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MELISSA BLOCK, host:

As we mentioned, our co-host Robert Siegel is in New York reporting on Wall Street's troubles, and he's been talking with people who can take the long view.

ROBERT SIEGEL: Pick a role on Wall Street, and William Donaldson has played it. He founded a big investment firm. He was CEO of a company, Aetna, that trades on the Stock Exchange. Then he was CEO of the Stock Exchange. He founded the Yale School of Management, and he went to Washington after the Enron scandal to chair the Securities and Exchange Commission. He says he voted for more regulation there. He says some actions of the SEC have been misunderstood. And I asked him today about the future of regulating a financial industry that knows no national boundaries.

Mr. WILLIAM DONALDSON (Former Chairman, Securities and Exchange Commission): Well, this is the ultimate challenge or the immediate challenge, I would say, which is that we are going to have to, first of all, readjust our institutions of regulation to adjust to the circumstances that exist today, one of which is global ownership. The second thing is we're going to have to work with regulators in other countries to try and get some mutually recognized rules for regulation. The simple answer to your question is, globalization presents some real challenges in terms of regulating our markets.

SEIGEL: Does it mean that American business regulation inevitably is going to look less American and more of a compromise with what European or Asian ideas are about how you regulate finances?

Mr. DONALDSON: Well, I hope that's not true. I think that there's a general recognition throughout the world of the need for greater regulation. We've always been the gold standard of regulation. As a matter of fact, stocks have sold at higher price earnings multiples in this country because of regulation, because of the exchange rules and the SEC rules.

SIEGEL: People can believe more in the securities that they're buying.

Mr. DONALDSON: Yes. And I would hope that we don't have a race to the bottom in terms of regulation.

SIEGEL: This is a question I'm putting to everyone, because I just cannot - I can't grasp it. The estimate of what the whole market of credit default swaps was is up over - the estimate's run over $50 trillion. That's almost the sum of all the gross domestic products of all the nations in the world in a year. Something seems wrong there. It seems impossible that there could be any market, no matter how notional, whose value exceeds what the whole world makes in a given year - or comes close to it.

Mr. DONALDSON: Well, the fact of the matter is the way it works is that I sell you a credit derivative, and you turn around a day later and say that you've taken out too much risk, and you sell another credit derivative that takes you out of that risk position. And it begins to multiply. Although 50 trillion probably is not a bad figure, the real value of that when it all X's out one another is closer to a trillion dollars.

SIEGEL: What this is all derived from the - the original investments that people are hedging on at the bottom of it, is a small fracture of all of these bets that have been made above it.

Mr. DONALDSON: Exactly, exactly, and the fact that we don't know when we at the commission put forth regulation of hedge funds, if we had that now, we would know how many of these derivatives are inside of those hedge funds. If we had record-keeping, you sell to me that there's a record of that through a clearinghouse, we'd know, that's what we have to get.

SIEGEL: I read something in the New York Times that I want to ask you about this morning. In the story about Kirk Kerkorian, the Times writer just referred to the fact that Mr. Kirk Kerkorian was reconsidering his billion- dollar bet on Ford. And increasingly, I read and hear people discuss bets that investors make. One used to say one invested in something. Has bet always been a term that people have used freely around Wall Street to describe what they do with a billion dollars? Or is that a sign of the times? Or have we just gotten more candid about what people are doing?

Mr. DONALDSON: There's always been a certain amount of speculation in a marketplace and on short-term moves and so forth, but the idea of betting and gambling, if you will, has been fanned, in my view, by popular communications media where we have breathless conversations back and forth all day long about this is moving up and this is moving down. That's accentuated by program trading and electronic trading, you know, gigantic amounts of money, so we've gotten away from fundamental investing.

SIEGEL: You bet that things will look up in a few years right now?

Mr. DONALDSON: I think we have a major adjustment here. I think we're beginning to solve the credit crisis. But now, we're into the impact of that on the economy itself. I think we're going to have to go through some rough times here before the economy itself turns around.

SIEGEL: Well, Mr. Donaldson, thanks you very much for talking with us.

Mr. DONALDSON: No, my pleasure.

SIEGEL: Former SEC Chairman William Donaldson. We spoke in his office in New York.

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BLOCK: You're listening to All Things Considered from NPR News.

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