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Fareed Zakaria GPS

Crisis in U.S.-Israeli Relations

Aired March 21, 2010 - 10:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

FAREED ZAKARIA, HOST: This is GPS, THE GLOBAL PUBLIC SQUARE. Welcome to our viewers in the United States and around the world. I'm Fareed Zakaria.

This week, we have a discussion about Israel and what its ambassador to Washington called the deepest crisis in its relations with America since 1975.

My own take on what this crisis has revealed, at least for me, is that Israel does not seem truly serious about what it claims is its existential threat from Iran. What do I mean?

Well, think about it. Israeli officials are constantly declaring that Iran poses a dire and deep threat to Israel's existence, that the world needs to mobilize against it. But if this were true, would it not make sense for Israel to do everything it could to deepen its ties to the one country whose military, political and economic help it will crucially rely on to combat the Iranian threat?

Would it not make sense for Israel to subordinate all petty domestic considerations to this overriding strategic issue and make whatever compromises, course corrections, adjustments are necessary to stay tight with Washington? And would it not make sense for Israel to give enormous priority to strengthening its relations, overt and tacit, with moderate Arab states who share similar fears about Iran?

Instead, this Israeli government has ruptured relations with Washington, makes little effort on the peace process, and, with its inaction, makes life more difficult for moderate Arabs that have relations with Israel, like Jordan and Egypt.

So, the conclusion I draw is that while the Israeli government talks a great deal about the Iranian threat, its actions suggest that this is actually not that much of a priority and it can continue business as usual with its motley collection of political parties, each vying with the next to demonstrate it can pander to some narrow political constituency. And Prime Minister Netanyahu, who presents himself as a Churchillian figure in the midst of this world crisis, is actually more like a local hack, counting the votes that will allow him to stay in office, even if that means doing very little while in that office.

Anyway, those are my thoughts. As always, on this program, you will hear others. We're joined Mortimer Zuckerman, the owner of the "New York Daily News" and the "U.S. News & World Report". He's just back from Israel where he met with Prime Minister Netanyahu. Also, Martin Indyk, who has served as ambassador to Israel twice, ran the Middle East Division at the State Department and also at the National Security Council, all for President Clinton.

And later in the show, a special treat. Michael Lewis, the best selling author of "The Blind Side" has returned to his original love or hate, Wall Street.

(BEGIN VIDEO CLIP)

MICHAEL LEWIS, AUTHOR, "THE BLIND SIDE": There's a question that arises from this -- why? If they're borrowing to buy subprime mortgage bonds, I mean, they're not only making leveraged bets, they're making really stupid leverage bets. And that's catastrophic.

(END VIDEO CLIP)

ZAKARIA: You wouldn't want to miss it. Stay with us.

(BEGIN VIDEOTAPE)

ZAKARIA: Joining me now to talk about the troubled relationship between America and Israel right now, Mortimer Zuckerman and Martin Indyk. Welcome, gentlemen.

You see it, Martin, as a -- a culmination of events in which the Israeli government has seemed to be surprisingly uncooperative towards its strongest ally.

MARTIN INDYK, FORMER AMBASSADOR TO ISRAEL: I would just say tone deaf in this particular case. The issue of Jerusalem was handled by Prime Minister Netanyahu and Senator Mitchell, President Obama's Special Envoy, in detail in the context of negotiations about the settlement moratorium that has been announced.

It took a long time to work that out. It took a long time, subsequent to that, to try to get agreement on these indirect talks going. And, all the time, there was a discussion about Jerusalem, how sensitive it was, how it needed to be put to the side, how it needed to be dealt with later, and how, in the process, once negotiations started, there had to be no provocative acts in Jerusalem that would blow them up.

And the fact that the day after the proximity talks were announced, we had this zoning committee make an announcement about housing units. It was just an example of -- of an obtuseness, or that's the way it appears in Washington on -- on such a sensitive issue.

ZAKARIA: Mort, you just -- you're just back from Israel. What do they think happened?

