. the revenues fell just shy of consensus. it is indicated slyly higher on the opening as you can see. honeywell's earnings per share top estimates by 3 cents, revenues just light of the street's view. ben bernanke is back on the hill today this time in front of the house financial services committee. yesterday, bernanke stopped short of predicting more stimulus for the economy, but he did kind of upgrade his assessment of the risks facing the economy including europe's debt crisis and looming spending cuts and tax hikes known as it is fiscal cliff in the u.s. checking u.s. equity futures this morning, we finally have a winner overall yesterday and today where it may give back a little bit of 33 points or so is what is indicated on the dow so far today. >> joe, we're less than 30 minutes away from treasury secretary tim geithner keynote. larry joins us on set with a preview. mr. kudlow, what are you going to ask the secretary? >> well, we're going to talk about the economy, and we're going to talk about the fiscal cliff. we'll talk about europe. we'll probably have to talk about libor and a few other things. you don't want me to front run my own interview. >> i haven't heard politics in there, though? >> there might be political overtones. secretary geithner is the treasury secretary. that's not really a political position, andrew. that's a senior high policy position. very important distinction. >> the presidency is not a political position either. >> the president is a political position, and the president has said some very strange things recently on the campaign trail. that's raeally not where we're going with mr. geithner. >> you probably shouldn't. we had a gentleman on earlier and andrew asked a question about an overall grade for the president in terms of jobs creation. we got an a minus for that. i mean, i'd like you to pose the -- >> a little bit of inflation on the set. >> we thought at harvard they give nothing lower than an a minus. would you ask the same question? >> i'm not going to front run my own interview with mr. geithner, but it would not be an a minus. how's that? >> what did you think about bernanke's comments yesterday on the hill just in terms of laying out, yeah, the economy is getting worse? he's very worried about europe. >> i thought he was very realistic. his assessment was a bleak and dower assessment. the economy is losing altitude right now. we're just above the treeline right now, just above the waterline. a very difficult situation. it this is the third time in the last three years that that's happened. i thought bernanke was brutally honest, and i might say that i thought it was one of his best testimonies before congress. >> he did not give us any sort of a time frame or conditions set up for what it would take to get the fed back involved with the qe3. >> what i liked about his testimony is he really pointed the finger at congress and said, look, you have to deal with this fiscal cliff, and that fiscal cliff could put us into recession. don't expect me or the fed to bail you out. this is your problem. please take action. i admired that. as i said, i think that was one of his strongest testimonies i've seen. >> i'd like to talk further about senator patty murray, and that's a new tax. >> let the tax cuts completely expire. we don't care. if we can't get our way, we're going to let the economy go down. it's a brand-new strategy. you're exactly right. >> i want to see how it plays out. i don't think it's a winning one. >> i think it's a losing strategy for the country and stock market. it's a losing strategy for the democratic party. how are these swing democrats, joe, go to run for re-election? i don't get it. i was very surprised at senator murray. >> that's the first thing we've probably agreed on, larry. >> ever? i can't believe it. >> that's not the first. >> i cannot believe that. >> larry, good luck with the enter sprue interview in 25 min. >> thanks for having me. >> our next guest might be the most powerful hedge fund investor you don't know about, and richard perry likes it that way. he made his way working for robert rubin at the famed desk. since 1988 he's building his own empire, perry corporation, and quietly going along with this, he's known for keeping his investment thoughts out of the public eye. that is, until now. richard, thank you for joining us this morning. we've looked forward to this sbeer have you for a long time. you spent a lot of time in europe recently. your aassessment is different from what we heard from ben bernanke yesterday and what we heard from bruce richards who talked about how he thinks when it comes to distressed debts the best prices are still to come in europe. what do you think? >> i think a lot of people that haven't spent a lot of time interviewing and talking to people that run his countries and different regulatory bodies have a view of europe, which is based on the fact that they made a lot of promises about greece and didn't deliver. and that angela merkel and then the rest of the euro zone ended up changing its mind with regard to greek policy and bringing private-paying to couple the public-paying. i think that was then and this is now. i think that the eu learned its lesson. i think that they are much more coordinated than they have been. you've got a new head of the ecb. you've got new heads in italy. you have new heads in spain. you have new heads in france, and i think that we are going to continue