WASHINGTON — After 12 years as one of the Senate Banking Committee's most articulate, and independent, members, Sen. Chuck Hagel is retiring.

The Republican from Nebraska clashed frequently with the Bush administration and other members of his own party over issues ranging from the Iraq war to reform of the government-sponsored enterprises. He was an early and vocal proponent for reining in Fannie Mae and Freddie Mac, openly worried about the unregulated nature of hedge funds, and supported efforts to create a federal insurance charter.

Sen. Hagel sat down with American Banker to discuss his tenure and the future of financial services. The following is a transcript edited for length and clarity.

You've said the Banking Committee will be the most important committee next year. Why is that?

Hagel: This next two-year period is going to be as active a period in the banking committees of both the House and Senate as any time since the Glass-Steagall Act.

Gramm-Leach-Bliley was important. Sarbanes-Oxley was important. But I don't think those eras are going to be nearly as profound in the implications as what the Congress and next president and his administration will have to deal with in the next two years.

We are going to have to restructure, rewrite the entire financial services regulatory regime in this country. We have to bring it into the 21st century. Insurance would be one example.

Do we need a federal insurance charter?
Hagel: We've never taken it seriously because it's too touchy. Governors don't want to give up their mandates, they don't want to give up their control and state commissioners. Unfortunately, we are now well beyond that.

Like so much of what we've talked about over the past few years — like Fannie and Freddie — we just defer it. That is the easiest thing for Congress to do. It's the politically safest thing to do. And it's the most irresponsible thing for Congress to do.

Until there is a crisis. When there is a crisis, action is demanded. When there is a crisis, you can actually get something done. We can't continue to walk away from this.

I don't think we can continue to go along the way we are, letting states have the authority to regulate insurance companies. They don't have the capacity to regulate … [global firms], they don't have the expertise to regulate, they don't have the budget to regulate.

Do hedge funds need to be part of any overhaul of regulation?
Hagel: Absolutely. All financial institutions have to be part of the larger regulatory regime in this country if for no other reason than transparency. The influence that hedge funds have had has been astounding.

Corporations are transparent. They have SEC regulations and filings and so on. But the guys with the huge billions of dollars and these funds out here are manipulating companies, manipulating stock, manipulating countries. And we are sitting up here fat, dumb, and happy thinking we know what's going on.

There is a push to create a systemic risk regulator, and the default position seems to be to give that job to the Fed. What do you think?
Hagel: The Fed has a responsibility, but they have very limited capability with their people, with their budget, with their resources. You can't load everything on there.

Why not just expand the Fed?
Hagel: It would be irresponsible for Congress just to take the short cut and say, "Well, let's just expand the Fed's power. Let's just give them 500 more employees."

It may be where we end up. Maybe they are going to need a more expansive regulatory regime, and that may make sense, but we've got to get there through a thoughtful process.

We have to have some hearings, we have to listen to people, we have to bring people up, rather than members of the Senate Banking Committee talking for an hour and a half before we listen to the witnesses. Before we just keep hearing ourselves regurgitate the obvious.

Committees have a great capacity — we all do — of restating the obvious, and then we think we're smart.

How would you rate the government's response to the financial crisis?
Hagel: You can argue whether conditions have been strong enough, or oversight has been strong enough, but you have to remember something here. We are truly in uncharted waters. No country has ever gone through what we are going through. We don't know where the bottom of this is. We are going to make some mistakes, but we can't afford just to defer or to hang back.

I think where the government can do something, where we do have some ability to shepherd things, we have to do it.

Do you worry about the government overreaching?
Hagel: Sure, I worry about not just the government getting in too deep but getting into things it just doesn't understand.

Do you think Congress should give Treasury the rest of the $350 billion?
Hagel: Things you have to do, you have to do. You keep the bridge being built across this great chasm of disaster. But I think you've got to leave as much as you can to [incoming Treasury Secretary] Tim Geithner. It's the Obama administration that is going to have to pick all this up in little over a month.

In recent testimony, former chief executive Franklin Raines said Fannie lobbied just like any other company. As a senator, was that your experience?
Hagel: It was the most sophisticated network of power I've ever seen in this town. Then they had the cover of the nobility of the mission. That was what was so hypocritical: "Oh we are just the poor little housing authority who are trying to keep poor people in their homes."

What should be done with Fannie and Freddie?
Hagel: We need to get at this question: Do we still need these companies? Are they still relevant? I've never come down and said we should abolish them or not abolish them.

But we are going to have to answer that question. You can't continue to go in the direction you are going, half in and half out.

Something is going to have to be decided here, and it will take some time for them to do that. I believe that after this disaster what we now have is further evidence we can't continue to do this.

I'll give you one crisp example of this: At a hearing, I asked the chairman of the board, 'What is your responsibility?' And he looked at me and said the board's responsibility is to the shareholders. I said, 'Wrong.' Their responsibility is to the mission — to the congressionally chartered mission of helping people get into housing.

We can't leave them alone now. We don't have any choice. The American taxpayer is so deep into bailing them out here. There is no going back.

The committee, the Congress, the next president is going to have to figure out where do we go from here.

How do you see the future of the Banking Committee?
Hagel: It takes, unfortunately too often, a crisis — a jarring gong — to get people's attention, to change the process. You have to be jarred into the reality that the world has changed.

What's dangerous today is that the world is changing, reorganizing itself, at an astounding rate. We never have seen this pace of change. We now have to be far closer to the problem and respond to it quicker — not mindlessly — but quicker than we've ever had to do it.

It not only presents a huge set of challenges, but it also gives us new capacities — improved capacities to fix the problem.

I think they will work through these issues. What has to happen over the next four years — which has not happened around here certainly for four years — we have to get some consensus to achieve some objectives. We have to get beyond the raw partisan political paralysis that has sucked us all down into this underbrush.

We've been paralyzed. And every committee has been subject to it. The overall responsibility is to make our government work again. Our government hasn't been working.

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