MORTIMER ZUCKERMAN, OWNER, "U.S. NEWS AND WORLD REPORT": Well, I think Martin captured some of it. I think they realized that this was a -- a blunder, if I could put it that way, and I certainly agree that it was a blunder.

But, on the other hand, of course I thought the reaction was an overreaction and was -- there was nothing that the prime minister could do, apparently, to assuage it. He did work out an agreement with the vice president when he was there after this blew up in terms of how to manage it.

And then, of course, you had the Secretary of State really dressing down the ambassador, dressing down the prime minister, going on national television, David Axelrod going on national television. That's what then rekindled this whole issue of a controversy. This was not of the Israeli doing. It was frankly of the doing of this administration.

And I think it's counterproductive to do that because it frankly is going to inhibit the ability for these negotiations to go forward in a positive and constructive way rather than help it. So I have a real problem with that.

ZAKARIA: Martin, would you agree with that? Do you think the American reaction was an overreaction?

INDYK: No, I don't. I think that there was a combination of circumstances here.

First of all, there was the humiliation of the vice president, which, I think, got the president particularly upset. But it comes in the context of history, a troubled history of relations between the prime minister and the president and -- and the administration in which there is a sense that every time the prime minister needs something, he comes to Washington, he insists, you know, demands this -- this has to be done.

You have to take this into account. You have to take my right wing into account. I can't do this because of my coalition problems. And it's -- it's just a kind of litany. But, on the other hand, he expects the Obama administration to meet all of his requirements, particularly when it comes to Iran, where we have a common interest in curbing Iran's nuclear program.

So I think it comes in the context of a feeling that, you know, enough is enough. We need some clarity as we go into these negotiations. We need some clarity, and we need to send a message, not just to the prime minister but to his whole government, that you can't play around. You can't take us for granted.

ZAKARIA: Let -- let's talk for a minute about -- about Netanyahu, about the prime minister. This is a man who presents himself in almost Churchillian terms, warning the West and warning the world of this -- this danger that Iran poses.

But, when you watch what he's actually willing to do, Mort, in terms of actions, he has not prioritized it in a way which says I'm going to -- you know, I'm going to do whatever it takes to deepen and strengthen the relationship with the United States, which is, after all, the one country that can help him on it. He's not trying to make common cause with the Arab states.

He's sitting there like a local alderman, counting votes in his constituent -- you know, with his coalition, to cobble together some kind of coalition that can keep him -- keep him alive. Is -- I mean, it's not a particularly inspiring figure in action, leaving aside his rhetoric.

ZUCKERMAN: He -- he is trying to hold together a coalition. Surprise, surprise, he is a politician.

All I'm saying to you is that he is definitely prepared and he has been prepared to negotiate without preconditions with the Palestinians, which they have -- have not been prepared to do, in part because of the position of the United States on the settlement freeze.

So, it's -- it's always complicated in that part of the world. All I'm saying to you is that I think he is definitely committed to that objective. He -- it is his -- he's not going to be a prime minister a third time around. This is his historic chance.

By the way, I believe it's also true of Mahmoud Abbas, the Palestinian leader. I think he also feels it's an historic opportunity.

So there is a moment here, and the parties are going to have to do this and they're going to have to do it directly. But, for the Israelis to do it, they're going to have to have a lot more confidence and trust in the American administration, and that, too, has been eroded and been eroded, I might add, by the Obama administration, not just by B.B.

ZAKARIA: Martin, you've negotiated with Netanyahu several -- for years. What do you think?

INDYK: I have the scars to prove it.

Look, it's good that you invoke Churchill because I think that that's appropriate. B.B. Netanyahu, at the moment, I don't -- I think sees himself in a kind of Churchillian mode, warning against the gathering storm which comes from the East, from Iran, and that's his major preoccupation.

Peace with the Palestinians is a minor concern, I think, in terms of his world view at the moment, and -- and the big question is whether he's going to be Churchill or whether he's going to be Ben- Gurion. Ben-Gurion was the one who was capable of -- of taking really tough, hard decisions that involved bitter compromises in order to secure the creation of the state. In this case, it would be to secure the well being and longevity of -- of the state of Israel, and I think B.B. has to decide.

