This is a rush transcript of "Special Report With Bret Baier" from March 26, 2009. This copy may not be in its final form and may be updated.


TREASURY SECRETARY TIMOTHY GEITHNER: U.S. law left regulators without good op tions for managing the failure of systemically important, large, complex financial institutions. To address this will require comprehensive reform, not modest repairs at the margin, but new rules of the game.

REP. SCOTT GARRETT, R-N.J.: The entities that are subject to this authority were seen to be too big to fail. Without clear signals indicating what the consequences are for the creditors and the counterparties, we could really end up doing a heck of a lot more harm than good.


BRET BAIER, HOST: More testimony on Capitol Hill today. And today the treasury secretary talking about an unprecedented expansion of government control and oversight over the U.S. financial system, as he laid out the administration's plan for reform.

Let's bring in our panel to talk about this: Mort Kondracke, executive editor of Roll Call, Nina Easton, Washington bureau chief of Fortune magazine, and Byron York of The Washington Examiner.

Byron, first, your thoughts on this rollout and the pros and cons?

BYRON YORK, FOX NEWS CONTRIBUTOR: Well, we already have really extensive regulation of the economy. We have the SEC. We have the FDIC. We have OTS, CFTC. We have all these agencies that do that.

And I think expanding it to cover some things like, sale of hedge funds — excuse me — sale of credit default swaps, things like that, it's going to happen.

But the thing that struck me about the proposal was how wide-reaching it was, so that they wanted to do things like go after hedge funds, which are really not the big villains in this economic collapse, go after economic compensation, gives you the idea that they had kind of a preexisting agenda to change the things they wanted to change beyond the narrow actions that are needed to fix the problem.

BAIER: Nina?

NINA EASTON, WASHINGTON BUREAU CHIEF, FORTUNE MAGAZINE: That's the thing. There is increased oversight, which I think most people think we need given the near global economic collapse of the past year, that you do need some more oversight of credit default swaps and some more risky operations. Fine, that's oversight.

But this Geithner proposal, when you look at the details — as you know, I was supportive about this expansion of oversight — but you look into the details, and this gets into control, not oversight. They are talking about controlling executive pay, controlling — and going beyond even setting capital requirements, which I think are good —

BAIER: These are for firms that they deem as systemic risks.

EASTON: Systemic risk firms. And they already regulate banks. These are for financial firms that would be a potential risk to the economy.

But to go in there and start setting up compensation standards, to start determining whether the company is operating in the long-term interests of the company as opposed to short-term interests, this is controlling these companies.

So I think it really moves into extremely dangerous territory.


And here is what he said. In addition, regulators must issue standards for executive compensation practices across all financial firms.

Those guidelines should encourage prudent risk taking, focus on long-term performance of the firm rather than short term profits, and should not otherwise create incentives that overwhelm risk management frameworks.

That is really micromanagement. The next thing you know, the treasury secretary will be approving expense account receipts for all these firms.

Look, grave, grave damage has been done to the national economy because of under-regulation and people not paying attention and financial entities being able to play one regulatory body off against another.

But overregulation, on the other hand, will stifle the kind of enterprise and entrepreneurship that managed to finance the creation of something like 44 million jobs over the last 25 years, vastly more than the Europeans ever could create.

BAIER: Is there a pro here?


KONDRACKE: Yes, there is a pro here. There is a pro. There is definitely a pro to this regulation.

Look, these credit default swaps and the other derivatives should have been regulated a long time ago.

BAIER: But you're saying there is scary stuff in here?


EASTON: It goes way too far.

YORK: Two things. I mean, the government determines what is a systemically important business. And they just decide that, and we don't know exactly how they will decide that.

The other thing is, even Democrats at the hearing today were concerned about putting a lot of power in the treasury department, with the political appointee, the secretary of the treasury. They wanted whatever power there was to be in some more independent, semiautonomous agency.

BAIER: And that's possible. They could be structured outside -

EASTON: The Fed — the original focus was it would be the Fed.

YORK: Which is kind of busy.

EASTON: But when was the last time we saw the government run a business well? This is not something we want — I have visions of the post office in the 1970's as I was reading this.

This takes us back. I mean, if we really do all this, I think this takes us back to really putting the government in control of, you know, private sector, places that they shouldn't be.

BAIER: Mort, what about the sign on? Will there be sign on on Capitol Hill?

KONDRACKE: Oh, yes. There's going to be regulation.

The Bush administration wanted a new regulatory regime. And ,as Barney Frank said, the Chairman of the House Financial Services Committee, you want something between letting Lehman Brothers collapse, which began the cascade, and then having to suddenly try to buy into AIG.

