Secretary Tim Geithner Discusses the 'Healthy, but Slow' Economic Recovery

GEITHNER: We've got to be clear about this. There were systematic failures in the basic protections our system is supposed to provide and that's going to require stronger enforcement, and better tools. And there's no way to fix these vulnerabilities without having more authority, more accountability for the people who's job is to safeguard this system, protect consumers. So, it is going to require stronger enforcement resources. But we are not substantially expanding the broader layers of supervision and regulation. In fact, we are simplifying them in important respects.

MORAN: Two big to fail? There's now going to be a club if this law passes. Banks and other institutions get to be considered too big to fail, subject to some more regulation. But also, isn't there a guarantee there, that if they do fail the taxpayer will once again ride to the rescue?

GEITHNER: Our objective is just the opposite of that. The critical, and the sort of tests of credibility for reform is to try to make sure the system is going to be strong enough to withstand the potential failure of large institutions. We want to reduce the risk it happens. But it will happen and we want to make sure it happens because it is not a good strategy for the country to protect them from their errors. But for that to happen you have to make the system strong enough to withstand the effects of their failures. So by forcing stronger capital requirements, stronger shock absorbers in the system, you help achieve that outcome. And we're proposing stronger authority that we now have for small banks and thrifts to help manage the failure, resolve these large institutions, allow for an orderly unwinding of institutions that get to the point where they pose risk to the system.

So, what we're trying to do is reduce the risk in the future. That we have institutions that are too big to fail, and make sure if we get to that point, you have a large institution whose failure would threaten the system we have a better capacity to manage that failure. That is the objective our proposal.

MORAN: So, the notion that a bank or institution might considered too big to fail, is not going to encourage more risk taking? Not the sense that, well, the government is there to back me up?

GEITHNER: Look our system is actually less concentrated, has less consolidations than the financial systems of most countries around the world. You know we have 9,000 banks around the United States. The 10 largest banks in the United States account for a much smaller fraction of financial activity than is true in Canada, most of Western Europe, certainly in Japan. And we want to preserve that balance, where we have the benefits, the flexibility, the diversity that comes from having thousands of small banks across the country, operating alongside these large institutions. But by holding them to higher standards, tougher capital requirements on large institutions, and having this better authority to deal with the potential failure of those institutions. We will reduce the risk, the moral hazard risk in having institutions that get to be that size.

MORAN: Let's talk about a big failure: In retrospect, was letting Lehman Brothers fail, and you were there, was that a mistake?

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