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TRANSCRIPT: MSNBC'S RACHEL MADDOW INTERVIEWS TREASURY SECRETARY TIM GEITHNER

MSNBC anchor Rachel Maddow interviewed Secretary of the Treasury Tim Geithner this afternoon, discussing the need for financial regulation, the proposed Consumer Financial Protection Agency and Geithner's previous actions as president of the New York Federal Reserve at the start of the financial crisis. Transcript of tonight's interview is below; it will air in its entirety tonight on "The Rachel Maddow Show," 9-10 p.m. ET on MSNBC. If used must credit MSNBC's "The Rachel Maddow Show."

RACHEL MADDOW, MSNBC ANCHOR: Mr. Secretary, thanks very much for your time. Appreciate it. Today, on Capital Hill, you said, essentially, that the rest of the year looked tough, in terms of unemployment, and then you urged lawmakers to pass the new Wall Street rules, financial regulation. Is there a connection between those two? Are those two items connected?

TIMOTHY GEITHNER, TREASURY SECRETARY: For the economy right now, the most important thing we do is to pass additional targeted support for growth, for expansion, for job creation. The president has proposed a series of measure to promote small business, more money for state and local government, so they can make sure that teachers and firemen can stay on the job, support for infrastructure, energy retrofit.

We think there's a very good case for a series of additional targeted measures to help strengthen the expansion, make sure it turns into more jobs more quickly.

But the financial reform, in general, is very, very important. You've seen the devastating crisis, just deeply unfair, brutally unfair, hurt millions of American families, hundreds of thousands of small businesses. We all feel a deep sense of responsibility and obligation to make sure we are fixing what was broken in this financial system, and put in place kind of tough reforms, provide better protections for consumers, and make sure we don't have a financial system that can take these kinds of risks again.

MADDOW: I want to talk policy, but we also have to talk some politics, in terms of what's possible for making new rules. After health reform, a lot of Democrats in the Congress are looking forward to being able to run on Wall Street regulation, these new rules for Wall Street. With Republicans essentially signaling they're mostly going to oppose them, it essentially gives Democrats the opportunity to say we're running against Wall Street, which I think a lot of them are salivating at the chance to do that.

Your political image does not help them do that, because you are seen as a Wall Street guy. Do you think that image is unfair?

GEITHNER: First, I'm not a Wall Street -- you know this.

MADDOW: I know you're not a Wall Street guy, but everybody says you are.

People think you worked for Goldman Sachs. They think you were a banker.

GEITHNER: I never worked on Wall Street, just so your audience knows.

I've spent -- every job I've had in life, since I came out of graduate school, in affect, has been working as a public servant in government.

I've never worked for a bank, never run a bank, never worked for a hedge fund.

But I sat at the New York Fed, sat at the Treasury, and I watched what financial crises do to the innocent victims across the country. I feel a huge sense of personal responsibility and obligation to make sure we are putting in place the kind of reforms we need to a create a more, stable, safer, more fair system in the future. I am working very hard to make sure we achieve that.

I think this is a just war. I think it's a necessary and important thing to do. I think we have a deep obligation to get them to do this. The president has put out a sweeping package of reforms, strongest reforms we've contemplated as a country since the Great Depression, necessarily so because this was so damaging.

The House passed a bill very close to what the president proposed.

Senator Dodd has put out a very good, strong bill. I do not think this is a Democratic or Republican thing. This is an American thing. I think you're going to see -- when this gets to the Senate floor, I think you're going to see a lot of support for this, because I think it's very hard for people in Washington to look their constituents in the eye and say, we've just had the worst financial crisis in generations, but we couldn't find the will as a country to reform the rules of the game.

I don't -- I believe -- I'm more confidant in this country that we're going to see people, in the end, decide they want to be part of reform, not part of resisting reform.

MADDOW: I think you are right, on one condition. That is that if people see these reforms and the actions of this administration, and your actions in particular, as being standing up for the American people against the predation of Wall Street and the banks.

GEITHNER: Again, the great thing about this country is they can look at what we propose. They can at what the president proposed. They can see those things, and they can judge for themselves whether they look tough enough, whether they look fair enough, whether they think we got the balance right.

