KATHERINE LANPHER: President Obama has proposed sweeping changes to the regulation of the country's financial system. The powers of the Federal Reserve would grow under his plan, hedge funds and similar private pools of money would have to register with the SEC and there would be a new consumer protection agency. But does this actually address the root causes of our financial crisis? For another view, we’re going to turn now to Eliot Spitzer. He, of course, is the former Attorney General and Governor of the State of New York. You might recall as Attorney General he sued companies like AIG for deception, fraud and boosting the company’s stock price. Thanks for joining us. This plan is being hailed as a big reform, but is it the reform we actually need?

ELIOT SPITZER: Well, it is important, and it is useful and it rationalizes many rules. But I think there is a fundamental misperception that it grants dramatic new powers to entities and that had these entities, whether the Fed, the SEC or any of the other wealth of government agencies had these powers in the past, somehow they could have avoided the crisis. The reality is they had all the power they needed to stop the crisis, they just didn’t use the power.

KATHERINE LANPHER: Hang on a minute, where were those tools that people could’ve used? There’s been a lot of reporting, for instance on the Office of Thrift Supervision, saying that in fact they didn’t have oversight over some of the areas like with the credit security departments.

ELIOT SPITZER: Unfortunately, those reports are wrong. If you look at what, and I hate to point back to the office when I was Attorney General a number of years ago, what we were able to do with a very simple fraud provision in a state law. We were able to delve into the fundamental financial workings of every one of these companies, from AIG to the major banks to the hedge funds on occasion. All you needed was a simple anti-fraud provision in a statute, and the Fed, the SEC, the OCC had all the power they needed to look at these entities and to set credit ratios, capital ratios, liquidity requirements. They just didn’t do it. Now, I don’t say this as though we should somehow be angry at these folks. The new rules are fine. They’re good. They rationalize. Creating a new consumer protection agency is very nice, but again it does not grant new powers, it takes little bits and pieces of authorization that are already there at these entities and puts them in one home. The question is: Where was the Fed when it had the capacity and affirmatively decided not to regulate derivatives? Where was the Fed when it affirmatively looked at all the major banks and let them go to ratios of 25-to-1 in terms of their capital ratios. The question really should be: Have we learned from the crisis? If the answer is we learned and next time we start to see a bubble and escalation of capital ratios, an escalation of leverage compared to what we saw in the past couple years we’ll react, that’s good. But re-arranging the deck chairs doesn’t fundamentally alter the fact that the regulators had the power over the past few years.

KATHERINE LANPHER: You’re asking the question: “Where was the Fed?” What’s your answer to that?

ELIOT SPITZER: I think that they made an affirmative ideological choice not to intervene and we have now, and I remember when I read Alan Greenspan’s autobiography being amazed because here was somebody who was writing in these glowing terms about Ayn Rand and the notion that governments should never intervene in the marketplace, and yet the Fed is the fundamental most important regulator out there. It swamps the capacity of the SEC, and OCC, OTS, all the others. The Fed has the capacity to look at any entity on the street, and say to them, “You have too much debt, you have too much leverage, raise your capital ratios, or you won’t have access to the borrowing we authorize.” This is the process by which it really regulates these entities, and it chose not to do so. Because the ideology of the past 30 years was let the individuals who were selling the credit default swaps and all the other sophisticated instruments, let them figure it out on their own because they will understand when they have too much debt.

KATHERINE LANPHER: Okay. Re-arranging the deck chairs. Tell me how the Spitzer plan would be more than rearranging the deck chairs.

ELIOT SPITZER: I’m not there having crafted a specific alternative plan. I’m not going to pretend that I could, or I would, in 30 seconds on air. The one thing I would say would be put people at the Fed, put people at the SEC, who affirmatively want to regulate. I’ll give you an example: The OCC, an entity that probably only one in a thousand of the listeners of the show have heard about, the Office of the Controller of the Currency, has the capacity to stop the predatory lending and the sale of those sophisticated instruments that actually brought down the banks. When my office, and many other AG’s offices around the country, started investigating the sale of subprime loans, because we said these are bad loans, they’re both discriminatory in the way they’re being marketed, they are debt that we believe is going to be burdensome and that people who borrowed it will not be able to pay it back, and who knows what that does to the financial structure. The OCC didn’t come in and say “Yes, this is an important issue. Let’s take a look at it.” They went to court to stop us from investigating the issue. They said, “You are pre-empted. You can’t ask these questions.” Pre-empted being the sort of technical, jurisdictional, legal argument that a state entity, which I was the state Attorney General, we could not ask questions of federally chartered banks. This may not sound like a terribly important issue, but all the banks in the OCC went to court and they won. The case is now pending the United States Supreme Court. But those are the very loans and debts that metastasized into the products that were then guaranteed by the credit default swaps that exploded and brought down the banks.

