April 22, 2010 -- As members of Congress continue negotiations over financial reform today, Treasury Secretary Timothy Geithner said he believes they will reach a bi-partisan deal that will contain strong reforms to prevent another financial crisis.
In an interview with "Good Morning America" anchor George Stephanopoulos, Geithner said he realizes there is still "enormous resistance" from the financial community, but the government has an obligation to enact reform.
"That's why it's been so hard to get this done, because people recognize this is very tough. It's going to transform the role of our financial system in the economy and make it much more stable, give people much more protection," Geithner said.
President Obama heads to New York City today to make his case in Wall Street's back yard for additional regulation of the financial industry.
The Treasury Secretary said the legislation in negotiation needs to address the size of the banks, which many experts believed in 2008 were too big to fail in 2008. Today, the six biggest banks in the country have assets equal to more than 60 percent of the GDP of the United States.
"Our view is that we need to make sure that you're limiting how big they can get and how risky that they can get. But if, in the future, if they mess up and they take themselves to the edge of the cliff again, then we want to make sure we can put them out of existence, dismember them, break them up safely without the American taxpayer having to bail them out again," Geithner said.
The possibility of taxpayers footing the bill for the banks again has been raised during the debate over the financial regulations overhaul. Democrats support the creation of a $50 billion fund which banks would fund. That money would then act as an insurance policy should the banks fail again. But Republicans have argued that the fund is just another bailout, and if it does not cover the banks' losses, then the taxpayers would again be on the hook for the remainder of the money.
Banks Should Be Able to Fail 'Safely,' Geithner Said
Geithner said both parties agree that taxpayers should never again bail out financial institutions, but said it is necessary to have a system in place where "we can fail them safely."
"We can put them…through a form of bankruptcy and not have the taxpayer exposed to any risk of loss," Geithner said. "So if the government is ever exposed again to taking any risk in these things, cleaning up these messes, we want to make sure that the banks are the ones paying for those costs."
The Treasury Secretary said that if reform legislation passes, the government will never again step in and save the banks because "you can't run a system in which private investors or their executives can take risk on the expectation the government is going to come in and protect them."
Today, the six biggest banks in the country have assets equal to more than 60 percent of the GDP, according to the National Information Center.
"That's a recipe for disaster," Geithner said.
SEC vs. Goldman Sachs
The news that Goldman Sachs made $3.5 billion in quarterly profits, which was released days after the Securities and Exchange Commission announced investor fraud charges against the company, is seen as one of the turning points in generating public support for financial reform.
Republicans have publicly questioned the timing of the SEC's charges against Goldman, and nine Republicans on the House Oversight Committee addressed a letter Tuesday to SEC Chairman Mary Schapiro asking if the SEC action was timed to increase support for the Democrats.
"The events of the past five days have fueled legitimate suspicion on the part of the American people that the Commission has attempted to assist the White House, the Democratic Party, and Congressional Democrats by timing the suit to coincide with the Senate's consideration of financial regulatory legislation or by providing Democrats with advance notice," the letter said.
Geithner said the White House had no idea about the charges against Goldman until the SEC announced them.
"It's a fully independent agency and they give no warnings, no notice, no heads up. And there should be no involvement by any person in the executive branch ever in those kind of investigations," Geithner said.
Schapiro also denied that charge Wednesday, saying in a statement, "The SEC is an independent law enforcement agency. We do not coordinate our enforcement actions with the White House, Congress or political committees. We do not time our cases around political events or the legislative calendar."
While Geithner refused to comment on the details of the SEC's allegations, when questioned why government backed firms are allowed to set up synthetic, collateralized debt obligations and other risky investments such as in the Goldman case, Geithner said in some ways it was a failure of the financial regulatory system which was put in place following the Great Depression.
"The markets just outgrew it. The obligation of government is to prevent firms from taking risks that could imperil the economy and to prevent people from taking advantage of their customers," Geithner said. "Those are obligations of policy and government. We did not do a good job as -- as a country in preventing those things and that's the centerpiece of what the reforms are trying to establish."
Movie Futures Traded?
Stephanopoulos also questioned Geithner about recent moves on Wall Street to create futures trading markets which would allow people to bet on the financial success or failure of movies. In the past two weeks the Commodities Futures Trading Commission has approved two futures markets designed for trading on potential box office receipts. On Wednesday, a U.S. Senate committee moved closer to passing a federal law banning the practice.
Geithner said he believes the government can't prevent the creation of new markets and financial products, he said it must do what it can to prevent the risks they cause.
"And our job, our obligation is to make sure that we're reducing those risks, we can contain the damage when those financial innovations go awry," Geithner said. "And again, you need the government equipped to do a better job earlier, preemptively, to limit the risks that come with innovation."
Geithner also suggested he would not support the ban.
"You can't run a system where you have a bunch of bureaucrats in Washington trying to figure out what's risky and what's not, because the risk is they'll miss it, they'll be too late, or they'll overdo it, Geithner said. "So the best thing we can do for the country is to make sure the system just has better protections in place when innovations go a little too far."