Shortly after President Barack Obama proposed the biggest financial regulatory overhaul since the Great Depression in a speech at the White House today, Treasury Secretary Timothy Geithner warned that the government still lacks the "capacity to deal" with a major collapse in the financial sector.
"Even today, we still don't have the capacity to deal with a future AIG, a future Lehman," Geithner told "Nightline" anchor Terry Moran in an exclusive interview in Washington, D.C. "That's why we're proposing these better tools for crisis management. So it was a tragic thing for the country, the government did not have the ability at that point.
"We need to prevent a crisis like this from ever happening again. ... You know, this crisis was enormously damaging to the basic lives, businesses, people across the country, across the world, and our basic obligation and our core mission is to make sure we put in place safeguards to make sure this never happens again."
Watch Terry Moran's full interview with Timothy Geithner on "Nightline" tonight at 11:35 p.m. ET
The debate over the regulatory package, which includes new executive powers and a new government regulatory agency, began even before its official rollout today. Consumer groups hailed the proposal as providing important new protections, while Republicans on Capitol Hill and lobbying groups voiced opposition to the government expansion.
The Treasury secretary addressed those criticisms and returned to the roots of the financial meltdown, saying banking executives showed "stunningly bad judgment" in the lead-up to the crisis.
Geithner: Three Goals of New Regulations
"I believe it would have been better, but we would still have faced enormously power financial crisis at that point," he said. "And it probably would not have saved us, still, from a very deep recession and a risk of substantial further failure across the financial system.
Geithner said the administration's regulatory package would ensure against future crises. The package, he said, sought to address three key objectives: protecting consumers, reigning in banks and providing for new oversight of international markets.
"The first [objective] is we need to give consumers better protections against the risk they get taken advantage of, sold products they didn't understand, take on too much debt, debt they can't afford," the Treasury secretary said. "That is critical.
"The second is to make sure that banks can't take on this much risk and other institutions can't take on risk that threatens the basic fabric of the economy. And so we've put in place much stronger protections, safeguards, stronger constraints on leverage, capital requirements, shock absorbers to reduce the risk that ever happens again.
"And the third, because we're not going to be able to prevent risk-taking everywhere, we're not going to be able to prevent all crises in the future, we need to have better capacity to manage them, so we're proposing new authority -- not just here but with other countries -- to better manage the failure, potential failure of large institutions."
Republicans have argued that with the president and lawmakers already bogged down with health care matters and the auto industry, there is too much being done, too quickly. Lobbyists for the financial sector said the plan would impose unnecessary and damaging new strictures on business.
Geithner: 'Stunningly Bad Judgments'
Geithner took issue with the idea that the plan would give too much power to the Federal Reserve, which would take a more active role in managing financial institutions. There is "no credible alternative" to a new role for the central bank, he told Moran.
"The question is, and the challenge is to make sure [the Fed has] the authority to discharge that responsibility well," Geither said. "And we need to give them some tightening up of authority in those areas if they're going to do that job well. And there is no credible alternative to giving the Fed this responsibility.
"And I think that you're not going to have a system that is more stable in the future without giving them a slightly clearer set of responsibility for maintaining stability and tighter authority to go with that."
Geithner said his time as a Treasury official in the late 1990s serves as his guide now for getting the country back on track.
"We helped put in place a fiscal program that produced surpluses, helped generate very high rates of private investment, a huge amount of confidence in U.S. financial assets, a big wave of growth in productivity improvements," he said. "We lived through what it means to achieve that. And we all understand what it will mean for the economy if we fail to produce sustainable, fiscal position."
Asked whether the financial sector had shown gratitude for the government bailout, Geithner said banking executives had to work to regain taxpayers' trust.
"I do think there was a period of stunningly bad judgments by the leaders of our financial systems, by their boards of directors," Geithner told Moran. "And I think that made the crisis worse. And I think that helped precipitate a loss -- big loss of confidence and trust in the financial system as a whole. And those systems depend on trust and confidence.
"I think we need to do a lot to earn that back."
The sweeping package comes on the heels of a series of devastating shocks to the financial system, beginning with the collapse last year of Lehman Brothers, American Insurance Group (AIG) and Washington Mutual. To contain fallout from those closures, Congress under President George W. Bush passed a $700 billion bailout bill. Now the Obama administration is seeking to fix what it says are the underlying causes of financial volatility.
In his White House appearance today, which was attended by representatives of the regulatory community, consumer groups, the financial industry and members of Congress, Obama cited a "cascade of mistakes and missed opportunities which took place over the course of decades" and called for "a new foundation" for sustained economic growth.
"We did not choose how this crisis began, but we do have a choice in the legacy this crisis leaves behind," Obama said. "So today, my administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression."
The next step is winning over Congress. White House officials say they hope to pass the legislation by the end of the year.
Looking Back at Lehman
Geithner said he feared the collapse of the entire financial sector after the downfall of Lehman Brothers in September 2008, even though as the then chairman of the New York Fed he was partly responsible for decision to let it fail.
"We were really at the edge of the abyss," he said. "And for the first time in really almost a century, we faced the prospect of a catastrophic failure of our financial system. And that's why [a new regulations package] was so important."
When asked if letting Lehman fail was a mistake, Geithner said it was a "tragic thing" but could not have been prevented.
"The government did not have the ability at that point," he said. "But they did not make a choice. It was really -- they had no ability at that point, given what Lehman, the sort of the size of capital needs of Lehman, to come in at that point and prevent failure."
Geithner said saving Lehman would have helped, but the country would have still faced a recession.
"I believe it would have been better, but we would still have faced an enormously powerful financial crisis at that point," he said.
Geithner seems to have bounced back from a rough start at Treasury. After a scandal over not paying self-employment taxes and a poorly received first speech to the nation, Geithner's wonkishness and aggressive course of action seems to have won over many critics.
He claims he never had any doubts about remaining in his post, even when he came under heavy criticism for the AIG bonus debacle.
"The president was totally supportive," Geithner told Moran. "He said 'Stick with it, and focus on doing the right thing.' He didn't waiver."
These days Geithner has plenty of the most important currency in Washington -- access to the president.
"I see the president a lot," he said. "I go over once early in the morning for a senior staff meeting. Then I go back a little later for his daily briefing on the economy, which Larry Summers and I do with the rest of the economic team every day, half an hour, 45 minutes. And then we have a lot of time working through the broader economic financial issues with him."
Geithner said Obama's reputation for seeking out multiple opinions is founded in truth.
"As you see, he engages in the substance of the debate," Geithner said. "He wants to be exposed to the debate, he wants to hear all the options and hear all the arguments. Wants to know all the dark side of every issue. He wants people to debate it in the open, a competition for ideas. It's a great strength in a president."
Geithner said he identifies with Obama on the issue of family. Both men have young children and have had to spend long periods of time away from them.
"The hardest thing is just being away, just not being with my kids and my wife," he said. "But you know they believe in the president, they know it's an important thing to do."