And this -- we've got a very tough, strong package of reforms.

MADDOW: Why is the Consumer Financial Protection Agency inside the Fed?

Why not as a stand alone agency?

GEITHNER: Our view is it should be a stand alone agency. We think it should be an independent agency. And what we proposed met that basic test. The key thing is that it be -- have the resources it needs to do its job, have the authority to write rules that apply to everybody, not just to banks, but to pay day lenders, to mortgage brokers, everybody that's in the business of providing credit to a consumer. And we wanted to have the authority enforce those rules across the system.

(CROSS TALK)

GEITHNER: What happened -- we got into this mess because we allowed this country get to the point where there were a set of rules -- they weren't tough enough, but they existed. But they really were enforced on banks.

And, over time, what happened is a whole industry of other people could come in and provide credit to consumers with, effectively, no constraints, no protection.

It's an outrageous failure of government. And the centerpiece of our reform is to make sure that never happens again. There's a clean set of rules, tougher rules for consumer. And they're enforced fairly and evenly across the --

MADDOW: What about this threshold, though, that institutions smaller than 10 billion dollars are not going to be subject to the same kind of rules as these larger institutions? The more I look at pay day lenders, the more disgusted I get. I don't think there's any reason to say they're like loan sharks. I think they are loan sharks.

GEITHNER: I think it's much worse than you think. To say it's much worse than you think, in the sense that, again, across our economy, you had people that did just terrible predation, terribly abusive things, and they were left outside any effective set of constraints. So we have to change.

Again, the critical test is rules that apply to everybody, enforced, with people who know what they're doing.

MADDOW: Then what's with the 10 billion dollar threshold, that institutions smaller than that aren't going to be subject to the same rules that these larger institutions are.

GEITHNER: I can only tell you what the president proposed. What the president proposed is a very strong package of reforms and enforcement.

As this bill has made its way through the Congress, in an effort to find the number of votes to make it pass, people have made some concessions.

And, again, the test we're going to use, the president's going to use, is does it have strong, independent authority to write rules and enforce them, not just on banks, not just on large banks, but on the non-bank consumer finance companies, pay day lenders, check cashers, mortgage servicers, mortgage brokers, that were the centerpiece -- the center of all the stuff that happened that cost so much damage.

Our test should be -- and this should be the test of the American people

-- they should watch very carefully as these bills move through the Congress, because you're going to see a lot of efforts to weaken them further. You're going to see a lot of amendments that protect individual types of consumer finance industries, to protect the banks from supervision, from oversight, from enforcement. And we should all resist that.

MADDOW: That's -- there's an important precedent here, which is what we're going through with health reform. We passed the Consumer Financial Protection Agency as a nation, through the House, without zero Republican votes. It's in the Senate right now. Senator Dodd has introduced something that's a little bit different. But Republicans are not promising any votes. I know you say they might be there.

But what's happened, like with health reform, is Democrats made concessions, traded away, made the rules a little softer than what you and the administration proposed. And in the health reform debate, the administration went along with those concessions. We ended up with something that's a lot softer, probably a lot less effective as a policy than it would have been had we not been seeking those votes. We didn't get those votes anyway.

So do you make the same mistake again? Do you trade away this 10 billion dollar threshold for regulation? Do you trade away the independence, the literal independence of the CFPA, in order to chase these phantom Republican votes? Or do you push further?

GEITHNER: We're going to try to get a very strong bill. I'm very confidant we're going to get a strong bill. We're spending a lot of time making sure that we're listening to consumer agencies, advocates across the country, so that we have their input on what makes a credible test of a strong bill. The president's very committed to this. The American people are with us on this. I think we should have a strong hand.

Senator Dodd's trying to balance -- he's got a complicated job. You know, he's trying to get a bill that's got enough votes to pass. Of course, we want to give him as much support. You heard the president say yesterday that we're going to fight against efforts to weaken this, and we're going to take every opportunity to strengthen it as it goes through the process.

