How can we avoid having to bail out large firms in the future? Eliot Spitzer gives an emphatic answer.

Question: How can we credibly commit to not bailing out any more large firms?

Eliot Spitzer: Only by making them smaller. In other words, the “too big to fail” problem is at the heart of this and the institutions that got too big to fail that were overleveraged, that had a federal guarantee could again, absorb risk in their investment portfolio with the knowledge that if things went bad, they weren’t going to pay the price, taxpayers would. So, at the point of crisis, we couldn’t let the banks all fail because then we would have had a depression. So, there was an imperative to get cash into the system to ensure the solvency of the banks. The question is, what did we do in return? What did we get back from them? And that’s where Geithner and Summers failed. They didn’t ask for anything back. It was at that point we should have said. The nature of your investment portfolio has to change. What you do with the money has to change. And the size of the institution has to be limited. And so, that is the reform that we’re talking about.

You know, a lot of screaming and shouting about passing bills, giving enforcers more power. Enforcers didn’t need more power; they just needed to use the power they already had. And I think that is evident, not only from the cases that we made when I was Attorney General, but what they have been able to do over the past year. There hasn’t been a new law passed giving the Fed and other institutions more power. They finally woke up to the fact that they needed to use it. So, hopefully that is where we’re headed.

Recorded January 21, 2010
Interviewed by Austin Allen