to see that the european union stays together. that the euro remains the currency of the euro zone, and that although there will be noise and pain, that's what the future will bring. >> what are they waiting for from the ecb? why don't they just print money? >> they put a trillion euros into the system with the ltro since the beginning of 2012, so i would say they've actually done an enormous amount since they really began this effort, which really only began november, maybe december of last year when they realized how serious this crisis was that the markets were going to continue to question nem and challenge them. i think that they've actually done an enormous amount in ten months to erase hundreds of years of history and i think it will continue. >> when you look at the yields for sovereign debt, maybe in spain and italy in particular, when you look at that, the market still has doubts that the ecb will be there as a backstop or that germany can pull things together. how do you quell those doubts and the angst it brings with higher interest rates? >> the market is willing to pay way too high a price for what they perceive as riskless assets, and they're not willing to pay almost any price for what they perceive of assets with some degree of risk. i think that it's the opportunity for a value oriented investor to try and determine where there is actually the difference between value and value traps. that's the question that all of us must deal with. >> when you look around and you look for actual value, where do you see it these days? >> i think you see it in the places that people are most scared of. everyone wants to get out of d mediterranean sovrnereign debt. they don't want to be in italy or spain. i think it's pretty much we'll see a replay with what happened with greece, and the chancellor is going to wake up one day and decide that public and private need to share the pain in spain and need to share the pain in italy. i don't think that's going to happen again. so everybody wants to avoid those sovereign situations. i think they're pretty interesting. >> you would buy straight in the open market with some of those? >> that would be one way to play it. you can also look at some of the other key assets in those countries where if they're not redenominated back into the currencies of where they were, back into the peso and lira, i think you're okay. >> bruce said the best is yet to come meaning it will get worse before it gets better. >> i think it's possible. i think the people in the u.s. in general were educated by following the resolution trust corps. they followed what the fdic did in 2008 and 2009, which was essentially create good banks and bad banks, spin them off and give people like us the opportunity to manage them. i think it's much more likely that we're going to see examples like bank of england did with royal bank of scotland where they made huge equity infusions and created an asset protection scheme that essentially gave the huge insurance backdrop so that the bank would be almost impossible to go insolvent, and then they manage their own risk of core deposits and non-core businesses in order to do it themselves rather than give us the opportunity to do it. >> one question, though. if angela merkel does wake up, she's probably the most important player in europe right now. if she says we're going to backstop there. there is a shared pain that has to come from this, we'll get the shared responsibility at some point, but we will share the pain right now, how long does is she have with her constituency, with with her voters to stay in office? is there a risk she's forced aaside, and does that keep her to the sidelines at this point? >> not that i want to not answer this question, but the more important question is what is the alternative? is there a nationalist party in germany if angela merkel were unseated that would be elected that would be anti-euro and anti-eu? the answer is no. i spent a lot of time trying to understand, and this is really something you have to go back and study history from the 1920s all the way through to today to understand why there isn't a nationalist party in germany and that they not that they're willing to spend an enormous amount of time and energy for peace and prosperity and probably the best example would be after 1989, the berlin wall comes down. 1989 to 1999 they set the tone. austerity, and they clean up east germany, and you can look at the results of the german miracle today of how well the country is run and how efficient it is. >> that leads into what i want to ask you. what does the europe of the future look like in five years in terms a growing, vibrant economy again? if you have the euro as a single currency and the euro doesn't split up, i imagine they need to learn how to operate as germans, at least that was the hope initially, and this hasn't happened. do you see those types of reforms, structural labor reforms and end rushing sentiment of pro-capitalist free market economies? is that possible? it just doesn't seem very likely. >> i think we'll see a lot of reform. it's already happening in italy and begun in spain. whether or not it happens in greece, don't use that as the model. use spain, use italy, look at these countries and they are definitely willing to change. don't expect that the people in southern italy or the people in the mediterranean coast of spain are going to act like the people in new york. think