He cannot have it both ways. He exists in a political coalition that does not believe in a two-state solution, that will not, at the end of the day, support him giving up 95 percent or whatever it is of the West Bank and the Arab suburbs of Jerusalem. So, he's in a tough position.

But, ultimately, he has wielded immense authority as a prime minister, and I think that he -- he will have to make a decision whether he's going to go with the United States and go for a two-state solution, or whether he's just going to try to stay on his seat.

ZUCKERMAN: You know, I -- I find that really a -- a puzzling statement, because here you have a prime minister who frankly has taken his government to the point where he does want to enter the negotiations, without preconditions, and it's the Palestinians at this stage of the game who say they don't want to enter the negotiations unless there are preconditions which a government simply could not do.

And those preconditions -- bear in mind, the Palestinians were willing to negotiate with the Israelis for 15 years without the issue of having settlements frozen, OK? This was a -- a situation, a condition created by the American position.

So it's not just the Israelis. The Palestinians also have to be forthcoming. They can't just sit there and say no all the time, and that's frankly what they have been doing for a long time. And I think, frankly, they realize it as well, and Netanyahu realizes it as well.

This is their historic opportunity, and I do believe if the pressure is kept off of them, in fact, they will be able do it, but primarily through negotiations that the parties carry on by themselves. If the United States is going to be the honest broker, they have to have the confidence of both sides. That is one thing that has been undermined this time around.

INDYK: Yes, there's an erosion of confidence between the United States and Israel on both sides, not just on the Israeli side. And we've been through many crises before. And I think that if we can get through this one, reach clarity on how to proceed, that it will be possible for the American -- the Israeli people to have confidence in the United States, in this administration, because of all the things this administration is doing to manifest its commitment to Israel security, from $3 billion a year, to enhanced missile defense, to -- to detailed coordination of the Iran challenge.

I think that -- that there are many things that the -- this administration is doing to provide the kind of safety net that would make it possible for Israel to take calculated risks for peace.

ZAKARIA: We're going to come back to this discussion of the United States and Israel in just a moment.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP)

ZUCKERMAN: They want to get some kind of quid pro quo going, so it -- the whole onus is not on Israel.

(END VIDEO CLIP) (BEGIN VIDEO CLIP)

INDYK: We should not be seen as the sucker, and that's what happened this last week. He made us look like the sucker.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: And we are back with Martin Indyk, two-time U.S. ambassador to Israel, and Mortimer Zuckerman, real estate billionaire, owner of the "New York Daily News", to talk about the United States and Israel.

Do you -- do you worry, Mort, about the -- the aftereffects of this -- of this crisis and the tensions over the last year between Israel and the United States? Because what I'm struck by, I mean, here -- one of the reasons I asked the two of you to join me is you're both strong supporters of Israel. You're both Jewish-Americans.

And yet there is this growing divide within the American-Jewish community, is there not?

ZUCKERMAN: Well, I think there is less of a divide in the American-Jewish community. I think it is a community that by and large is totally committed to trying to do whatever it can to help -- to bring about a peaceful resolution.

But let me -- let me just say -- say this, look, it is a very difficult and a very complicated issue, and it is very emotional. I think that Mahmoud Abbas is somebody who is a very decent man, who is absolutely determined to try and bring about a reconciliation and leave a legacy of a Palestinian state. And I think he is somebody that the Israelis can and should work with, and there has to be a way found to make that happen.

But I also think, and I think it's easy to underestimate Netanyahu, and a lot of people have, but I -- I spent quite a bit of time with him just this past weekend. I can assure you that -- and this was -- I'm not violating any secrets -- he is absolutely committed. He stated it publicly, he states it privately, he's absolutely committed to do whatever he can, consistent, of course, with what he believes to be Israel's interest and consistent with his sense of the way to negotiate with the Palestinians to bring about a peaceful resolution.

You know, it's a very different world, and -- and Martin knows this better than almost anybody. In that world, when you make unilateral concessions, it's seen as weakness, not necessarily as a constructive step. And they -- they want to get some kind of quid pro quo going, so it -- the whole onus is not on Israel.

