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ROBERT SIEGEL, host:

Lawrence Summers is the president's top economic advisor and Timothy Geithner's partner in creating the proposed regulations. Summers says they will change the way banking is done for the better. I spoke with him at the White House this morning. Summers brushed aside the judgment of New York Times columnist Joe Nocera that it is, and I quote, "little more than an attempt to stick some new regulatory fingers into a very leaky financial dam, rather than rebuild the dam itself." Not so, says the former Treasury secretary.

Mr. LAWRENCE SUMMERS (Director, National Economic Council): Respectfully, the clamor of concern, particularly about the consumer regulation from financial industry lobbyists, suggests that they don't share Mr. Nocera's view. More profoundly, this is about reducing leverage, causing there to be more capital, getting rid of the gaps and that's exactly what we're going to do. I think financial practice is going to be very, very different, and that when we look back a few years from now, we're going to see a very different American financial industry, and this bill is going to be an important part of the reason why.

SIEGEL: I'd like to hear your thoughts a bit on what these reforms say about the role of the Fed in all this. Now, the Fed is seen as the best potential regulator of systemic risk in these reforms. On the other hand, under Chairman Greenspan, the Fed seemed to misread a systemic risk terribly. The Fed had responsibility for consumer interests. You've now created an entirely new agency because of the perception that they weren't doing the job. Should there be more profound systemic change at the Fed to make it work better for us?

Mr. SUMMERS: I think there's been a lot of soul-searching at the Fed and that soul-searching will continue. I think Chairman Bernanke has different views on a range of regulatory questions than Chairman Greenspan did. I think the critics are right that an agency charged with maintaining the health of the banking system is always going to be prone to look out for bank profits rather than consumer interests - and that's why we've established a separate consumer agency. But our judgments on systemic risk reflect two judgments and those who disagree should be clear about how they want to challenge those two judgments.

The first judgment is that committees can't take effective responsibility -that collective responsibility is no responsibility or accountability, and there has to be an agency headed by an individual with responsibility for systemic risk. The second judgment we made is that if there is going to be such an agency, it should be the central bank. That's the way it is most typically around the world. More fundamentally, if you look at where the technical expertise is to deal with all the complexity of risk modeling and the like, in our system, it's currently very much concentrated in the Fed. And it's for those reasons that we would look to the Fed.

As it is recognized, the Fed's been a highly imperfect actor. It's made serious mistakes. On the other hand, I think it's important to remember that some of the worst cases — Countrywide, Washington Mutual — involved institutions that actually moved away from the Fed's regulation and were allowed to, because they thought the Fed's regulation was too tough.

SIEGEL: But if the Fed, as you say, has been perceived as being more interested in the soundness of the institutions that it oversees, than in the interests of the consumer, let's say in the new world there's this new agency that's looking out for consumer interests and it comes to loggerheads. The consumer interest agency says one thing, the Fed says another - bank profits versus protecting the consumer - who settles?

Mr. SUMMERS: Oh, it's very clear. Oh, it's completely clear. On consumer issues, the consumer agency makes the rules and the Fed has no say.

SIEGEL: Even if that would reduce the profits of the banks?

Mr. SUMMERS: Completely clear. Those rules are set by the consumer agency. No ambiguity about that.

SIEGEL: And can trump any other regulatory…

Mr. SUMMERS: No ambiguity. No ambiguity about that at all.

SIEGEL: So that's an enormous authority that the head of that agency will hold.

Mr. SUMMERS: Very substantial responsibility. I think that's why so many consumer advocates are really hailing this step as an important step forward.

SIEGEL: And you would say why so many financial institutions are upset about it at the same time.

Mr. SUMMERS: It's also, undoubtedly, part of their concern.

SIEGEL: As a measure of the success of this legislation as it moves from here into effect, how vital, how central is the strength and existence of that Consumer Financial Protection Agency?

Mr. SUMMERS: I think consumer agency is one of the key pillars. The elimination of gaps is in regulation, so that we focus on the whole financial system is a second key pillar. The establishment of authority that will permit resolution of a failed institution is another key pillar. So there are a number of crucial elements. But the consumer protections after what we've seen with predatory lending, subprime and the like, is really critical. So I think it's pretty clear that…

SIEGEL: But from lack of structure…

Mr. SUMMERS: …that regulatory system has to be changed in fundamental ways to protect consumers.

SIEGEL: I mean, one could also say the agencies had the power and they just didn't - they were captive to a herd mentality, or they were of a mentality that was…

Mr. SUMMERS: I think with respect to the consumer, I think one needs to distinguish different issues, Robert. With respect to the consumer, any institution whose primary loyalty, whose primary test is the health of financial institutions is going to look out for financial institution health rather than consumer interests. So that area, that's certainly right.

SIEGEL: Lawrence Summers, thanks a lot for talking with us today.

Mr. SUMMERS: Thank you.

SIEGEL: Lawrence Summers, former Treasury secretary under President Clinton is now director of President Obama's National Economic Council.

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