* * *

MADDOW: From 2003 to 2008, you were at the head of the New York Fed. That was a time on Wall Street of untrammeled, defying common sense both risk taking and deceit that almost destroyed the American economy. I think some credit due to you and the administration for saving the economy and not having that happen, having this not be a Great Depression.

But where were you when it was happening in the first place? What do you wish you had done differently?

GEITHNER: Excellent question. Important to start with the basic mistake, and it's like in consumer protection. What we did as a country -- it was a tragic failure of government -- is we left vast swathes of the financial system with no oversight. OK?

So pick your example, Fannie, Freddie, the major investment banks, Lehman Brothers, Bear Stearns, Countrywide, Indy Mac -- you can take -- AIG, any example you want. You can take derivatives, any example you want. And we left vast swathes of the financial system without anybody in charge and accountable for overseeing those things.

Now the Fed had a very important responsibility, as the supervisor of the nation's largest banks. And the Fed did a very good job -- the New York Fed did a very good job in trying to move early to try to bring a bit of order to derivatives markets, to try to make sure we were inducing these firms, the biggest firms across the world, to make sure they were building stronger capital cushions against risk.

But we did not do enough, I'm the first to admit. I know a lot about what our mistakes were. I would be the first to admit we could have done a better job in this case. We were very aggressive in New York. We made a lot of difference in New York. But we could have gone further.

But the big mistake we made as a country was to allow a system to develop where you could get around those rules, build up a huge business with a huge amount of leverage, with no oversight, no transparency.

That's what brought the system to the edge of its knees.

If we hadn't made that mistake, that huge mistake, not moved early to put these kind of sweeping reforms across the system, this would have been a much more manageable crisis, much less damaging to the American people.

So you're right to focus on the Fed. But the Fed was the strongest, the best, most able of those regulators, in the United States and around the world. And the mistake the country made was to not provide broader authority to constrain risk taking across the entire system.

If you only do it on one part of the system, what happens is the risk and the assets just moves. It just moves. That's what happens over time.

MADDOW: To a more lawless neighborhood.

GEITHNER: So you had a whole parallel banking system merge, outside banks, almost as large as what was done with banks, funded in a very vulnerable way, very vulnerable to runs, with none of the protections and constraints we built after the Great Depression, to constrain that kind of risk taking. That was the big mistake me made.

That was not the Fed's mistake. That was not the Fed's mistake. But it was that mistake that brought the system to the edge of collapse, because in those -- what happened was we faced the modern version of a classic run on the financial system. People were not just starting to take their money out of banks, but they withdrew their money as quick as they could. They came down with forceful, brutal pressure on the rest of the system.

And the government didn't move early enough to try to contain that damage. But that's what we're trying to fix and reform. We're trying to make sure we have as much authority to contain those -- that kind of risk taking, more broadly, early.

MADDOW: That issue of how much authority you have, though, is where I get hung up, and why I'm still concerned about the Fed now, why I'm still concerned about you working at the Fed, frankly.

GEITHNER: Really, I'm happy -- you can go back over my record. I can tell you, with a lot of knowledge, of course, the stuff we were right on early, the stuff where we made a lot of difference early. But I can also tell you -- and I know a lot about this -- where the Fed was behind the curve and late. The best example of that was the Fed did not use its authority to write rules to provide better protection for consumers like in mortgages early.

The chairman of the Fed has said that openly. I agree with that. That's why we proposed to take that authority away from the Fed, and give it to an agency where the people wake up every day, and they think about one thing, which is how to protect consumers.

MADDOW: That is actually getting at the crux of my worry, which is that it's not that just the Fed didn't have the authority to do all the things it did, in some cases. And you see it because the Fed has done some things post-crash, pre-new rules that it could have done before.

And no statutes have changed. It hasn't gotten any new rules. It just decided to exert some things, pressure that it didn't choose to exert before.

That makes me worry about the overall mindset of the Fed. It is one thing to be a supervisory agency of big banks, who you get along well with, and they're your board, and all of those things.

(CROSS TALK)

MADDOW: It's another thing to be a representative of the people against the banks.

GEITHNER: But judge them by their record, OK? The Fed was much tougher on banks than the other supervisors. That's part of what produced Countrywide. Countrywide did not like being subject to the tough regulations of the Fed, and it chose to become a thrift, so it could evade that.

