Jennifer Dauble
Wednesday, 17 Jun 2009 | 2:23 PM ET

MARIA BARTIROMO, host: Larry, can you talk to us about the new regulatory reform, please? Tell us how it impacts banks, investment banks and the shadow banking industry.

Mr. LAWRENCE SUMMERS: Many changes. Institutions aren't going to be able to play one regulator off against another regulator the way they have in the past. Big institutions are going to be regulated on a comprehensive basis in a way that they haven't been in the past. There's going to be a system so that if an institution gets in trouble, it can be resolved, whatever size or type of financial institution it is. That's something--it's not a tool regulators have had before. Institutions are going to be regulated in terms of their consumer function by a separate agency that's going to be focused on the interests of consumers. Those are some of the major changes.

And above all, what this is going to mean is more capital. You know, Archimedes said that if you give someone a long enough lever, they can move the Earth. We've proven in the last couple of years that with enough leverage, people can lose themselves and their clients any amount of money. And if this financial regulatory reform works, we're going to have less leverage and more capital in the system and that's ultimately going to mean more stability, it's going to be mean a healthier, less bubble-driven prosperity.

BARTIROMO: Some people might say isn't this what the Fed has been doing? Why is this different than what the Fed has been doing for the last 70 years?

Mr. SUMMERS: You know, if you look, a number of the institutions that got in the most serious trouble, Countrywide, Washington Mutual, had regulatory relationships with the Fed and flipped their charters to escape the kind of regulatory regulation that the Fed provided. That's not going to be possible anymore under this legislation. The Fed's had regulatory authority, but if you look at a large institution, a Citigroup, for example, it's had to defer to other regulators with respect to the bank, with respect to the broker-dealer. Those are the places where most of the problems were. There isn't going to be that forced deference, and so there's going to be a much higher degree of accountability then we've had in the past. So this represents, I think, an important change in US regulatory practice. It's one that will bring it more in line with international practice where there is a holistic regulator with responsibility for the systemic risk posed by institutions on an overall basis. Our system where someone's got the trunk and somebody else has the leg of the elephant hasn't worked so well, and so by providing for a more comprehensive responsibility in conjunction with other regulators, I think we're going to contribute to stability.

BARTIROMO: So which agency runs this then? Is it the Fed having more power? The SEC? Who exactly is the overseer?

Mr. SUMMERS: You know, Maria, what's much more important is what happens to financial practice, what happens to leverage, what happens to risk taking, what happens to market practices and what happens to organization charts in Washington. This isn't something that's got winners and losers. It's a reorganization. The Fed, for example, is going to lose its responsibilities in the consumer areas under this plan. The Fed's going to have to get more approvals from the Treasury secretary when it engages in certain kinds of lending activities than it has in the past, but it is going to have more authority, vis-a-vis, the overall institution and vis-a-vis other institutions that are involved in the--other regulatory bodies that are involved in regulating a major financial institution. So I think if you look at most of the agencies, they're going to gain something, they're going to lose something, they're going to have to cooperate more.

But what's really important is not how it looks from the perspective of the agencies, but how it looks from the prospective of the financial institutions. And it's going to be harder to find the crevices and the gaps when there's no regulation. It's going to be harder to play one regulator off against another. There's going to be more market discipline because there's going to be the possibility of resolution, and all of that should make for greater prudence in the future than we've seen in the past.

BARTIROMO: So there's not a turf war going on as far as who's in charge?

Mr. SUMMERS: People will always argue, but that's not what's really most important here. What's most important here is that we're systemically going to be able to increase capital and reduce leverage. What's most important here is that we're going to take an overall view of systemic risk. What's most important here is that you're going to have the largest institutions looked at in a comprehensive way. Those things should contribute to greater financial stability in the future.

BARTIROMO: Well, what about the international look at this? I mean, do you need one overseer that is in step with other economies? I mean, how do you do that when all of these institutions or most of them are global?

Mr. SUMMERS: Well, with respect to US institutions, we're going to continue to take responsibility for those institutions. There are a whole set of international fora in which US authorities will work with their foreign counterparts to harmonize rules. One of the real problems has been that too much of the energy in regulatory discussions has been around winning a race to the bottom, trying to deregulate faster than other people do so you're able to attract business, rather than trying to work cooperatively internationally to raise standards, to set higher standards and to promote more stability. And I think if you look at the focus of international cooperation over the last six months coming out of what the president at the G-20 meeting in London, looking towards the next G-20 meeting in Pittsburgh in September this fall, I think what you're seeing is much more emphasis on collective efforts to raise standards and ultimately that's going to mean a healthier financial system and healthier economy for everybody.