That is something that they feel will not help the negotiations. Whether that's right or wrong, that is the way they feel, and a lot of people in that part of the world feel that way.

INDYK: There -- there are some like Mort and many others -- leaders of the Jewish community who -- who don't feel comfortable with -- with a loud, public brawl between the United States and Israel and say, OK, we've got differences. Let's do it in -- in quiet. Let's not make an issue out of it.

That's -- that's the criticism from -- from Israel supporters in Congress this week as well.

And there are others -- I count myself among them, who -- who say, you know, sometimes it's -- it's a good thing in a relationship, if you're going to have an argument, to have it out in the open. Get it out. Get some clarity so we can move on.

Now, as -- as far as what happens with -- with Netanyahu and -- and his difficulties, you know, I think it comes back to this question of having to make a decision of who he wants to be. Tom Freeland put it as does want to go down in history as a statesman or as a footnote?

Last -- his last round as prime minister, he went down as a footnote, at least in my book, that I wrote, because he -- he basically achieved nothing. He just got everybody angry with him. And that's -- that's the way he's headed now.

And part of B.B.'s concern, and I think Mort was referring to this, is that he doesn't want to be seen as what's referred to in Israel as a friar, a sucker. He's not going to give unless he gets, and -- and he makes a big deal about that. He wasn't the only one. Ehud Barak had the same -- had the same attitude. And so that's -- that's the kind of mentality that -- that really guides his -- his judgment on these kinds of things.

My view is, OK. If he doesn't want to be a friar, we should take that into account. But he should not make us the friar. We should not be seen as the sucker. And that's what happened this last week. He made us look like the sucker.

ZAKARIA: Mort, let me ask you one thing about -- about Netanyahu. You -- you said, of course, he is a politician. He has to take into account his coalition.

He does, of course, have the -- have the potential to form a different coalition. He has chosen to have a coalition with a group of very right wing parties who are fundamentally opposed to a two- state solution.

There is an alternative coalition which would actually be larger, electorally and which would make it much easier. It may mean some personal sacrifice on the part -- on his part. He would have to share power in a way that he doesn't right now.

But surely that's the test of statesmanship. Does he want to do something for Israel or for himself?

ZUCKERMAN: I -- I think you're posing the wrong question. I really do.

I don't think he's going to have any difficulty. I mean, it's got to be an agreement, shall we say, that protects Israel's national security. I do think his coalition understands exactly what is at stake, and he will have no difficulty getting majority in the parliament if he has an agreement that he has to put to that parliament.

It is not just -- his policies are not just determined by the far right of Israeli politics. You take the foreign minister. Many people think he is a far right -- but he is the most flexible person on the issue of -- of the -- if you talk to him, the most flexible person on the issue of what it's going to take to bring about a -- a resolution.

They all know they have to do that.

ZAKARIA: This is Avigdor Lieberman --

ZUCKERMAN: Lieberman.

ZAKARIA: -- who many people believe is in favor of the ethnic expulsion of -- of Palestinians.

ZUCKERMAN: He -- don't -- don't -- you know, you put it the wrong way.

ZAKARIA: I just heard (INAUDIBLE).

ZUCKERMAN: What he said was that the easiest way to resolve a lot of these issues -- and I might add there are many people who have -- certainly, that it's preposterous, but that's not the point -- was to find some way to have a population exchange so if you had a total Arab population on one side and a Jewish population on the other.

It's -- it's completely unworkable. It's just his way of trying -- I'm not trying to justify it. But he is somebody who is completely flexible on this thing. So let's not overstate what it takes to get an agreement within his cabinet.

There are other people within the -- the Likud Party who are much tougher on these issues than Lieberman. But the fact is that he'll be able to get the majority in the Knesset if he had a deal to pursue.

In fact, one of the things that I think is very important on both sides is that because it is such a sensitive issue, everything is so sensitive, neither side can afford do this in public because any single issue that you get an agreement on will have detractors, and you'll have a big political brouhaha. What you have to do is reach an overall agreement, present it to the parliament, present it to the Palestinian world, and they'll accept it in the context of it being an overall agreement and not have to fight over every detail of it.

