This is a rush transcript from "Your World With Neil Cavuto," April 21, 2010. This copy may not be in its final form and may be updated.
NEIL CAVUTO, ANCHOR: All right. Now to Washington, where Democrats are promising to bring sweeping financial reform bill to the Senate floor, potentially in a matter of hours. The bill could come up for a vote this week as they kick this off. Democrats need 60 votes to block a GOP filibuster. They have got 59 right now.
My next guest supported the House version. He’s a Washington Democrat, Congressman Adam Smith.
Congressman, good to have you.
REP. ADAM SMITH D-WASH.: Thanks, Neil. Good to be on. Appreciate the chance.
CAVUTO: This is quite a labyrinth you’re going through this, but do you think in a weird way, Congressman, the Goldman saga and the SEC crackdown helped you and helped the cause of reform, because now even Republicans are saying, "Hey, some of us better go along"?
SMITH: I think what helped the cause of reform more than anything was the 2008 meltdown and what came out of that, and these big, huge markets and money, derivatives, other funds, that were unregulated, that enabled firms like AIG and others to make these enormous bets that they did not have the money to cover, and at the same time AIG had debts to a lot of other people, and the economy became dependent upon that.
Now, I agree, actually, with the conversation, I listened to a little bit of what you had to say with Mr. Trump. You know, we need to support capitalism, we need to support economic growth. But I think anyone who looks...
CAVUTO: But do you think you’re sending a message to the contrary that — maybe that isn’t your intention...
SMITH: No. I think...
CAVUTO: ... but I talk to a lot of these guys and they feel that the sheriff is out and if they even bet against something or so much as short a stock or bet on a global panic and then buy gold or commodities, they’re going to have their fannies rolled to Attica.
SMITH: That’s not what was going on here by any stretch of the imagination. What we are trying to say is that we cannot have trillions and trillions of dollars completely and totally unregulated that puts our entire economy under the gun.
Now, you’re right, we have to strike the right balance. But any objective observer looking at what happened in the buildup to the 2008 collapse would say that we are out of balance the other way, out of balance in allowing too much unregulated capital.
And this undermines the whole system. You talk about the credit, you know, the credit default swaps, the problems with mortgage-backed securities. You had a lot of financial institutions who initially said, "We’re not going to do that. It’s too risky, these Alt-A loans, these sub-prime loans."
CAVUTO: And then they all jumped in. You’re right about that. But, you know, that’s...
SMITH: And do you know why — do you know why they jumped in, Neil? You know why they jumped in?
CAVUTO: Well, it was easy money, but...
SMITH: Because everybody else was making so much money, they felt like they had to, to compete.
CAVUTO: But you know why they also jumped in, Congressman, why they also jumped in, we’re just casting blame around here, you know...
CAVUTO: ... there was a push in the late ‘90s and the early 2000s, throughout the Bush years as well, that home ownership was almost like a birthright, like that everybody had a right, and that soon we were giving mortgages to people the only qualification was, you have a pulse, we’re going to give you a mortgage.
CAVUTO: So now I’m not saying that’s forgivable, I’m just saying that then these institutions, money-making centers that they all are, sort of gunned the system and said, "All right. Well, you want everybody in? We’re going to come up with a lot of things to take advantage of that."
So didn’t it really start in Washington?
SMITH: Well, I think it — those policies certainly contributed to those Alt-A, those sub-prime loans, that contributed to it. But what really poured an unbelievable amount of gasoline on the fire was all of the profits that could be made from inflating the housing bubble. That’s what did it.
And that’s why, when you look at the reform bill that we’re talking about, we need regulation over the system.
Now, you’re right, we got to strike a balance. But I don’t see how anyone can look at the system and say everything’s fine, we shouldn’t regulate it, we should just let them go forward. We’ve got to strike a balance.
CAVUTO: Well, you know what I would worry about? You’re a good guy, Congressman, you’re working very hard to try to find the right balance...
CAVUTO: ... and I commend you of that. But what I have always discovered covering Washington and Wall Street all these decades is that the cure tends to be ultimately worse than the disease. And you build a new mousetrap and in the end you get smarter mice. And you get more police to police this, but they’re just at dumb as the original cast of police who missed this. Promise me that won’t happen.
SMITH: Well, I can’t promise you that there won’t be aspects of that. That is clearly a risk.
But in this case you have such a clearly definable problem: the trillions and trillions of dollars in the derivative market that has worked its way into investment banks, worked its way into insurance companies, that is not regulated. The AIG problem that is very simple to apply the same rules that now apply to banks and others.
You can make loans, you can do all this other stuff, you know, but you have to make sure that you have the capital to back that up. And if you don’t, we’re not going to let you make $10 trillion, $20 trillion bets that have the entire economy at risk.
CAVUTO: So — and if they do — OK, then, real quickly, we’re pushing this, I apologize, but if they do and they get in deep doo-doo, next time would you just let them go, there is no such thing as too big to fail, just goodbye?
SMITH: Well, no. I think what we’re trying to do is we’re going to regulate them in such a way that they don’t get too big to fail.
CAVUTO: Congressman, it’s going to happen again, I’m telling you, buddy, it’s going to happen again, and then you’re going to face that come to you know what moment when you’re going to have to decide, do I let this turkey stay or go?
SMITH: It is far, far more likely to happen again if we allow it to continue to be completely unregulated.
CAVUTO: Got you. Sir, a real pleasure. Thank you very much.
SMITH: Thanks, Neil. Appreciate the chance.