KATHERINE LANPHER: This leads to another question. The Obama plan doesn’t really lean or rely on states to act, and yet you would argue that was where you were able to be most effective.

ELIOT SPITZER: I think states are…it’s a whole separate discussion about the interplay between state enforcement and federal enforcement. I think state enforcement can play a very important backstop function. It certainly should not be viewed as the frontline line of defense for improprieties in the marketplace. What we need is an OCC that actually understands its obligation to ask hard questions. A Fed that says, “The leverage ratios of the last several years were simply out of whack.” A Treasury Secretary, and let’s hope that Tim [Geithner] understands this, in the past they haven’t, that derivatives can explode in a way that can be fundamentally hazardous to the financial system. Again, the rules are good. They’re fine. Everybody is now saying “Aha! New oversight over the rating agencies.” The rating agencies, of course, slapped triple-A ratings on all the securitized debt that had within it these subprime loans that were not going to be paid back.

FEMI OKE: Mr. Spitzer, this is Femi Oke listening in to you talking to Katherine this morning. Thank you for being with us this morning. You have so much good information at your fingertips, you’re so knowledgeable, how frustrating is it that you’re not really in the mix right now, and not able to put your expertise to work?

ELIOT SPITZER: There are lots of people out there who know it much more deeply than I, and they are working down at the Fed to put this together. These are good folks. And there’s lots of knowledge out there. I’m now pursuing different options, and so be it. That’s the nature of life.

KATHERINE LANPHER: According to a poll in the New York Times, only 21 percent of New York voters say they have a favorable view of Governor Paterson, and you’re polling at 26 percent. Given that you’re the one who left the office in some disgrace, what do you make of those numbers?

ELIOT SPITZER: I was in politics long enough to know that letting poll numbers guide one’s image is a very dangerous and hazardous thing to do. Poll numbers go up and down. You can even see in today’s papers that President Obama’s numbers are beginning to slip in some areas. When you make tough decisions your numbers go down, and that is the nature of leadership. I think that I had a great time and was thrilled to spend 8 years as attorney general, a shorter period of time, obviously, as governor. I look back at that fondly and now move forward. You just don’t look back wistfully or look forward and say, “I wish I were more productive.”

KATHERINE LANPHER: Speaking of looking forward, we’ve been asking everyone this Takeaway question today: What is the economic indicator that you look at to tell you what’s going on with the economy. What’s yours?

ELIOT SPITZER: I’m going to give you a real life, New York, day-to-day example of how I will know when the recession is over. When you can walk out into the street in the rain in rush hour and get a cab, we’re in a very serious recession. And the moment that I can’t get a cab anymore, I will feel the economy is picking up. Right now, it’s raining this morning, but I have no doubt I can get 10 cabs in 30 seconds. That’s a bad sign for the economy.

KATHERINE LANPHER: You must be in a different corner of New York than we are. Quickly, one last question, and that is looking ahead at this financial reform that the President has suggested. What part of it do you think is actually going to happen?

ELIOT SPITZER: I think most of it will happen, because Congress feels a remarkable obligation to do something. And the beauty of passing a new law, and the reason legislators like to pass new laws and presidents like to sign them, is it creates the impression that you’ve done something, that you’ve addressed the problem. And yet, as I’m arguing, the new law will not fundamentally address the problem that led to this crisis, which was the failure of regulators to use existing power. So yes, we will get a new law that captures these ideas, and they’re fine ideas, there’s nothing wrong with them, it’s just that they don’t go to the heart of what led to the crisis in the first place.

KATHERINE LANPHER: Eliot Spitzer, thank you so much for joining us.

ELIOT SPITZER: My pleasure.