That's the only way to do it, and that's why the negotiations have to be held in private and not in public. And so, I couldn't disagree more strongly with Martin about that because it just inhibits what both sides have to do.

ZAKARIA: All right. We are going to have to end on -- this note, but in -- in this particular context, between these two people, it was very useful to have a public disagreement because the rest of us got -- got a chance to be educated as a result of it.

Mort Zuckerman, Martin Indyk, thank you very much.

We will be right back.

ZUCKERMAN: Thank you, Fareed.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP)

LEWIS: When you look back at what happened, there was so much propaganda in the air, it was this kind of collective thing, group think on Wall Street, this all was OK, this business. It was obviously insane.

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: A lot of people are talking about Michael Lewis' new book, "The Big Short". It's about a handful of people, all oddballs, all independent thinkers, who saw the financial collapse happening before anyone else did, and most of them made spectacular profits from their foresight.

But the book is about more than that. It poses a provocative thesis that Wall Street in its current form may just be a dinosaur, a dying empire.

Michael Lewis is a best-selling writer of all kinds of books, but he has a special insight into Wall Street. Back in the 1980s he worked at Salomon Brothers, the firm that pioneered the kinds of bonds that eventually almost took down the American financial system. He wrote a book about that experience, "Liar's Poker", and even then he was questioning the way Wall Street operates.

Welcome, Michael.

LEWIS: Thanks for having me back.

ZAKARIA: The central premise of this book, you know, it's a wonderful set of stories, but the central analytic premise, it seems to me, is that on the biggest financial trade in the history of capitalism, the vast majority of Wall Street was on the wrong side.

LEWIS: Absolutely. I mean, this -- this story is really the story of a single bet. And the -- the entire financial system organized itself around this bet, and it's a bet on or against subprime mortgage bonds and the various derivatives thereon. And the -- the vast majority of the financial system, virtually all the big firms, were -- were on the wrong side. They were (INAUDIBLE) it. And this is -- this, to me, this was one of the things that awakened my interest in Wall Street as a narrative subject.

When I left, the last thing an investor would want to be is on the other side of a trade from Goldman Sachs or Salomon Brothers. If you were betting -- if you were in a zero sum bet with one of those firms, you could be sure you were going to lose, that -- that you just did not want to be in that situation.

They were the smart money, and, somehow, they became the dumb money, and I think that somehow it is they got structured in a way that caused the collective intelligence to decline. It caused a kind of a stupidity inside.

ZAKARIA: Well then, risk-seeking, so that, you know, there was money to be made in the short-term because the bubble kept inflating, and nobody wanted to miss that opportunity.

LEWIS: That's right. That -- that short-term is at the center of the problem. And if you want to, in a very abstract way, back away from -- from the massive losses in these Wall Street firms and say, so -- so why -- what were the incentives that caused people to -- to take those risks that led to the losses?

It's basically that the traders -- the -- first, the CEOs are evaluated quarter to quarter, so if their insane businesses have been happening to be making money at any given time, they can't avoid the businesses, because -- because their peers will be in it, and -- and they can't afford to have returns that lag their peers for very long, or else they lose their job.

But on the level of the trader, the actual risk taker, you think about what it means to be paid massive sums at the end of a year, based on, you know, what -- what you did that year, irrespective of the risk you've taken on into the future.

You create an incentive, essentially to be a seller of catastrophe insurance, because you book the profits -- you book the premium as profits right away, and -- and while there's this long-tail risk, but there's a one in 20 chance it's going to will happen, it's going to -- there's going to be a disaster in one in 100 chance there's going to be a disaster. And, in any case it's in likely in the future we can ignore it.

ZAKARIA: What did it take for somebody to bet against all these Harvard, Yale, Princeton people making multi-million dollars, occupying enormously important positions? You found a bunch of people, and they're all oddballs --

LEWIS: They all are --

ZAKARIA: But you choose --

LEWIS: They're all unusual people.

