Obama's economic whiz

Larry Summers, director of the White House's National Economic Council

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(Fortune Magazine) -- He famously stirred controversy with his observations about women and science while running Harvard, but in his current post as director of the White House's National Economic Council, Larry Summers received a warm welcome from the female power brokers at Fortune's summit.

The outspoken Summers even poked fun at himself: When asked whether he would have let Lehman fail, Summers started his answer with, "Gee, can we go back to women and science?" Edited excerpts from the conversation follow.

Do you agree with those who say that Lehman had to fail in order for Congress to have the political will to pass any kind of rescue package?

I can tell you that when I learned that Lehman would go bankrupt, I was very surprised and very, very nervous. What could have been done -- what the other options were -- I'm not in a position to second-guess. I think we got to the brink of Armageddon, and fortunately we've been able to pull back very substantially from that.

When Tim [Geithner] and I were working with President Obama during the transition, the question frankly was whether recession would become depression, and I think today the questions are, When will recession end and how satisfactory will the recovery be?

American taxpayers have become shareholders in AIG, GM, and so forth. What's the exit strategy?

Because we were more aggressive going in, I actually think we're going to be able to get out faster. If you look at the TARP infusions, roughly $75 billion has come out, with taxpayers earning an average return of 17%.

We're not out of AIG, but the company has plans for strengthening the key insurance businesses so they'll be ready for sale, which is ultimately part of a prospect for taxpayers to get out.

GM and Chrysler are running ahead of projections, and now central governance is really coming from their boards rather than from the government.

Overall it was virtually everyone's view that the $700 billion in TARP wasn't going to be enough. But we indicated recently that we no longer anticipated needing to make a supplemental request.

Regulatory reform will mean higher capital requirements for financial institutions. Won't that limit GDP growth?

The last generation saw a Latin American crisis, the 1987 stock market crash, the S&L debacle, the Mexican financial crisis, the LTCM financial crisis, the crashing of the Nasdaq bubble, Enron, and now this.

Surely that's too much interference in the lives of too many people coming from the financial system, and it's got to change.

I am very confident that you will see the most far-reaching financial regulatory changes since the Depression legislated in the near future. I don't think it has to compromise growth. Properly regulating the financial system by promoting stability will lead to more steady and sustained investment and more economic growth.

Instead of attempting to regulate using a patchwork of agencies, why not create your ideal agency from scratch?

The best way to divert energy from solving this problem would be to set off a war about the organization chart.

If you come back two years from now and capital levels of financial institutions aren't substantially higher than they were in 2007, we will have failed. If two years from now there are trillions of dollars in derivatives exposures that nobody understands, we will have failed. But those points of substance are the right test, and the people who want not to act are the people who want to divert the debate into a turf struggle about jurisdiction.