TOPICS > Economy

Geithner: Banks with ‘Privilege’ of Borrowing from U.S. Must Limit Risk

January 21, 2010 at 12:00 AM EDT
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President Obama moved to impose new restrictions on banks aimed to discourage the kind of risky behavior that led to the financial collapse. Judy Woodruff speaks with Treasury Secretary Timothy Geithner about the president's proposals.
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JUDY WOODRUFF: Now: President Obama takes on the banks and rolls out new plans to cut them down to size.

The president opened with another verbal assault on the nation’s mega-banks, accusing them of taking reckless risks in pursuit of quick profits.

U.S. PRESIDENT BARACK OBAMA: We have to enact commonsense reforms that will protect American taxpayers and the American economy from future crises as well, for, while the financial system is far stronger today than it was one year ago, it’s still operating under the same rules that led to its near-collapse.

JUDY WOODRUFF: In effect, Mr. Obama said, the banks want to rake in profits when their gambles pay off, but they want taxpayers to bail them out when things go south.

Now, he said, it’s time for Congress to adopt additional major reforms. First, to reduce risk, he called for a ban on commercial banks owning, investing in, or sponsoring hedge funds and private equity funds. He would also bar financial institutions from investing money for their own benefit, restoring curbs similar to those first enacted in the Great Depression.

And the president said he wants to limit the size of any single firm in the financial sector. He said Americans should never again be held hostage by firms deemed too big to fail.

Just a week ago, the president proposed a fee on large banks to cover shortfalls in the federal rescue fund. Today, he acknowledged getting action on his reform list won’t be easy.

BARACK OBAMA: But what we’ve seen so far, in recent weeks, is an army of industry lobbyists from Wall Street descending on Capitol Hill to try and block basic and commonsense rules of the road that would protect our economy and the American people.

So if these folks want a fight, it’s a fight I’m ready to have.

JUDY WOODRUFF: Wall Street reacted with a sell-off in financial stocks. And that pulled the broader market sharply lower. The Dow Jones industrial average fell 213 points, to close below 10,390. The Nasdaq index was down more than 25 points, closing at 2,265.

To help us understand the administration’s plan and the thinking behind it, I’m joined by Treasury Secretary Timothy Geithner. Thanks very much for being with us.

TIM GEITHNER: Thank you, Judy.

JUDY WOODRUFF: So if I’m a big bank, what does this mean for me? What changes do I need to make?

TIM GEITHNER: The president proposed two simple principles today. One is that banks who have access to the safety net have the privilege of borrowing from the government in times of stress, should not take advantage of that privilege to subsidize risky activity that could threaten the stability of the system. The second is we’re going to make sure that we don’t have a system in the future where banks get to the point where they are so large that they threaten the stability of the system.

Those are two simple principles that are a part of this very important effort we’re engaged in to try to encourage the Congress, work the Congress, to pass a set of financial reforms that would provide better protection for consumers, create a more stable, safer financial system.

JUDY WOODRUFF: So how different would the banking sector look if everything you want is enacted?

TIM GEITHNER: Well, we want to have a more stable system that does a better job of protecting consumers and meeting the needs of companies that need to raise capital, families that need to borrow to finance their kids’ education. That’s our basic objective in this. To do that, we need to make sure that banks aren’t taking the kind of risks that will threaten the stability of the system. That requires a whole range of complicated, important reforms constraints.

We’ve made a lot of progress in the House; we’ve got a very strong bill there. But we’re now at a critical moment in the Senate and we wanted to make sure at this critical moment as we try to move this forward, we had the best set of ideas in place that offer the best prospect of a strong set of reforms.

JUDY WOODRUFF: So in essence, are you saying, big banks need to be broken up?

TIM GEITHNER: No, this does not propose that. What this does is try to make sure we limit risk-taking – the kind of risks that could threaten the stability of the system in the future.

JUDY WOODRUFF: I ask because banks are already saying – and there was a CFO of Goldman Sachs who said today, this is not practical for us to separate, for example, private equity from the other work that we do. We hear other bankers saying, we’re going to have to lay people off, it’s going to hurt our business.

TIM GEITHNER: You’re going to hear a lot of concerns from bankers about this and, you know, we’re involved in a very important cause, which is to try to work with Congress to put in place a set of reforms that will prevent this from happening again. And that’s going to require a lot of changes.

