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Geithner On Failing Firms: 'We Will Dismember Them'

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Geithner On Failing Firms: 'We Will Dismember Them'


Geithner On Failing Firms: 'We Will Dismember Them'

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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This is MORNING EDITION, from NPR News. Good morning. I'm Mary Louise Kelly, in for Steve Inskeep.


And I'm Renee Montagne.

President Obama inherited an economy in crisis, and one of his top priorities has been to rewrite the rules for the financial industry. A proposed overhaul is close to becoming law. It has passed the House and is expected to come up for a vote soon in the Senate.

At more than 2,000 pages, there is plenty of fodder for proponents and critics alike. A central figure in the planned overhaul is Treasury Secretary Timothy Geithner. We reached him at his office to talk about some of its key features.

Thank you for joining us, Secretary Geithner.

Secretary TIMOTHY GEITHNER (Treasury Department): Nice to talk to you, Renee.

MONTAGNE: Much analysis of this bill finds that it does provide more protections for consumers, which is certainly one of its aims. But when it comes to our money as taxpayers, how does this bill cure the problem of having to resort to big bailouts should a huge bank or financial company start to collapse?

Sec. GEITHNER: The bill does two very important things. One is it gives the government authority they did not have to limit risk-taking by these institutions. Firms were able to evade that. They could choose the regulator, choose the rules. We end that basic mistake, that basic loophole, that huge gap in the system.

But if in the future, firms end up taking on too much risk again, then we won't give them a second chance. We will dismember them, put them out of existence. And what this bill does establish in law, the basic principle that banks should be paying for bank failures, not the taxpayers of the United States.

MONTAGNE: So if, say, Lehman Brothers - which took, along with many other banks, a lot of risks - at what point would the rules of this new law sort of intervene and change the way Lehman Brothers is doing business, or keep it from doing something that would hurt it and thus hurt everyone else along the way?

Sec. GEITHNER: Right from the beginning. What causes financial crisis is when banks are allowed to take on too much leverage, to borrow too much, to operate with too little financial reserves against the risk of loss in the future.

So what this bill does is allow the government to constrain leverage and risk-taking by forcing all institutions to operate with much more capital, much more financial resources, financial cushions against the risk of loss.

But, of course, you know, firms are going to want to take risks again. And there's a - some chance in the future they're going to take mistakes that would not allow them to survive and operate without the government stepping in. And so, therefore, what the bill does - and this is very important - is to make sure that the government has no option in that context except to put them out of their misery, out of existence in ways that doesn't create risk of the crisis spreading.

MONTAGNE: I'm talking to Treasury Secretary Timothy Geithner.

This week, the Wall Street Journal had an editorial complaining about the new rules on derivatives. Now, most of us don't quite understand what derivatives are. But we know that they're the risky financial products that contributed to the financial crisis.

The complaint is that many companies that are not banks, but use derivatives to protect themselves against future financial risk - a chemical company was the example the Wall Street Journal used. They are now being forced to put up a lot of collateral, in the millions. And these companies say they'd rather use that money to hire people or invest in, say, a new plant. How do you respond to that particular complaint?

Sec. GEITHNER: The derivatives are - a way to think about them - they're a form of insurance. What happened in our financial system is we allowed trillions and trillions of dollars of those things to operate in the dark without transparency and disclosure. And we allowed large institutions, like AIG, to write commitments like that without the financial resources to back up those commitments.

So what this bill will do is to bring transparency and disclosure to all those products and make sure that the institutions that participate in those markets run with the kind of financial cushions that allow them to meet those commitments.

The bill is very carefully designed to make sure that great companies of the United States - whether they're in the agricultural business, or they make tractors or trucks - are able to still hedge their risks and buy the types of insurance they need. And so I am not concerned.

MONTAGNE: So you're saying a big company that says this is going to cost it even a billion dollars either can afford that or is exaggerating.

Sec. GEITHNER: I think those concerns are wildly over-exaggerated. Again, I think for people who need these products, who participate in these markets, who have a good economic interest in needing to buy some protection against a potential risk in the future, they're going to be able to do that in a way that leaves the system more stable, less vulnerable to these kind of crises.

MONTAGNE: So what have you been hearing from banks?

Sec. GEITHNER: Banks are very unhappy that the rules are as tough as they are. They were hoping that they'd be weakened as they came out through the process. But again, our standards will be very strong. And strong, well-run institutions will thrive with those new protections.

MONTAGNE: Treasury Secretary Timothy Geithner, thank you very much for joining us.

Sec. GEITHNER: Nice to talk to you, Renee.

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