much more that maybe they act like the people in florida or maybe they act like the people in one of our southern states. there's just a difference in how behavior is going to be. >> they have the same currency they need to be closer in terms of the way they manage their affairs? >> i think they're affairs are magged much more similarly today, and you can ask any wealthy italian, does he see a difference? >> you're not anti-awe tear rit then? >> i think they're definitely pro collecting taxes, which is a very different way than the world used to be run. >> richard, we're going to slip in a quick commercial break and continue our conversation with richard perry. still ahead, of course, the headliner of the morning, treasury secretary tim geithner will kick off the delivering alpha conference at 8:30 a.m. eastern. don't go anywhere. why is the sleep number store such a great place for couples? the sleep number bed offers couples the ability to have unique support for their individual bodies. we have a left and a right 'cause you can each control your individual side. i can adjust mine to my liking and she can do the same. oh yeah. you can have it your way and i'll have it mine. now, save $500 on our exceptional p6 bed set. and hurry in for the final closeout of our 2011 flexfit adjustable base. only at the sleep number store, where queen mattresses start at just $699. i bought the car because of its efficiency. i bought the car because i could eliminate gas from my budget. i don't spend money on gasoline. it's been 4,000 miles since my last trip to the gas station. it's pretty great. i get a bunch of kids waving at me... giving me the thumbs up. it's always a gratifying experience. it makes me feel good about my car. i absolutely love my chevy volt. ♪ we are back with richard perry, and we want to bring it -- we're going to deliver some homegrown alpha maybe. we'll see. we heard your thoughts about investing in sovereigns, which you're right. that is where people are a little bit hesitant at this point. same situation in this country? what are the most unpopular ideas to invest in here do you think? >> i think that one of the things that -- there are a couple of things and it was interest, joe, because you talked about it before in bernanke's testimony, which is don't look at me. let's see what congress is willing to do. so i think that there are a number of things that need to happen in this country that could really stimulate the economy and could really create the type of jobs that everyone keeps talking about. it probably isn't quantitative easing, but i think that one of the things -- it really began the financial crisis, and i think that this could be something that could really be very, very important in terms of ending the financial crisis. it would be what happened with fannie mae and freddie mac. so completely unexpectedly the government takes them in 2008, puts them into conservatorship, and you can say that's the beginning of the domino effect of everything falling apart right after that. since that time they've been in this conservatorship, which is this limbo, and so if you're the average american where 90-plus percent of mortgages used to be financed by fannie and freddie, obviously that has changed a lot since 2008. and that availability and that american dream might no longer be something that the average american can get. so i think that that's part one. part two is, the american government's put $140 billion into fannie and freddie. for whatever reason, with with citi bank and aig and general motors, they had a clear focus. we'll put our money in, and let's try to get our money out. two things. i think we can get the money out and the american taxpayer can get back a huge portion is not all of the $140 billion. two, i think we can open up the mortgage market again, and what are the ancillary effects of opening the mortgage market? that means that the engineers are going back to work and the architects go back to work. that means the people that provide all the different supplies for building a home are going back to work. the economy starts to generate again. so for whatever reason the government does not seem to understand this link between people who buy homes and the economy and the ability to change that and put fannie and freddie back on stable ground again. >> there are people that look at the involvement of fannie and freddie in the original problem and want on to extricate the government completely from this. that's impossible. we can see the effects of that already. in listening to you, do you ascribe blame to fannie and freddie more than the revisionist history we have now that it's a private he sector blame game? i mean, that's what i read now. fannie and freddie did very little subprime and didn't get into that business until the private market had already sort of owned it. >> the problems with fannie and freddie made different politicians in different parties extremely uncomfortable. if you go to the hill and discuss fannie and freddie, people on the left sxrit each have a lot of issues with fannie and freddie. totally differenti issues. these two companies made a heck of a lot of money for a really long period of time. underwriting real estate and taking a very small percentage in order to create an opportunity for the american taxpayer homeowner to create that american dream. >> wasn't it the structure of a gse that allowed them to have themplicit backing