But our principle objective is to make the system safer and more stable so that the economy, the average American family and business, is not vulnerable again to this. And that, again, is going to require changes in behavior.

The president said today – and you’ve heard him say this – even though we’re 2 years, 3 years into this deep financial crisis, our financial system today is still operating under the same rules that helped create this crisis. And we need to move with Congress to change that system.

JUDY WOODRUFF: Let me ask you about one particular aspect and that is banks that would separate some of their investment operations. Does it mean, for example, that at J. P. Morgan – without naming a bank, that in essence, would have to spin off its investment operations?

TIM GEITHNER: Banks will have some choice about how they comply with this, and it’s going to have to change, result in some changes. And we’re going to work very carefully with the Congress and the regulators to make sure we do this in a sensible way.

But again, the basic principle is that banks that have the privilege of taking advantage of the safety net should not use that to subsidize risky activity. I think it’s a simple principle, I think people can understand that and we’re going to do it in a careful, well-designed way.

JUDY WOODRUFF: And when would you like to see this take effect?

TIM GEITHNER: We’d like Congress to enact reforms as quickly as possible. And we’re very close now, I think. And when those reforms are put in place and legislated, then we will work carefully with the regulators to put out the kind of detailed, complicated guidance to make sure we got the balance right.

JUDY WOODRUFF: This would be legislated as you just referred to. I heard a lot of comment today about how much uncertainty there is, that this leaves the banking sector in limbo, in effect. They don’t know what they’re going to look like in a few years. What do you do about that?

TIM GEITHNER: The banking sector is in a substantially stronger shape today than it was really any time over the last two and a half years or so, much stronger shape today. But as you know, we have a deep obligation and responsibility to the American people to make sure that we are changing the types of practices and constraints that helped produce this crisis. That is very important for us to do. It’s going to require changes going forward. And you should view these as part of a very strong broad package of reforms that again are designed to make sure consumers are protected and the American economy is never again left vulnerable to this kind of crisis.

JUDY WOODRUFF: A couple of questions about the timing, Mr. Secretary. Former Federal Reserve Board Chairman Paul Volcker who heads up the Economic Recovery Board for the president, he has publicly advocated this for the last year. He’s been very open about it. He told reporters last summer the president had said no to this. What changed the president’s mind.

TIM GEITHNER: I am – I would just want you to know – very close to Paul Volcker, have enormous respect for him. And the president and I have been talking to him about this for a long period of time. And you saw in the House bill that passed the House and even in the draft Senate bill a provision that was very responsive to Paul Volcker’s ideas. And this provision would give the Fed the authority to impose these types of restrictions, exactly these types of restrictions. We thought it was time now to provide a little more clarity though about what this would mean because as I said we’re at this critical moment where we need to make the last push to get reforms through the Senate. And that’s why -

JUDY WOODRUFF: But why not do it earlier?

TIM GEITHNER: Well, we’ve been – again, we’ve been working on how best to do this for some time. And we thought now was the time to bring some clarity to it.

JUDY WOODRUFF: And I also ask because as you well know, there are voices out there today saying this is largely politically driven, that coming on the heels of the Massachusetts Senate outcome, a Republican won. You have polls showing Americans increasingly unhappy about administration policies, a sense the administration has been too soft on Wall Street, that that’s really what’s behind this.

TIM GEITHNER: That’s not what’s behind this. I’ve read that. I’ve heard that. But the president asked us to work on this going back several weeks. We’ve provided these recommendations to him two weeks ago. And again, the timing is driven by the fact that we’re at this moment in this very important cause we’re fighting, which is to get financial reform through this next stage of the process in the Senate.

JUDY WOODRUFF: One final question you hear from Republicans, and that is, if you’re going after the banks this way, why not also go after Fannie Mae and Freddie Mac, the government enterprise?

TIM GEITHNER: Oh, we are going to have to bring very substantial reforms to Fannie and Freddie, absolutely. And we are completely committed to that. And we are committed to propose a set of detailed reforms beginning this year. I don’t think we’re going to be able to legislate that until that process can start until next year, because it’s just a complicated thing to get right. But we are completely supportive and agree completely with the need to make sure that we take a cold, hard look at what the future of those institutions should be in our country.

JUDY WOODRUFF: Treasury Secretary Tim Geithner, thank you very much.

TIM GEITHNER: Nice to see you.