BARTIROMO: What about the ratings agencies? A lot of people wonder if they're going to be regulated.

Mr. SUMMERS: I think there are some practices there that are going to be adjusted. You always worry about any situation where somebody's paying the person who's evaluating them. So there're going to be some adjustments made there.

BARTIROMO: Let me--let me ask you about those adjustments. Will we see new regulatory reform for the ratings agencies?

Mr. SUMMERS: I think you will see some important regulatory reforms and we'll see just how they evolve in the course of the legislative debate.

BARTIROMO: Larry, let me switch gears and ask you about tax policy. Right now a lot of people are unnerved about new taxation on international profits for American companies. Where does that stand?

Mr. SUMMERS: We've believed for a long time that we're going to have to take a comprehensive look at the corporate tax code, what it means for job creation in the United States, what it means for revenue at a time where we have a major deficit. And the president's proposals are one part of what we envision will be a pretty comprehensive look with a focus on all the aspects. I think most people who've looked at the international tax system have seen how much profits are located in jurisdictions where there's a very low tax rate, but where the economies are small, so there can't be that much actual economic activity. And that's got to be something that we view with concern and want to take a serious look at. That's what the president's proposals are directed at, but we very much want to work with others to make sure that we have a spare, as pro-American a tax system for corporations as we possibly can and it'll be looked at in the context of overall tax--corporate tax reform, I'm sure.

BARTIROMO: Have you been hearing a lot about this from business owners and CEOs of multinational businesses?

Mr. SUMMERS: Oh, sure. There are concerns that they've expressed. We've also heard concerns from many businesses who recognize that the kinds of--some of the kinds of things we want to do in terms of cracking down on tax havens are right and important, that people feel that they're doing the right thing, but they're put at a competitive disadvantage by others who aren't. And so they think it's important for us to establish rules so that you won't be able to get ahead by relocating profits to tax havens or engaging in other practices of that kind, and we want to be responsive to that concern.

BARTIROMO: We all know that we can't really put a dent in the deficit just by taxes. The CBO predicts that the deficit will hit $1.43 trillion in fiscal 2010. What programs would you recommend cutting in terms of spending?

Mr. SUMMERS: If you look at the federal budget, the really important issue is not the way it expands during a recession, which is important for getting the economy out of the recession. That's why the stimulus bill that the president passed has already been important in bringing back a measure of confidence in the economy. The really important issue is the long run, Maria, and if you look at the projections for the budget in the long run, it all comes down to health care. Health care is overwhelmingly the most important factor driving the federal budget and we've got to get health care costs under control. And that's what the president has emphasized as he's talked about the whole health insurance issue, whether it's questions of preventive medicine, whether it's reimbursement practices, whether it's issues around defensive medicine and excessive prescriptions, excessive tests, whether it's cost effectiveness in only doing things that are cost effective and not doing procedures which are risky and contribute to the tens of thousands of deaths caused by medical errors while at the same time bloating people's bills.

These are all areas that we've got to go after if we're going to get health care costs under control and I think what the analysis we've done has shown is that if we can even change the growth rate by a limited amount, 1 or 1 1/2 percent a year, less than many corporations have achieved with their savings programs, we can make a huge dent in the prospective federal deficit. So that's probably the most important issue on the spending side of the budget.

BARTIROMO: Is that--is it fair to say you have to spend more, though, in order to cut into the deficit over the near term?

Mr. SUMMERS: No. I don't think so. No, I don't think it is fair. I think over the--I think over time you can actually, by emphasizing changing reimbursement, by emphasizing cost effective--cost effectiveness, you can actually slow the growth in spending. And I expect well within the budget window you'll start to see some important savings materialize from the measures that the president's proposing.

BARTIROMO: Larry, final question here. A lot of people looking toward Bernanke's term coming to an end. Do you want that job? The buzz is that you'd like to be chairman of the Fed.

Mr. SUMMERS: I am very focused on working with the president as head of the National Economic Council and that is my only focus. We've got a huge agenda before us with the financial regulatory issues that we've been discussing, issues around health care, issues around assuring that this recovery is as rapid as possible, issues around energy and that's where my focus is.

BARTIROMO: Would it be appropriate for someone from the White House to go to the Fed?

Mr. SUMMERS: Maria, I'm focused on that and I learned a long time ago when I was Treasury secretary that whenever anybody asked any kind of question about the Fed, I noted the Fed's independence. I do the same thing even more when I'm in the White House.

BARTIROMO: Would you like to add anything else?

Mr. SUMMERS: Good to be with you.

BARTIROMO: And to you. Thanks so much, Larry.

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