ZAKARIA: Did you seek the oddballs or were they, in fact, mostly oddballs?

LEWIS: It's very hard for a writer of narrative nonfiction to avoid the oddballs. There's an appeal in -- in them.

But -- but I think, generally speaking, the people -- I mean, there were only a really small handful of people who were on the right side of the bet in -- in a big way. I mean, we're talking somewhere between 10 and 20 investors. And I did a kind of casting search and met a lot of them -- most of them.

I didn't pick the oddest of the bunch, just because they were the oddest. I picked them because they were -- I picked -- the characters I focused on because I thought through their story the reader could learn about why this happened. But it's a really good question why them.

And in the first place, you know, if you're going to have variant views, it helps to be variant. It helps to be different. It's -- it's -- when you look back on what happened, there was so much propaganda in the air. There was this kind of collective thing, group thing on Wall Street that this all was OK. This business. It was obviously insane.

And nobody wanted to say no. It was almost rude to say that this is a disaster. In the making. So the people who said that in the first place were socially equipped to say it. They were kind of walled off. One of them in fact had Asperger's syndrome. He was literally walled off, you know, he really had very little face to face interaction with other human beings, he was just looking at data. But that was the first ingredient, I think, that made it possible for them to see the truth.

ZAKARIA: Are they smarter? Why are they more independent?

LEWIS: They are not smarter. They are all smart. Everybody on Wall Street is smart. You know, smart isn't the problem. The problem is -- it's a story of human perception more than anything else. That you have this -- you have this set of facts out in the universe, and they can be organized into a pretty picture or ugly picture. Why does 99 percent of people organize it into a pretty picture, and what is it about this one percent that organize it into an ugly picture?

And it's different in each case. There was a tone of either rooted in their experience or character, some pre-disposition to interpret the facts the way they did. It really is -- this is why it's literary material, that these investment decisions they made were deeply rooted in character or experience.

So you have to take it on a case by case basis. But the starting point in each case is they're not a part of the -- they're kind of outsiders. They're kind of -- they don't have any social investment in Wall Street. They don't belong. In some sense they don't belong. And so there's no social cost in taking an opposing view.

ZAKARIA: What's interesting to me about this is the ability to break with the herd. It's the ability to, you know, to say the emperor has no clothes or predict some kind of sharp discontinuity. Because that is the most difficult thing --

LEWIS: It is.

ZAKARIA: -- for a collective system to do, even now what you notice is so Wall Street went through this enormous crisis, this collapse, the Dow goes down to 6,200, 6,300 and then it rallies rather remarkably over the last year, which nobody predicted. Again, when things went bad, everybody straight line projected -- the herd mentality -

(CROSSTALK)

ZAKARIA: Right. Present trends continue.

LEWIS: You know, in each case with these people it was an act of imagination that was required. Because you're absolutely right, that in order to have made this bet, because you were betting on the financial system collapsing, and you knew it, you had to be able to imagine a world radically different than the world you were sitting in. And people have trouble with that.

This is why global warming has so much trouble getting politicized. People have trouble saying, "yes, yes, yes, the scientists say the sea levels are going to rise 20 feet," but they have actual trouble imagining the sea levels rise. But when it happens, then people are going to over react. They're going to say, oh, my god, they'll rise a hundred feet. You know, that people are kind of trapped in whatever is happening in the moment.

But in addition, it's also true that the vast majority of the financial system was incentivized not to see the truth. That there people who were paid not to see this was a disaster in a making.

ZAKARIA: We will be back with Michael Lewis. We will figure out how to solve all the this when we come back.

(BEGIN VIDEO CLIP)

LEWIS: The politics is obvious. It's an interesting (INAUDIBLE) if people knew the truth, they would want all of this to happen. And, I think, largely people sense the truth.

(COMMERCIAL BREAK)

ZAKARIA: And we are back with Michael Lewis. So, you look at the Wall Street that you describe. And you said this can't last. Now -

LEWIS: I was wrong.

ZAKARIA: I was just about to say - LEWIS: Very wrong.

