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TOM HUDSON: Just as there`s no shortage of blame for the near collapse of American banks, there`s also a long list of ideas for how to fix finance: a pay czar, more rules on derivatives, even smaller banks. Earlier today, I spoke with Robert Pozen, chairman of MFS Investment Management and author of “Too Big to Save? How to Fix the U.S. Financial System.” I began by asking him if the reform efforts so far are addressing what`s wrong with banking.

ROBERT POZEN, CHAIRMAN, MFS INVESTMENT MANAGEMENT: Some of the problems are being addressed. For instance, we have financial derivatives legislation. We`re also going to register the managers of hedge funds. But there are a lot of other areas, such as capital requirements, mortgages and corporate boards, where we still have a lot to do.

HUDSON: In regards to that, you come up with very specific ideas within the book and I want to go through just a trio of them, beginning with something a lot of potential homes buyers may find unfathomable here, bigger down payments for the housing market.

POZEN: Even now, FHA only requires a 3.5 percent down payment and you can reimburse yourself through a refundable tax credit. So it`s effectively a no-equity loan. And there`s one thing we know that if you don`t have a significant amount of equity in your home, you`re likely to default.

HUDSON: Considering where housing prices have come from and are currently today, wouldn`t this discourage buyers to get in this market and help stabilize prices?

POZEN: There`s a balance. On the one hand we don`t want to make it too tough for homes owners. On the other hand, if somebody really doesn`t have a 3.5 percent or a 5 percent down payment maybe they shouldn`t be owning a house. We can`t afford to set people up for defaults.

HUDSON: Is that where you draw a line in the sand, at least 5 percent for buying a home?

POZEN: I think that`s a reasonable place to draw a line in the sand.

HUDSON: You also talk about fewer Federal government guarantees, specifically the one that most depositors, most banking customers are used to is the FDIC insurance.

POZEN: I`m all in favor of FDIC insurance. That`s for small depositors, but what we`ve done is guaranteed the debt of very large bond holders and this has been done not only for banks and S&L, but for their holding companies. So for example, we guaranteed $2 billion of the debt of John Deere, a tractor company because it owns an S&L and we have companies like JPMorgan and Morgan Stanley that have paid back their TARP money, but they still have their guaranteed debt, billions of it. It`s worth a fortune and we ought to have them repay the guarantee debt.

HUDSON: What about the two guarantees and two names, Fannie and Freddie?

POZEN: Those are the ones that are the most problematic and will probably take us years to work that out and the Treasury is supposed to come up with a proposal in February, but we`ll see what they`re going to come up with.

HUDSON: You also talk about how the Federal government and the Justice Department specifically should discourage big mega-bank buyouts like those that built up Bank of America, that built up Citigroup, that even built up JPMorgan, one of the survivors here.

POZEN: Yes, I think that we should have a lot tougher antitrust policy and not allow these institutions to grow so much. In some cases we even encouraged these acquisitions. On the other hand, it`s very difficult to break up institutions that are already there. So let`s take a preventive approach and not let these institutions get so big to begin with.

HUDSON: You talk about too big to save. Is U.S. finance currently too big to save?

POZEN: No, I don`t think it`s too big to save, but I do think there are a lot of things that we have to do that we haven`t done and the most important one is to change the nature of our capital requirements. We need to have higher capital requirements, lower leverage and different types of capital requirements. We now allow the largest banks to set their own capital requirements by these very elaborate internal risk models and one thing we`ve learned about these models is that they were wrong. They were wrong a lot and people had a hard time understanding them. So that doesn`t seem to be a good basis for capital requirements.

HUDSON: An interesting read. Robert Pozen, the name of the book is “Too Big to Save.”

[Video on CNBC, Airtime: Tues. Nov. 10 2009 | 4:16 PM ET

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