JUDY WOODRUFF: We turn to the impact of government bailouts here in the U.S. and questions that continue to surround those decisions.
It was September 15, 2008, when the investment bank Lehman Brothers filed for bankruptcy protection.
Ray Suarez looks at what it set in motion and where things stand now.
RAY SUAREZ: Lehman Brothers' collapse sent employees packing and the stock market plummeting. The Bush administration had decided it wouldn't rescue Lehman.
The Treasury Department had taken over mortgage giants Fannie Mae and Freddie Mac that same month, and saved Bear Stearns earlier that year.
Treasury Secretary Henry Paulson told reporters he was drawing a line in the sand.
HENRY PAULSON, former U.S. treasury secretary: I never once considered that it was appropriate to put taxpayer money on the line with -- in resolving Lehman Brothers.
RAY SUAREZ: The decision helped trigger a credit and liquidity crisis, fueled by deep doubts about the health of financial institutions.
WOMAN: The motion is adopted.
RAY SUAREZ: Weeks later, Congress and President Bush passed the $700 billion Troubled Asset Relief Program, or TARP. Through TARP, the government disbursed money to hundreds of banks, and propped up firms like Citigroup and Bank of America. Money also went to General Motors and Chrysler.
The program, along with the Federal Reserve, also provided new help to insurer American International Group. AIG was exposed to risky securities and provided insurance on credit swaps around the world. If it went down, the fear was other firms would follow.
In October 2008, I asked Edward Liddy, who was the newest head of AIG, whether the lifeline would save the company.
Do you think that's going to be enough, though, the $120 or so billion, or might you need more?
EDWARD LIDDY, American International Group: You know, I think so and I sure hope so, Ray. It's very much a function of two things, one, our ability to stop the bleeding that we have in the financial products areas, and we have made good progress in that. But it's also what happens to the capital markets.
RAY SUAREZ: The final tally for AIG would reach $182 billion, as the government became majority shareholder.
This week, the Treasury Department said it recovered all of that money, plus a profit, as it reduced its stake in the company to 16 percent.
White House press secretary Jay Carney:
JAY CARNEY, White House: We have been committed to exiting those investments as quickly as practicable, but always with a mind to taxpayer interests. It's safe to say that the president is pleased with the progress being made as we wind down these investments and recover taxpayer money.
RAY SUAREZ: In total, the government disbursed $417 billion through TARP. While critics question the official accounting, the Obama administration says $366 billion, or 88 percent of the total, has been recovered.
Republican presidential nominee Mitt Romney has said he supported the rescue of financial institutions. But the former governor has criticized the auto bailouts, as he did recently in this TV ad airing in Ohio.
NARRATOR: In 2009, under the Obama administration's bailout of General Motors, Ohio dealerships were forced to close.
MAN: It was like, the dream that we worked for, that we worked so hard for, was gone.
MITT ROMNEY (R): I'm Mitt Romney, and I approve this message.
RAY SUAREZ: As for Lehman Brothers, four years later, it is still selling off assets to pay back creditors.
We get two views about the rescues and the state of the financial system. Michael Barr worked on many of these bailouts when he was assistant secretary of the treasury in 2009 and 2010. He's a professor at the University of Michigan Law School.
And Dennis Kelleher is president of Better Markets, a nonprofit organization pushing for tougher financial regulation and transparency.
Michael Barr, the U.S. government took big holdings in a lot of companies in that brief era, but AIG was arguably the poster child. How does the idea look in retrospect, now that it's unwinding and selling back the stock?
MICHAEL BARR, former assistant U.S. secretary of the Treasury: I think the government took the right steps that were necessary to stabilize the financial system, not just the investment in AIG and the Troubled Assets Relief Program, but also the efforts of the Federal Reserve to intervene to stabilize the economy.
The Federal Deposit Insurance Corporation stepped in with guarantees in the banking system. The Treasury Department stepped in with guarantees in the money market mutual fund system. None of these were pretty things. All of them were politically unpopular.
But I think that, when you look at it if he end of the day, we had a situation in which the economy was falling off a cliff and the government stepped in and took the steps necessary to make sure that the financial system didn't crash, that the economy could recover, that the automobile sector could recover.
And I think, without those steps, our country would have fallen into the abyss.
It would have been a horrible, horrible situation for all of us.
And I think now, when you look at it, the taxpayers being paid back, we have got a new strong financial regulation in place in the Dodd-Frank act, and the economy is beginning to recover. I think it was a necessary and just thing to do under the circumstances. And it is working.
RAY SUAREZ: Dennis Kelleher, is it fair to say that you don't quibble so much with the what, but the how?
DENNIS KELLEHER, Better Markets: Right. I mean, I think nobody really sensibly debates whether or not the financial system had to be saved and we had to do everything we could to avoid a second Great Depression.
And I don't think there is any question that, on a bipartisan basis, credit deserves to be spread far and wide and that Secretary Paulson and President Bush, President Obama and his team and Michael Barr in particular worked very hard to make that happen.
The real debate is over the conditions under which the bailouts were done and then, importantly, the incentives that they created and the implications of those. So, it's true -- it's good news that AIG didn't collapse and bring down the entire financial system, along with Goldman, Merrill Lynch and a bunch of the others.
