Interview with Peter Cook of Bloomberg's "Money and Politics"

COOK: I'm Peter Cook in Washington. We're interrupting "Night Talk" to bring you a Bloomberg exclusive now. After the biggest selloff on Wall Street since 9/11 and continuing concerns about the state of the financial system, the economy again returning today as the top issue in the presidential campaign. Tonight, we are joined by the Democratic presidential nominee, Sen. Barack Obama, to get his take on what happened on Wall Street today, what he will do about it as president. He joins me now live from Denver, Colorado, where he's been kind enough to stay up late for us here on Bloomberg.

Sen. Obama, good to see you again. Thank you for the time.

OBAMA: Thank you so much for having me, Peter.

COOK: Given what played out on Wall Street today, I've got to ask you your reaction to it. How serious is this situation? How dire a situation? Is it going to be the top priority of the next president?

OBAMA: Well, I think it's a very serious situation. We don't yet know how it's going to play out this week. But here's what we know. One of the most storied firms on Wall Street is now gone. The fact that Merrill was purchased by Bank of America I think was very helpful because there's no doubt that there might have been a move in the direction of Merrill going under as well. But we still have problems with AIG out there, we still have problems with WAMU. I think that there is enormous amount of uncertainty.

I was pleased to see that sort of the internal plumbing of the trading and systems remain in place, but obviously the stock market took a huge hit and that's an indication of how fragile things are. There's no doubt that there's going to be some credit contraction and all of this will end up having an impact on Main Street, on whether or not businesses can get financing for plants and equipment, whether they're hiring more workers, consumers obviously more uncertain. And it really indicates the degree to which over the last eight years we have not put in place the kind of regulatory frameworks, the transparency and accountability that could have prevented this problem in the first place.

COOK: Well, I want to hear about some of your solutions on that score in just a moment, but let me ask you one basic question that people are asking today. Given the selloff on Wall Street, given the intervention by the federal government just a few months ago at Bear Stearns, do you think it would have been reasonable for the government to do more to help Lehman Brothers avoid the fate that it's now - it's in bankruptcy now?

OBAMA: Well, you know, I don't want to play Monday morning quarterback because I think that there are a lot of factors involved here. The market had a long time to absorb the problems at Lehman's in a way that it didn't have in Bear Stearns, and the idea that taxpayers can continue to be on the hook for firm after firm after firm I think is a real problem. Whether it's Fannie Mae and Freddie Mac or some of the investment banks, at some level what you had is a situation in which investors and management at these firms were taking extraordinary risks with enormous upside when the market was good, but you can't have a situation where you expect the taxpayer to foot the bill when times are bad. And I think that Secretary Paulson understood that at some point the market it going to have to solve some of these problems.

Now, what I'm much more critical about is the last eight years and the lack of a regulatory framework. I warned a year ago, a year and a half ago, two years ago that what was happening in the subprime lending market was inappropriate, that nobody was looking at whether or not these loans made sense, that in many cases they were pushed into communities that in which workers and homebuyers couldn't support the underlying mortgages, and the fact that we just did not do anything is reminiscent of what happened during the savings and loans crisis. And we've got to recognize that given banks no longer are the largest source of capital on Wall Street, that our regulatory frameworks have to catch up. That's something that we should have dealt with earlier. It's something that I intend to deal with as president.

COOK: And, sir, you're sounding an awful lot like John McCain. He accused regulators of being asleep at the switch. He promised a regulatory overhaul if elected president. You both sound very similar. Where do you differ?

OBAMA: Well, I think one of the big differences is the fact that John McCain has embraced the philosophy and the economic policies of George Bush that are almost identical to what got us into this problem in the first place. I mean, I think it's easy for John at this point to suggest that somehow the regulators were asleep at the switch. The question I have is where was he pressuring the Bush administration, the president of his own party, whose economic policies he now entirely supports? And that's the problem.

The issue in terms of how we change Washington and how we deal with the economic problems going forward is not a matter of just sloganeering. There has to be a recognition that the economy works best when it's growing from the bottom up. When people who are going out there and working hard for a paycheck every single day are getting a decent wage, when they've got decent benefits, when they're able to save, that's when everybody does well. And we've been under a theory for the last eight years, which John McCain fully embraces, which is that you give more to those with the most that somehow prosperity is going to trickle down. That's not the history of growth in this country and it's something that I think we fundamentally have to change.

COOK: All right. When you talk about a regulatory overhaul, there have been several ideas put on the table, including some from Secretary Paulson here. He's talked about streamlining government, perhaps merging some of the existing regulatory agencies, the SEC, the CFTC, perhaps making the Fed perhaps the overarching regulator here for the financial sector. Is that a good idea in your view? You've been critical at times about the Fed - the concerns about predatory lending. Are they the right agency to take on this job?