(CROSSTALK)

ZAKARIA: I've been wrong for 20 years.

LEWIS: Good that you asked.

ZAKARIA: Every five years (INAUDIBLE) so this can go on forever, but somehow it does. But this time you think it's different?

LEWIS: Well, I think only once I said I thought that it was doomed. When I walked out -- I didn't say it exactly explicitly, but I thought it. I certainly thought when I wrote "Liar's Poker" that the mere fact that someone was paying me huge sums of money to give financial advice spelled doom. That there's no way that this was a sustainable enterprise. And I misread the situation. And this is -- what happened instead was that Wall Street in a very superficial way cleaned up its act.

It eliminated eccentric characters. It eliminated outrageous behavior that would make the "New York Post." It did it best anyway with you, guys. It became very corporate and sanitized and seemingly socialized. But, in fact, beneath the surface, the financial obscenity just got worse and worse and worse. So, you know, when I wrote -- the only reason I came back to it, is that I was wrong. That "Liar's Poker" was the story not about the end of an era but the beginning of an era.

There remained this kind of question. It was assumed that well the rest of the American economy may be going to hell. But those Americans really do know what they're doing with money.

ZAKARIA: Yes.

LEWIS: That, has changed. That has changed now. It now -- I don't think there's anybody who thinks people on Wall Street know what they're doing.

ZAKARIA: But those banks are still making lots of money.

LEWIS: Yes. It's because they created a crisis of such proportions that the first crack at the problem, the government's response was they have essentially got us hostage. We got to deal -- whatever the cause is, the symptoms are so grotesque that we got to deal with those first.

So, for a year and a half, we have been dealing with the symptoms. The government has made a decision, made a decision with the Bush administration preserved in the Obama administration that Wall Street shareholders couldn't take a hit. The creditors of Wall Street, banks couldn't take a hit. Very different policy than they adopted with the auto industry. Very different policy than the British government adopted with the banks.

Once you adopt that policy, which you paint yourself in a corner. The only way out is to give money to the banks until they're healthy again. And that's what they've been doing in dramatic fashion. Lots of subtle little gifts to the banks. And the bank's response, you might have thought, might have been, "wow, we're grateful. We are really sorry we behaved the way we did. Clearly there's something really wrong here. Let's figure out to fix these problems, regulate it, you know.

Instead, what the banks have done is used the money to pay themselves a lot of money personally and to do their best to stymie reform. Now, what I don't know is how long the reform process is going to take. The financial crises are quick and sharp. Democracy moves very slowly. (INAUDIBLE) it moves really fast, we might do things we shouldn't do.

But it's pretty clear that the reform idea is alive. The political anger is still not subsided about what Wall Street did. And that that political anger is going to be channeled into some sort of reform.

ZAKARIA: And looking at the proposals that are on the table now, are you broadly comfortable with what Senator Dodd is proposing?

LEWIS: Yes. You know, at this point, the knee jerk reaction to anything that anyone says in Washington is that it's BS. You know, he must be -- he's saying whatever he's saying because he's going to get paid by Wall Street firms when he gets out, which may be true. But -- and so it's interesting. Most of the media commentary has been very negative about it.

But the actual goal, his stated goals, are I think exactly the right goals. Whether the way -- whether we need two years of studies before we start implementing reforms, I mean, that's a good question. I think we just had three years -- we already had our study in the real world. We know that Wall Street screwed up. And we pretty much know why.

I think the things that he has proposed, the basic -- the basic idea of, one, forcing transparency in places. By transparency, meaning if you buy or sell a credit default swap or any other thing, you are not going to do it between yourselves and create risk that no one knows what they are or how big they are, creating all these uncertainty in the system.

You're going to do it on through a clearing house or exchange, and it's going to be on the screen and so we're going to know at any given moment what your exposure is and what the world's exposure to you is. Two, consumer protection agency. For whatever reason people and I've learned this from 25 years of writing on the subject. People have a hard time basically understanding money.