of the federal government and yet they took risks that were far too high and we were on the hook for it, right? >> it turns out we were all at risk, but the reality is everybody perceived those risks to not be risks. not everybody. there were a handful of people like us that actually believed that the -- >> what are you doing with fannie and freddie right now? how would richard perry seize on this opportunity with fannie and freddie. >> tlrn two preferred or a series of preferred that the treasury issued right before they put it into conservatorship where they were out there actually treasury department officials saying that these were essentially an arm of the u.s. government. so that distinction between what is a gse and what is actually a government guarantee, i would say this. you wouldn't want to litigate this if you were on the other side. you wouldn't like the language. >> you'd buy the preferred? >> do you want me to go andrew or go next? >> go ahead. >> i think the answer is preferred are trading at 6 or 7 cents on the dollar. these were 100 cents on the dollar and perceived around the world as creditworthy u.s.-issued paper. the reality is people woke up one day and found out it's a preferred, and that it's not issued by the united states government. be it that as it may, forget that part of it, if the government decides it wants to get the $140 billion back, there's a lot that can be done to recap titalize these two institutions and provide an enormous amount of stimulus for the economy and create jobs. >> those preferred would -- >> they would be -- >> a part of the capital sfrushgt? >> they would eventually -- if there's a lot of ways those preferred gets paid 10 cents on the dollar. we do own, them. >> hank paulson is here later speaking with bob rubin. do you think he made a mistake in how the conservatorship took place? there was a suggestion that that was the domino. >> there were lots of problems that created this fiscal crisis. exactly how we handled each of those problems probably with hindsight would have been done slightly differently. so did hank paulson handle it perfectly? i don't know the answer to that. in hindsight would he have handled it slightly differently? the answer is yes. would he say that? probably no. >> we'll try to ask him today. >> we are all big fans of your daughter, katy. if you could have brought her in here, it would have been exciting. thank you. we appreciate you being here. >> good to see you. >> we are just a few minutes away from treasury secretary geithner's keynote address to the delivering alpha conference delivered by cnbc and institutional investor. stick around. we'll be right back. 0 the spx is on my radar. tdd# 1-800-345-2550 we're hitting new highs. tdd# 1-800-345-2550 and i'm on top of it all with charles schwab. tdd# 1-800-345-2550 tdd# 1-800-345-2550 i use streetsmart edge and its tools like... tdd# 1-800-345-2550 screener plus - i can custom build my own screens tdd# 1-800-345-2550 or use predefined ones. tdd# 1-800-345-2550 and i can trade wherever i want, tdd# 1-800-345-2550 whenever i want. tdd# 1-800-345-2550 the kicker? 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>> that's not what i heard. i don't open the cereal and look for a decoder ring. i heard weak economy and many jump to the conclusion that weak economy is synonymous with more accommodation then i debate whether the economy is getting slower, and the answer to that is yes. i don't agree with mr. volcker about everything, but he put out a number of stories and interviews yesterday where basically he said enough is enough. we have to let the economy sink or swim on its own at this point. so i would urge all viewers and listeners to google some of the comments yesterday from previous head of the federal reserve and adviser to the current administration, paul volcker. >> do that, too, steve, right? >> i am, yeah. >> so what do you think? rick does -- i don't know. did volcker -- bernanke would have to listen to volcker, right? >> i don't want you to confuse my reporting on what i heard bernanke say with my advocacy of the program. i'm not sure qe will do much good. i think bernanke thinks it will happen. it could do some good at the margin. what i heard yesterday when he downgraded the forecast was if you atune your outlook of the fed to the forecast, which is what bernanke says we ought to do over and over again, when he downgrades the economy he increases the probability of additional quantitative easing. i think that retail sales number really shook the foundation of any hopes of even a 2% economy here. we're going to hit below 2%. some of the forecasts for the second quarter are in the 1% to 1.5%, some as low as 0.6%. steven stanley said that at peer upon the. there's two outliers and one is lower gas prices. do they save the money or spend it? these housing numbers are very interesting. rick is right. there was this diversification in starts and permits but it went the other way last month. they're down 3.7% this month. it's a volatile figure, but we had this slow, steady improvement p in housing. admittedly off a lower base. what i see, guys, is single family and multifamily are both up quite a bit in the prior months whereas permits were also up for single family but not for multi-family. that's a hot market, the multi-family building market because people are renting a lot of homes. northeast is up 42% and the west up 36%. modest declines in the