OBAMA: Well, keep in mind the Fed has a very important job to play in terms of regulating our monetary policy and I don't know want to have the Fed do everything. I also think it's premature for us to offer up very detailed prescriptions for how this regulatory framework should work, but there are a couple of principles that I think are in place. I think Secretary Paulson is right that we have to have a more streamlined regulatory structure. You can't have a whole slew of different regulatory agencies, none of which have oversight over the system, but just have a piece or a portion. Things fall through the cracks. That's point number one.

Point number two is there's got - there has to be much better transparency than exists right now. One of the basic principles after the crash in '29 and the Great Depression was that banks had to open up their books and maintain certain capital requirements in exchange for the support that the federal government provided and the FDIC that gave depositors more comfort. Now, if in fact we are going to be a backstop on some of these financial institutions that aren't traditional banks, then we've got to have that same kind of transparency and that same kind of accountability.

Ratings agencies - I think there's a lot of work that has to be done in examining the degree to which ratings agencies were involved in making some of this debt - some of the leverage that was taken on look like it was in - much safer and less risky than it was. And so that's a whole area that we have to examine.

COOK: Let me jump and ask you about one other specific -

OBAMA: Please go ahead.

COOK: - because Congressman Barney Frank says the next question for Congress and the next administration is whether the government perhaps should start buying up mortgages and distressed debt. The government might have to take a more central role in dealing with this housing situation. Is that something you would be willing to consider and support - something along the lines of what happened with the savings and loans and the Resolution Trust Corporation?

OBAMA: Well, I think it's a little premature for us to move forward on that, and frankly something like that probably could not get through Congress until we have a new Congress and new president. What is true is that we're going to have to strengthen the housing market. We've got to find bottom and, you know, we've got to explore ways so that people who can make their mortgage payments are able to stay in their homes, that those who had engaged in too much risk in terms of on the lending side are going to have to take some losses, but at some point people have some confidence that they can price assets accurately.

But let me just close with this broader principle and that is that our economy was weak even prior to some of the problems on Wall Street because we have seen wages and incomes flat-line, we've seen people working harder for less, people are less able to save, there are enormous strains that are being placed on the economy because of energy and the fact that we don't have a serious energy policy, a healthcare policy that is absent and so businesses and families are put under enormous strain. Enormous amounts of debt have been accumulated not only in corporate sector, but also among consumers, and part of what we have to do is strengthen the economy as a whole, whether it's tax policies that make sure that tax cuts are going to the middle class, whether it's making sure that we've got a better regulatory system on Wall Street, whether we're ensuring that we're investing in things like clean energy that can revitalize our economy.

These kinds of steps require leadership from the White House. That has been absent. John McCain has not presented clear ideas in terms of where he wants to take the economy. And until we have that kind of leadership and clarity in the White House, I think we're going to continue to see some of these problems.

COOK: Sir, one final question for you. If I'm one of those Lehman Brothers workers on the street tomorrow on Wall Street wondering about my own future, what would - Sen. Barack Obama, what would your message be to them?

OBAMA: Well, my message would be that the people at Lehman's were incredibly talented, incredibly smart. They are going to land back on their feet. And we need to provide help, as we should to all workers are laid off, to make transitions, to be able to find a new niche in a part of the new economy. But unless the economy is growing, we're going to continue to have problems. And what I would tell them is in addition to providing them some direct support, I want to create the kind of economy that is growing our middle class, that is eliminating some of these excesses, that is making sure that our regulatory system is working properly, that is adapted to a 21st century capital markets, but also 21st century competition. And that's going to require some hard work over the next four years. We can't have the sort of hands-off, head-in-the-sand attitude that we've had over the last eight years and think somehow we're going to reverse some of these trends.

America is the greatest economy on earth, the most dynamic on earth, and our workers are the best on earth. But we also have to have some leadership from Washington and that's what I want to provide.

COOK: And sir, just finally, I've asked you this before in Pittsburgh when we spoke there. How worried are you that as the next president, you're going to inherit these problems? The economy is in serious trouble, is it not? And this is going to fall right into the next president's lap. It's going to decide perhaps what your first domestic issue would be.

OBAMA: Yeah, I have to say the reason I'm running for president is because I think this is the defining moment in our history and we have enormous challenges, but historically it's always been during these moments of great challenge and great stress where we can mobilize our politics to actually take on big problems. And what's happened over the last several years is that Washington just keeps on putting things off. Now we can't put things off any longer. I'm looking forward to working with a new Congress to start putting our economy back on track.

COOK: All right. Sen. Obama, we thank you very much for joining us tonight from Denver, Colorado, staying up late with us. We appreciate your patience and appreciate you joining us here on Bloomberg. Thanks again.

OBAMA: Thank you.