The reason why there's so much risk and leverage built up outside the banking system was because the Fed was reasonably tough, much tougher than banking supervisors in other countries. I'll just give you another example. We messed up a lot of things in this country, and we're living with the cost of that, and we're going to be very aggressive in putting reforms in place.

But I'll just give you an example, in all the major economies around the world, outside the United States, the banking system is dramatically larger as a share of the economy. Their banks are much more concentrated. Far fewer banks command -- dominate the entire industry.

That's because, in those countries, they did not do a good job of constraining risk taking by banks. We were not good enough at it, but the Fed was better than its supervisory peers, much better than they were internationally, not good enough, which is why we want to put in place these reforms.

MADDOW: One of the other things that I think people have started to cotton to now, even those of us who aren't experts on the financial ins and outs of Wall Street, is that the ratings agencies were a disaster. The ratings agencies essentially took a bunch of lead and called it gold. They were the get-away car. I wonder what's going -- I wonder what the future is for the ratings agencies are now, and how much they ought to be essentially paying for what they did.

GEITHNER: Absolutely, the ratings agencies had a terrible record. They missed a huge amount of things. It was a terrible failure of basic judgement. Part of the reform bill does some very important things. It gives the SEC the authority to police conflict of interest, to make sure that their judgement is not being swayed by economics, they're not being paid to, in effect, do more favorable ratings.

And it brings much more transparency to ratings, to what goes into a rating, so people can look at the record a little more easily, and judge where they're going to be off. But you're absolutely right. They made a basic mistake, which is to not take into consideration that house prices might fall, and the value of all these securities may be worth dramatically less.

MADDOW: And their incentives were wrong for them to do that.

GEITHNER: Which is why the conflict of interest thing is so important.

MADDOW: On the issue of the bailouts, why not make help -- why not make rescue contingent on reform? Why not say, OK, AIG, here's your 180 billion dollars, OK? And X firm, here's your X billion dollars; you're not going to give any bonuses for the next five years, at least? You're not going to do any number of other things? And when reform comes around, you're going to be on board?

At that point, you've got maximum leverage. Why not use that leverage at that moment?

GEITHNER: Let me just walk back a little bit. You've been very good on this, but let me walk back and tell you what we did when we came into office. When I came into office, we had -- my predecessor put investments of capital into banks representing, I think -- I don't know

-- 75 percent of the US banking system. And we moved very quickly to force them to raise private money to replace the public investment dollars, so we could get that money back, and use it to meet the many challenges we face as a country still.

So we were very tough, and we moved very quickly, very forcefully. And we've achieved a huge improvement in basic cost of credit, confidence in the system, at a much lower cost than anybody anticipated. And that's a very good thing, because, again, it means we have more resources as a country to meet the many challenges we inherited when we came in.

MADDOW: Although loans still are not at the level anybody would want.

GEITHNER: Absolutely. But if you look at just the cost of borrowing for a municipal government, for a small business, for a family that wants to buy a house, buy a car, put their kids through college, cost of credit has come down very, very dramatically because of what we did.

So we have done a very good job of running a very well managed program that is in the interest of the average American, not just because they care about the cost of credit, but because, again, we face a lot of challenges as a country, and we don't want to see their resources used unnecessarily to benefit a big company.

MADDOW: Understand how mad people are to see the loans not being made and the bonuses being paid.

GEITHNER: People are incredibly angry, and they should be angry still.

Because, again, we had a terrible failure of government in the financial system that caused catastrophic damage to people that were totally responsible, didn't borrow beyond their means, were careful in their basic judgement. And they're suffering because of the mistake a bunch of other people made. People should be angry. We hope that anger turns into more political will in the Congress, frankly, to legislate a tough set of reforms.

You know, the president has proposed that we put a 90 billion dollar fee on banks over ten years, so we can say to the American people that they won't be exposed to a penny of loss from all the terrible things we had to do to step in and rescue this financial system, which was burning.

So, of course, they're angry. They should be angry about it. They have a right to be angry. They should be angry until they see -- they have more confidence that the government is actually going to put in place reforms that will fix what is broken, and they see more traction in all the things we're doing to help bring growth back, bring unemployment down.