midwest and south. >> steve, i wasn't saying that you were advocating for qe3. i say you used to think that the likelihood of bernanke finally deciding to do it was very small. changed what you were hearing. i wanted you to talk to rick about that. i don't know. you might give us the footnotes and every single details of the housing report before you're done. argue with rick a little. give me something. >> no, no, no. steve, let's not argue. let's agree. you know what? i discovered yesterday that we need to add another pillar to the federal reserve. can you believe it? me, add a pillar? the new pillar should be if we see something wrong in the market, yes, it's our job to do something about it. i was flabbergasted yesterday steve after everything i saw the fed do from unbelievable monetary policy to writing papers on how to fix the housing market and when pressed basically ben bernanke said it wasn't my job. it's not my job. i tell you what, if anybody listening or watching right now ever thinks that more regulators will ever, will ever stop anything, you have to watch ben bernanke, probably one of the most -- appears to be the most honest guy and straightforward and don't always agree with him. it's not my job. i don't regulate that. unbelievable. unbelievable. what do you think? >> all right. we're going to get to -- look at steve. anyway, hold that thought, steve, until like tomorrow. anyway, we're getting close to where we're going to go and have our keynote. >> delivering alpha, we've been waiting for this. we want to hear what tim geithner has to say about all the issues they've just been addressing, too. he's going to talk about europe, we hope. larry said he would bring up those points talking about the fiscal cliff. this is the perfect headliner to the start of this conference. big thing we've been waiting for. >> what do you want to know? >> larry, as you said, was not going to front run any questions. >> you can provide the questions you'd like to ask. >> i want to ask about over the last three and a half years as treasury secretary you're not political, but was there a time where maybe the depth of the crisis was underestimated and maybe you would have early on, you know, focused your efforts on something other than domestic policy like health care? i think we were in a heap of trouble and still are, and an a minus is a crazy grade. >> that's a high number. >> we're going to eventually talk about it between now and november. we have to get through the tax returns, because we only have two years. we have to get through bain and get through -- there's a lot of other stuff. the dog on top of the car. we have to get through, you know, outsourcing, but sooner or later having four years above the 7.8% where you took office, sooner or later you have to address athat as ato how you fission it. >> it is the official kickoff to the delivering alpha conference for 2012. let's go to larry kudlow and the treasury secretary, tim geithner. >> the treasury, tim geithner and his questioner this hour, larry kudlow, anchor of ""the kudlow report."" please welcome him. >> secretary geithner, as always, welcome. we appreciate your time and your efforts. let me begin with the subject everybody is talking about, and that is the faltering economy. of course, ben bernanke was especially bleak yesterday. some people are talking about a new recession threat. the jobs have come slow. the retail sales have come slow. i want to ask you in your judgment what has gone wrong? why are we facing this? >> larry, you're right. the economy is definitely slower. slower than it was the end of last year. why is it slower? it's slower mostly because of the trauma from europe, the after effects of the rise in oil prices earlier this year and because government spending is actually falling now quite significantly. those three things are a pretty significant drag on a recovery. i think if you listen to most business economists or people in the markets now, i'd say most people still think the economy is growing. still gradually getting stronger. likely to strengthen modestly over the course of the next six months, next 18 months. we have these two big risks still. i think we talked about them last year. one is the trauma, the crisis in europe. the second is this deep sense of political dysfunction, part of which is the looming effects of the tax increase and the spe spending kutds. those 2002 things are the dominant risk to the expansion in the united states. european risk is a more significant, more severe risk in part because it's beyond our control. the fiscal challenges are completely within our control and are completely manageable challenges to defuse and reso e resolve. but those are the main risks. >> can i ask you some challenges, some criticisms. you hear this all the time. first of all, that the government spending program, the stimulus program has not worked. short-term, even the short term tax credits have not worked. people are worried that the whole center of gravity of the economy, record food stamps, for example, social security disability payments framp actually running ahead of employment. for the first time in our history 50% of the american households are getting some form of federal assistance. people are saying that the obama administration's plan has not worked, and that's why we have these fits and starts. the economy runs up for a few months and then peters out, and we go through exactly the same