But when you give that many -- that much money and you bail them out with virtually no strings at all, you have rewarded egregiously bad behavior. And when you reward really bad behavior, you usually get more of it.
So it's true AIG has now, depending upon -- if you don't quibble with the accounting -- and some people do -- but even if you accept the accounting, getting some money -- getting all the money back is good. Getting more money back than you put in is good.
There's two key points. One is, that doesn't mean you made a profit. Frankly, the reality is, it is on a risk-adjusted basis. And the American people were at grave risk. But, secondly, you look, AIG is back in business. They have still not designated systemically significant.
They are still engaging in a lot of the activities they used to, as are the rest of Wall Street. So the potential for the next crisis and the implications of that are still quite grave.
RAY SUAREZ: How about that, Professor Barr? Can they just get in the same kind of trouble and come back to the federal government, in other words, the taxpayer?
MICHAEL BARR: No, they can't anymore.
I mean, the reason that the president came in and said, just as we are dealing with bringing our economy back and recreating financial stability, we have to be equally vigilant about creating a system for the future that makes the financial system more resilient, that protects taxpayers, that helps the economy.
And that's what the president stood for, worked on and fought to enact in the Wall Street reform act. We have a new Consumer Financial Protection Bureau to police against abusive practices. We have new authority for the government to wind down a firm like Lehman Brothers or AIG, if they manage themselves into trouble in the future, without harming the taxpayer, protecting the economy.
And we have a new set of rules in the game on derivatives to police that market and bring it into the daylight, new sets of oversight for firms like Lehman Brothers and AIG that weren't subject to the kind of supervision and regulation and capital requirements they wouldn't -- that they should have been.
And we have new capital rules being put in place globally that are much, much tougher than before. There will be bigger cushions in the system.
So, in my judgment, the financial system going forward is more resilient. Our taxpayers are more protected. Our economy is more protected.
And we have a system that is designed to get at directly the problems that led to the last financial crisis, the laxity in regulation, the leverage and the opacity in the system. So I think we're in a very, very different place, and it is because of the president's leadership.
RAY SUAREZ: Dennis Kelleher, does that list of safeguards not qualify as protection from the kind of thing you were talking about?
DENNIS KELLEHER: Well, if they were in place, they would.
Now, the problem is that Wall Street primarily and the biggest too-big-to-fail banks are even bigger now and pose even greater risks.
And the Wall Street reform act that he's referring to has got all the tools that we believe -- and my organization, Better Markets, are in the trenches every day fighting to implement Dodd-Frank and have very strong financial rules.
But we are up against an army of lobbyists and lawyers that Wall Street and all these banks that were saved are deploying to kill or gut financial reform.
Secretary Geithner in the Treasury Department, Chairman Bernanke and others in the other regulatory agencies have been doing the best they can in many respects. But in other respects, they have not.
You can't withstand the onslaught of unlimited resources that Wall Street has thrown against these agencies.
So, the real problem we have right now is we have moral hazard higher than it has ever been. We don't have an implicit government guarantee of these activities. We have an explicit government guarantee.
Everybody knows today that a too-big-to-fail firm will not be allowed to fail, that the American taxpayers will be put on the line to save them again.
There may be a time in the future when the regulations from Dodd-Frank are in place and will get applied, and they may work. But it's going to -- it's still a massive struggle to make that happen in light of the fight that Wall Street is putting up.
RAY SUAREZ: Professor Barr how do you reply directly to that charge, that if one of these firms -- and since banks have been allowed to merge in the last several years and become even larger, that, if they go down, they are so intertwined with the rest of the system, they will bring a lot of wreckage down with them and there is nothing to stop it?
MICHAEL BARR: Well, the Dodd-Frank act sets in place a framework for that.
There are actually rules that have been put in place for resolution authority, the technical term for the ability to wind down these firms. So if a firm got itself into trouble today, there is the authority to bring that firm into resolution, to wipe out the shareholders, to haircut the creditors, to fire the managers.
It's just a fundamentally different set of rules that were in place before the financial crisis. So I do think the tools are there.
Now, I agree with your guest that there is enormous lobbying pressure against the federal agencies right now trying to slow down or stymie financial reform.
And those need to be fought back.
There is enormous pressure in the Congress. There are Republicans in the Congress in particular who have sought to gut the enforcement agencies responsible for overseeing the derivatives markets. There is a candidate for president who has argued that we should repeal the Dodd-Frank act.
So I do think there is enormous risk that we could go back to the way that we were now if we don't stick with the path of reform.
And so it in incumbent, I think, in this election and in the course of the regulatory environment for every American to pay attention to the risk that we slip back to the way things were before.
It was enormously costly to the country. It cost millions of Americans their jobs. It shuttered American businesses. It really crushed the economy, and we just can't afford as a country to go back to that.
RAY SUAREZ: Well, the federal government still owns major positions in a lot of firms. We're not done yet, so we will continue this conversation.
DENNIS KELLEHER: Thank you.
MICHAEL BARR: Thank you.