You know, you want to have some forewarning. And when a big institution is about to go down and bring the whole world with it, you want to be able to do something about it.

BAIER: Last word on this topic.

North Korea says it will respond to any threat against its planned missile launch by reestablishing its nuclear program. so how will the Obama administration respond to that?


SECRETARY OF STATE HILLARY CLINTON: The intention, as stated by the North Koreans, to launch a missile for any purpose is a provocative act.


BAIER: The FOX all-stars give us their take, next.



DENNIS BLAIR, NATIONAL INTELLIGENCE DIRECTOR: As we looked at the North Korean government function when Kim Jong Il had his stroke and was recovering from it, the playbook was pretty well carried out by the team that were there.

So in the near term, at least, we can't expect some powerful alternative to Kim Jong Il to be taking power from him.


BAIER: National Intelligence Director Admiral Dennis Blair talking about the North Korean situation with the government there. He also said today that a North Korean missile launch would risk international condemnation, or worse.

Now, the missile, we're told by U.S. intelligence officials, is a Typo-O Dong II missile. It's a three stage rocket. It is already on the launch pad in North Korea.

U.S. officials are saying that they have two stages right now on the launch pad, expected to add a third stage, and once positioned, if it's fueled up, it could, in theory, carry a warhead as far as Alaska.

We are back with the panel — Mort?

KONDRACKE: Well, you know, if North Korea actually fired it Alaska, at last we would have a real live test of our anti-missile system. We've got rockets in Alaska, shoot it down over the Pacific, and find out whether the thing works or not.

I don't think that will happen. I think North Korea is going to test this thing. It says it is going to launch a satellite. It may fire it into the Pacific if it fires it at. I mean, the last test in 2006 was a bust. It blew up right after launch.

But, you know, the real danger here is that whatever North Korea develops in the way of missilery ends up in Iran. And if this thing works, this Type-O Dong ICBM, 4,000 mile range, ends up in the hands of Iran, Iran develops a nuclear weapon, then you have a real threat to Europe and to everybody else, that will justify American missile defense.

And I think the Obama administration really ought to think about whether missile defense isn't a good idea.

BAIER: Nina, that is a question — will the Obama administration, which has been at least lukewarm on missile defense — one could say cool — would they, number one, fire and try to shoot down this rocket? And number two, would it affect the missile shield in Poland?

EASTON: Or, would any kind of threat of retaliation against North Korea, would that prompt North Korea to restart its weapons grade nuclear plant, which it has threatened to do.

So all these questions are kind of up in the air. And, of course, it kind of brings home the Joe Biden line from the campaign, where he says "Mark my words. There is going to be an international crisis. An enemy is going to test this inexperienced president." And I do think this will become in the next few weeks a big test for this president.

YORK: We do have two warships in the area, one of them U.S.S. John S. McCain, that are capable of doing this.

But back in the campaign, in February 2008, Obama said "I will cut investments in unproven missile defense systems. I will not weaponize space. I will slow our development of future combat systems." This is a test, I think, of him.

And before hitting him too hard — you know, the Clinton administration failed its North Korea test and the Bush administration failed its North Korea test. But this, I think, it is a particular test of this man who has come into office saying hey no interest in weapons that have just now been developed.

Our missile defense systems are better now than they were in 2006. If you remember back then, when there was a lead up to that launch, a former Democratic Secretary of Defense, William Perry, advocated actually taking the missile out before the launch.

So this is going to be a test of what Obama thinks about missile defense.

BAIER: And Mort, the real motivation here for Kim Jong Il and the North Koreans?

KONDRACKE: Look, he loves to stir the pot and keep it stirring. My guess is that he wants international sanctions so he can restart his nuclear facility, so the barring can begin again, and he can get the world to promise him oil or promise him alternative nuclear fuel and food and bail his country out.

This is a survival act, and he uses nuclear weapons and missile technology to keep it going.

But as I say, if this missile ever works, it's going to end up in Iran, and that's a real danger.

BAIER: Down the road, do they launch it?

KONDRACKE: Do they launch it? Yes, I think they do. They will try.

BAIER: Do we shoot it down?

KONDRACKE: No, no, I don't think it will go toward Alaska.

EASTON: I think North Korea knows that provocative acts concentrate the mind in Washington. They have used it before, that technique, and why not use it on an inexperienced president this time?

BAIER: What's your guess?

YORK: We are slightly comforted by the fact that the last one blew up after launch. But if this one works, we've got to worry a lot more.

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