issue right now. how do you react to that? >> i don't think there's any basis or merit to that view. i mean, just remember -- >> to which the social statis c statistics view? >> let me explain. the economy end of 2008 falling off the cliff, shrinking at an annual rate of about 9%. within six months because of the force of what congress authorized, we did to the financial system, the fed did, we were growing again as a country. remarkably quick successful effort to pull the economy back from the edge of the abyss. now, growth has been slower than anyone would likewise has been slower because we are digging out of a huge, challenging mix of unbalances. people have been increased savings and reduces debt. we're working through a huge imbalance in housing. that process of delen-leveragin was essential sxun and unavo unavoidab unavoidable. it makes growth slower. that's reality. we had europe, oil, japan bad shocks and we had the trauma around the debt limit and the ongoing fiscal drag. but the actions we took, the president took and congress authorized on the fiscal side were absolutely essential and they were enormously powerful. as they started to fade, growth started to slow. >> which is what the criticism is. these temporary efforts don't work. i interviewed alan greenspan -- >> you -- >> let me give you what alan greenspan said. i'm smarter than i am. i don't know if he's smarter than you are. >> definitely smarter than i am. >> perhaps so. greenspan's concern again you heard this, the large scale relentless deficits have created an attitude of uncertainty that future tax rates will have to go up, that the debt-to-gdp ratio is now approaching 100%. things that critics have talked about, and that therefore, secretary, we're not getting the kind of long-term investment from business particularly there's almost a capital strike, and that's the source of the lack of steady hiring. that's the challenge. >> maybe we have more in common than you fear. let me explain what we're for and what we think the economy needs right now. what the economy needs right now is a very substantial, well-designed program of support for economic growth. better incentives for private investment and stronger public investment in time over infrastructure in particular and efforts to improve training and education and significant targeted support for scientific research. those things need to be tied to and down within the context of a framework of a set of well-designed, long-term reforms to restore our fiscal sustainability. you need to do both those two things. if all you do is act to try to bring down the deficit quickly without designing the sets of reforms you need to improve competitiveness and long-term growth potential, you will not solve the country's problems and you will find it very difficult to legislate things that are good for growth in the short term without a framework, a balanced framework of long-term reforms to restore fiscal sustainability. so our judgment is and this is the main thing that stands in the way of a stronger recovery now is congress should act on both those two things. a strong pro-growth, pro-competitiveness agenda tied to a balanced mix of long-term if fiscal reforms and modest amount of revenue tied to broad-based significant reforms to the broader safety net for retirees and for the disabled and, of course, for low income americans. >> you know, i completely agree with some of the your long-term agenda items at least in general terms, which is why i want to talk about the short-term problem we have, and that is the fiscal cliff. we heard it again from mr. bernanke yesterday. my take was he just pointed the finger at congress and said, this is your problem, otherwise, we'll have a recession. don't expect me to get out of it. i want to ask you. you have the expiration of the tack cuts and a substantial automatic sequestered spending cut and the end of the payroll tax cut. a huge shock to the system. almost all forecasters whether on wall street or congressional budget office say if we don't stop this, we're going to go back into recession for sure. what are you going to do about it, and what's going on behind the scenes? i need to know the back story here, mr. geithner. that's what wall street is waiting for. >> well, again, let me start with what -- >> the back story. that's the one we want. >> let me -- you're right about the uncertainty. i agree. it's one of the significant risks out there, and it's a broader concern about whether washington are do things to help the country's economic problems. what congress should do is extend the tax cuts that currently exists for 98% of americans and 98%, 97% of small businesses. take the risk of default off the table definitively. extend the business extenders that are important, r and e tax credit and things like that. so there's more certainty around critical things like that. they should pass the proposal we proposed to make refinancing the mortgages more widely available. to expand business investment like we proposed. to give in and place -- i know you don't like the short-term things always. give businesses an incentive to improve hiring, increase payroll. give states some ability to get teachers back to work, first responders back to work. that mix of things would be very good for confidence and for the near term imperative of getting growth stronger. of course, you want those to be done with a framework that puts in place a mix