MADDOW: The bonus issue specifically -- and I know it's not central to the structure of the financial system. But it's absolutely central to how much political will there is to get things done in this administration, even on a host of things that have nothing to do with financial reform.

(CROSS TALK)

GEITHNER: But the bonus thing was important to what caused the crisis, because we -- it was just a crazy system. You could get paid for taking a lot of risk, and not be exposed to any risk of losing that compensation if you end up losing your bank a lot of money. It was just a crazy way to run a financial system.

So it did matter to the crisis. And we think it's very important as part of reforms to change the way these people are compensated. So we've proposed, again, two very simple things.

MADDOW: But you already gave them the rescue money before you proposed the change.

GEITHNER: No, again, we came into office -- judge us by what we did.

MADDOW: Yes.

GEITHNER: OK? My predecessor had to do what he did. He had to put -- it was a panic. We were on the edge of collapse. He had to do the terrible thing of pushing a bunch of capital into the banking system, providing some guarantees. Those emergency actions saved us from a Great Depression. That was necessary.

When we came in, we went in and forced them to replace that money, that public money, with private money as quickly as possible. That is very, very quickly. That is good for us, good for everything you care about, everything you value, because it gives us much more room now to deal with all the challenges we face.

On compensation, though, what we're proposing is a very simple thing, which is that firms have to disclose to the public and allow their share holders to vote on how they're paying their senior executives. Then we're proposing that the supervisors, the people in charge, the police in charge of supervising these institutions, actually enforce a set of standards designed to ensure that these guys have money at risk, that it pays out over time. There's no golden parachutes. They're not insulated from the mistakes they made.

Those things are very powerful reforms. Frankly, there has not been enough - enough progress to it. But it takes the leverage legislation will bring to bring that about.

MADDOW: In terms of the overall politics here, the - sort of the rap that you've got - and I don't - I don't know if it's deserved or underserved, and you can make your case, is that you're a little - you're a little allergic to populism. And maybe that's in part because you feel like just -- as - as - from your position as secretary of the Treasury, it's not appropriate to take that sort of tone from this office. And I'd love to hear your explanation for it.

If, though, people do not believe that this administration and the government in general is on their side against predation from big firms, Wall Street, the result of that is that there's going to be a lot of people elected in November who, if they don't show up with actual pitchforks, probably will have flaming torches. I mean, we're going to get very, very, very populist, very fast, unless this administration takes a more populist tone, and people start to believe it. Because that is the mood of the country.

GEITHNER: I - I got to sell you a different view.

I think people are going to judge me, they're going to judge the president, they're going to judge their elected representative in Washington by what they do to make a difference in the lives of Americans. So we are overwhelmingly focused on trying to make sure that we are acting as quickly and as forcefully as we can to make things better here. And we - this president, he moved with enormous speed and care and force, doing incredibly important, difficult and, in many ways, unpopular things, because they were necessary to save the economy from collapse and to make sure we had an economy that was growing again, creating jobs again.

That's what's going to - what people are going to measure us by. If we don't focus on that every day, then we're going to be in a position where we're going to - where, you know, we're going to leave the economy much weaker, Americans losing even more faith in their government. And that's what guides all the actions we're making.

We're trying to focus on what's going to make the biggest difference as quickly as possible, and things that matter to not just the basic lives of Americans, but their confidence in government again. Because again, this government of the country, failed them terribly on - it - you know, it's not just that - left them in the worst recession in generations, we came into this recession with, you know, frankly an education system that did not do a good job, a fair job of educating our children. We saw a huge rise in inequality over time; the average American didn't see a rise in basic wages, living standards over a long period of time.

You know, we just came into this with really difficult, really bad long-term challenges that governments have to fix. So again, our test, what people should judge us by: what are we trying to achieve and how much are we achieving in terms of making these things basic better. I think that's - that's the essential obligation we all have.

MADDOW: Secretary Timothy Geithner, you're a busy guy. Thank you for your time.

GEITHNER: Nice to see you.

MADDOW: Nice to see you. Thank you.