Geithner Weighs In On Financial Overhaul

Melissa Block talks to Treasury Secretary Timothy Geithner about financial reform, and the broader economy.

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MICHELE NORRIS, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

MELISSA BLOCK, host:

And I'm Melissa Block.

Late this afternoon, on Capitol Hill, Democrats failed in their bid to open debate on their financial regulation overhaul bill. The Republicans got Democrat Ben Nelson to vote with them, and that left Democrats short of the 60 votes they needed to move forward with the bill. The Democrats will no doubt try again later in the week.

Earlier today, I talked about financial reform and the broader economy with Treasury Secretary Timothy Geithner.

Secretary Geithner, welcome to the program.

Secretary TIMOTHY GEITHNER (Treasury Department): Thank you.

BLOCK: If there were to be another big failure of another big institution, a bank, another AIG, say, explain for us, please, who would be paying to safely wind that institution down. Not to bail it out, but to wind it down. The administration is saying it will not be the taxpayer, so who is it exactly?

Sec. GEITHNER: Well, if the government is exposed to any risk of loss in cleaning up a mess like that in the future, then the banks would pay the costs of resolving the problem. But the way this would work - and this is the most important thing, which is that if a bank in the future manages itself to the point where it can't survive without the government stepping in, the government would have the tools, which we did not have in this crisis, to step in, wipe out shareholders, put in place new management board and break them up, sell them off, unwind them safely without risk of the fire spreads and the taxpayers get stuck with a big bill.

BLOCK: But when you say that banks would pay, there had been proposed a $50 billion bank fund that the banks would pay in advance. The administration seems to be saying, we're okay about letting that idea go by the wayside. So what would replace that?

Sec. GEITHNER: Well, what we propose is a system the United States has been living with as a country for more than 30 years. This is how we deal with small bank failures. So our judgment is, again, if in the future we face another crisis and the government has to step in to protect the economy from a financial fire like this, and if the government was exposed to any risk of loss, then the government would impose a fee on large institutions to cover those losses over time. So in a sense what we're saying is that banks should pay, in a sense, in proportion to the risk they take.

BLOCK: They'd be paying after the fact.

Sec. GEITHNER: They would be, yeah.

BLOCK: When you look at the assets of the six biggest banks, now this number is talked about quite a bit, that their assets equal more than 60 percent of GDP, we've been talking about too big to fail, what about just the two big part of that equation? Why not say, as some economists and some folks in Congress are saying, these banks are too big, we're going to cap their size, we're going to limit their size and we're going to limit their leverage?

Sec. GEITHNER: Really good question, and we are going to limit their size. But the most important thing we're going to do is limit the amount of risk they can take. Let me just give you two examples to how you think about this. The Great Depression was the crisis of small bank failures across the country. And Bear Stearns, Lehman Brothers, two failures that brought our system near the collapse were relatively small institutions.

And the most important thing this bill will do is to give the government the authority it did not have before this crisis to limit risk taking limit leverage by these large institutions. But in addition to that, we're going to put a cap on how large they could get, how concentrated our markets can get in the future by tightening up the existing limit, which restricts banks to having only ten percent of the nation's total bank deposits.

BLOCK: That doesn't seem to be satisfying the critics in Congress who would say, that just doesn't go far enough, that doesn't cap them enough.

Sec. GEITHNER: I believe it does. And, again, our system, we have a very interesting financial system. And we have 9,000 banks. Our system is much less concentrated than any other major economy. Look at Canada to the north, where they have, really, only five institutions that have everything. And - but they also had a much more stable system than we did.

Also, our banks are much smaller as a share of our economy than is true for any other major economy. So, again, what's critical is about risk and limiting the risk they can take, but making sure that if they mess up in the future, we can dismantle them without the taxpayer being exposed to risk of loss.

BLOCK: A lot of attention in the financial overhaul bill focuses on derivatives. And I'm wondering when you think about derivatives, credit default swaps, do they have social value? Is there a financial merit to them? Have they helped the economy in some way or if they have been as pernicious as they were in the last financial crisis, why not do away with them all together?

Sec. GEITHNER: It's good to go back of the beginning of derivatives. And, you know what, they came in a sense from the need of a farmer to buy insurance against the risk that the price of his crop would fall. It's a form of insurance.

BLOCK: And it's gone way beyond that now.

Sec. GEITHNER: And, still, at its core, it tries to meet that basic economic need. So the overwhelming demand for derivatives comes from a version of that basic search for insurance that all companies face. But, as we've learned throughout financial crises, these things come with substantial risk. And, again, the basic job of government is to make sure you are putting in place strong oversight to contain those risks, bringing transparency disclosure to these markets, making sure that the people who participate in them are forced to hold enough capital to back their commitments.

And, again, that's what this bill will do. This is a revolution in how we think about oversight in derivative markets, for the first time would bring what is a $600 trillion market out of the dark and into the light of day with strong protections for the economy.

BLOCK: Secretary Geithner, I want to talk to you a bit more broadly about the economy overall. And there have been a number of strong economic indicators lately - retail sales are up, new home sales climbed substantially in March. Exports are going up, but you still have of course unemployment at 9.7 percent. Does this look to you like a jobless recovery?

Sec. GEITHNER: It's a very tough economy still and I think that it's obvious to most Americans still that we're still living with the damage caused by this crisis. But things are getting better. The economy is getting stronger. I think it's very encouraging and you're starting to see the first signs of what we think will be a sustained period of job growth by private companies. That's the most important thing, that's the most important test of what we're doing and we're making some progress.

BLOCK: I know you're traveling tomorrow with Vice President Biden to talk in the Midwest about jobs. He has been predicting that the administration...

Sec. GEITHNER: About jobs and about financial reform.

BLOCK: Okay, jobs and reform. Vice President Biden has been predicting that you're going to be creating about 250,000 to 500,000 jobs a month in the next few months. Is part of your message to him, Joe, you're getting ahead of yourself there, maybe we're not talking about a half a million jobs a month?

Sec. GEITHNER: Well, again, what we're - what the vice president is working on, the president works on every day is try to figure out how we work to make sure that the growth we're seeing creates as many jobs as we can. And I'm not an economist...

BLOCK: Is that a reasonable prediction, do you think?

Sec. GEITHNER: Well, you know, I'm not an economist and I generally don't provide...

BLOCK: ...Joe Biden.

(Soundbite of laughter)

Sec. GEITHNER: I don't provide forecasts of how many jobs we're creating. But, you know, the economy is getting stronger and there is more confidence out there. You're seeing, you know, encouraging signs of improvement. But I think it's, we all recognize that it is still really hard out there.

BLOCK: Secretary Geithner, when you go out on the road, as you are tomorrow, you're going to Milwaukee, what do you bring back to your job here at the Treasury Department?

Sec. GEITHNER: I think every time Im out of Washington, I feel more confident about the country 'cause what you see when you visit communities across the country, even in parts of the country that were hardest hit by the housing crisis or hardest hit by what's happened to manufacturing, you see examples everywhere of strong, innovative companies doing promising things to grow their businesses.

You know, again, I think it's important for Americans to understand that we are a very strong, resilient country. This crisis caused enormous damage. But one of our great strengths as a country is how quickly we adapt and adjust and you can see examples of that everywhere. So, when I leave Washington, normally I come back encouraged.

BLOCK: Secretary Geithner, thanks very much.

Sec. GEITHNER: Nice to see you.

BLOCK: That's Treasury Secretary Timothy Geithner. We spoke at the Treasury Department.

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