of long-term tax reforms, entitlement reforms to restore fiscal sustain aabilias. if you listen closely, washington is a crazy place. hard to read, and mostly evokes despair at the moment in its basic -- well, i won't go on. >> is this the most chaotic -- i worked during the reagan years. things were pretty rough then. stuff got done. you've been around a long time. you've been in office a long time now. is this the most chaotic political moment that we've seen? >> i don't know if it's chaotic, but it's stuck and it needs to get unstuck. the most powerful instruments of economic policy that the country needs right now are in the hands of the congress. they're things the executive branch does not control and the fed does not control. you ask what's happening right now. if you listen carefully, there's a lot of very valuable foundation-laying under way among lawmakers in both parties in trying to think through how to design that long-term framework of tax reforms to raise revenue and broader spending savings spread over time. >> is it tax reform, you mean lower the rates, broaden the base, take the deductions away? is that when you say tax reform that raising revenues? lower the rates and broaden the base and you want a net revenue increase, not necessarily a net tax rate increase? >> yeah. you need to have reforms that produce higher levels of revenue. i give you a similar example. if you extend the tax cuts for the top 2%, it costs a trillion dollars over ten years. you can't ask us to go out and borrow that. not responsible. so if you want to advocate the extension of those, you have to figure out where you find a trillion dollars in savings. from defense? are you going to find it from from medicare beneficiaries? what would those do to the economy if you did that, not to mention what they do to our national security interests as a whole? so the basic fiscal realities that are going to force compromise ultimately is a recognition that it to dig out of this fiscal hole and to lock in some sensible long-term reforms, better incentives, you do it with a balanced mix of reforms. you've been intrepid and courageous in reminding people that getting rid of tax expenditures is good economic policy. >> i asked for it for the better part of 30 years. those are the original reagan ideas back in 1981 and '86. secretary, let me ask you, again, some challenges. you know where these criticisms come from. you raise the top tax rate. the joint tax committee said your proposal would raise it 3.5% of the so-called small business filers. they are 53% -- that's the joint tax committee, 53%53% of the sm business income, the job creators. ers & young say if you follow through on that, we'll lose 710,000 jobs and investment is going to fall. so the bigger question is with the economy perhaps poised on the front end of another recession, why would you want to raise taxes at all on anybody at this moment? >> nobody wants ever to raise taxes. but when you govern, you have to figure out how to make sure you put in reforms to balance all the conflicting challenges we face. the near term challenges about growth and the long-term challenges of fiscal sustainability. to extend the tax cuts costs $1 trillion over 10 years and they affect 2% to 3% of small businesses and 0.02% of small business income. >> but if we go in to a recession -- >> right. >> your revenue loss will be even greater. >> think of it this way. if you don't want to do those tax changes, where are you going to find the trillion dollars in savings? and what would that do to economic growth? do you think it's better for it to come out of national security, defense, or out of education or out of medication benefits? would that be better for economic growth? no. and the growth impact of those changes is very modest. significantly smaller than the fiscal reforms put in place very successfully in 1939. >> you know that paul ryan were sitting in this chair he would say to you, respectfully as i am, secretary geithner, i'm asking for a slower rate of increase on these spending areas across the board including entitlements. you once said to paul ryan, we, meaning the energy, we don't have an entitlement reform package. >> that's mott what i said. >> but we don't like yours. >> no. i said we don't have a plan to solve the problem for the next century but we have an excellent plan for the next 10 years and next 25 years. we definitely do not believe that the alternative plan works. what you said is not quite true, larry. 25 million americans become eligible for medicare and medicaid in the next 15 to 20 years so you'll see you have a huge increase in the eligible population for those widely popular benefits and although more moderate, significant growth in health care costs per capita. when people say they're just cutting the rate of growth, that's not true. to put in place that fiscal reform package cuts the level of benefits in real terms very significantly so if you don't want to do that, and you don't want to take it out of defense, what are you going to do? that's the basic fiscal reality to force washington to confront these kinds of things. you have to look at the proposals against the alternative. and if for people that advocate to push this off again, ask them what they're answer to the damage to do to the credibility of the american political system at a time when we have unsustainable deficits. what would it do to confidence and credibility to adopt the classic washington stance of saying put it off? what's it going to do for the capacity to legislate things good for infrastructure, tax reform that would help private business investments and the other reforms and competitiveness to grow over time? what with're trying to do is get washington to confront the challenges and to move on them, not to defer them or avoid them. >> i've got limited time. a lot more to ask you and we appreciate it very much. can i get lightning answers? number one, regarding your programs, do you still want to raise the tax on carried interest for the private investment partnerships? >> again, let me make sure. we don't want to do anything. why would -- have you met any elected politician -- i'm not a politician, of course, have you met an elected politician that wants to propose a tax? they don't exist. you only do it when you're trying to balance a set of broader set of constraints and when you govern you have to do that. so, if you look at any tax reform proposal out there, that has any patina of bipartisan support, they believe you have to rethink investment income and carried interest. that's lots of different ways to do it. that doesn't raise that much revenue. >> right. >> but you need to figure out again if you're not going to do that, whose taxes will you raise? >> so it's a yes? >> yes, thank you. >> second. again, just lightning round. the somewhat vague -- somewhat vague buffett rule tax to somehow i'm not sure i understand the details or any living person does -- >> it's a simple thing. can i explain it? >> 30 million on a million bucks or more, is that still in your package? >> i think any bipartisanship approach has this principle. we want to improve incentives for business investment. to do that you have to raise effective tax rates on some americans and we think we should do it on the americans that can easier -- more easily bear the burden of that so yes. any effective tax reform proposal is going to have some device. this is a simple one. not a complicated one to make sure there's a higher effective tax rate. >> so that's a yes. last one on this. actually two more on this and then move on. senator patty murray of washington state came out with this aggressive speech to the brookings institute. if we can't raise the tax rates on the upper brackets we'll let the whole thing expire and go in to 2013 which i think most people on both sides of the aisle would say, will lead to a recession. did you see that coming? did you know that's the senate position? what are you going to do with that? that doesn't sound like something that's negotiating. >> our position again is to put in place to replace the sequester and the other pieces of this mess a framework to negotiate tax reform that raises revenue alongside some comprehensive entitlement reforms to make more sustainable the safety net an we want to create some room for modest, well-designed things for growth long term and short term like infrastructure, business tax reform, education reforms with resources. >> but you would rather not see the tax cuts end. >> of course not. of course not. again, let me say it differently. there are people in the republican party who say the only way they can be part of an agreement that raises revenue is if you let the tax cuts expire then to vote for a tax cut. that is not a responsible way to approach tax reform or fiscal policy. so, we think we should avoid that. >> i have heard that view. >> you have heard that view. >> i have heard that view. last one. >> seriously. >> when was the last time you met with speaker boehner to talk about possible compromises? >> i think the last time i spoke to him was several weeks ago when i went to talk to him about europe. but i do try to talk to everybody that's going to be relevant to these decisions at the end of the year and as i said, if you listen carefully, there's foundation laying underway in the senate particularly bipartisan basis to explore what's going to work. >> all right. let me move on. >> this is not a complicated challenge. relative to '08 and '09, this is not complicated for the united states. people are worried about this but the scale of our fiscal challenges are much more modest than any other country faces. major economy faces. and they're within our capacity to embrace and act on without causing significant -- >> we can do this. >> we can do this. >> we have done stuff like this in the past and i admire that completely. let me just ask you this recent libor -- i'm reluctant to call it a scandal but an libor flap. "wall street journal" editorial and lots of other people are saying tim geithner knew about this, wrote a memo in 2008. if it was such a great problem or such a great scandal why did mr. geithner and other regula r regulators do so little? why did you make a bigger stink? >> let me explain what this is and what we did. we acted very early in response to concerns that the processes used to set this rate is vulnerable to misrepresentation. we were worried about it. we were concerned about it. i took the initiative to brief the entire u.s. regulatory community on this at a very early stage, early may. my staff then briefed the scc, ftc. we took the exceptional step of writing them -- putting in writing to them a detailed set of recommendations that revealed the extent of the concern in that context and the u.s. to its credit set in motion at

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