That we live in a society that's money drenched, the money obsessed, but Americans are easily people, generally, easily buffaloed on the subject of money. They're persuaded to do things that are against their own self-interest more easily when they're dealing with complicated financial matters than in other matters. And so, in this fear there clearly needs to be someone who watches out for peoples own interest, because they're not very good at watching out for themselves.

Three, the credit ratings agencies. The idea of having -- I think WHAT should happen is they should just forbid Wall Street from paying Moody's and Standards and Poor to rate their bonds. That's crazy. You're going to have a constant pressure to do the wrong thing. But absent that, to have some regulatory oversight of the credit ratings agency, make it easier to sue the ratings agencies if they screw up, sounds good to me.

The Volcker rule, which is think there's some version of it in and has found it's way into Dodd's plan. Which is banning proprietary trading. Now this is -

ZAKARIA: Now, banning proprietary trading for big banks -

LEWIS: Yes.

ZAKARIA: That effectively expect some kind of government assistance if they screw up.

LEWIS: right. Yes. Not using the taxpayer money to roll the bow. This is a special case of a broader problem. That I would love to have seen discussed in a broad -- in broader terms. But the broader problem is quite obvious. The broader problem is these firms trade for their own account in securities that they're advising you to buy and sell.

Now, if you're doing that, you're a Wall Street firm, what happens? Inevitably they abuse you for the sake of their own bets, especially when they increasingly conceive their business as a big bet. So you're not going to get, honest, straightforward financial advice from someone who has got an agenda and so it isn't just proprietary trading that causes the problem, it's the individual traders that are making markets in the securities being behind the transactions that ultimately are done with the customers, with the investors.

And I don't see any reason why a firm should be doing both. Any reason why it needs to be doing both. There should be the schwabs of the world that are giving right on institutional and individual levels, that brokerage operations that have no positions. And then you have things, I don't know what you call them? Hedge funds, proprietary trading banks, god knows what you call them? But they make the bets, fine. And they don't have any kind of guarantee behind them.

They're clearly allowed to fail. The politics is obvious. The interests to society are obvious. If people knew the truth, they would want all of this to happen. And I think largely people sense the truth. Up against this are the financial contributions and the political persuasion of Goldman Sachs and Morgan Stanley and other wall street firms that I can't believe that won't be overwhelmed by -- by the social interest.

So I feel kind of hopeful about it all. It's probably crazy, but if some of that happens or a lot of that happens, a lot of these reforms take place, you will have a dramatically reshaped Wall street.

ZAKARIA: Michael Lewis, always a pressure.

LEWIS: Thanks.

(COMMERCIAL BREAK)

CANDY CROWLEY, CNN SENIOR POLITICAL CORRESPONDENT: I'm Candy Crowley. And here are our stories breaking this Sunday morning. Congressman John Larson said earlier on this program that Democrats have the 216 votes necessary to pass health care reform in the House of Representatives. The vote is scheduled for later this afternoon.

Republican Congressman Mike Pence said his party will use every means at their disposal to oppose the measure.

In Iraq, they're still counting the ballots two weeks after the country's second ever parliamentary election. And they may have only begun. Prime Minister Nouri Al Maliki is now requesting a manual recount of the tight race. Al-Maliki says it is necessary to "protect the Democratic experience and preserve the integrity of the electoral process."

Initial results show Al-Maliki's coalition is leading in seven of the country's 18 provinces. Those are your top stories. Up next, more "Fareed Zakaria GPS."

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ZAKARIA: Now for our "What in the World" segment. What caught my attention this week was a new ranking of the world's top financial centers. First, did you realize that London was number one until this year? But now it's tied with New York. What really got my attention actually was that the rest of the top five were not Paris, Frankfurt or Boston, Chicago. Hong Kong came in right behind the U.S. and U.K. financial capitals. And Singapore and Tokyo followed in quick succession.

Rounding out the Asian cities in the top ten, Shenzhen. Ever heard of Shenzhen? It's a still of more than 10 million people in the southeast of China. You ought to get familiar with it. This Chines city has its own stock exchange, is ranked fourth in the world for the insurance industry and ranks first out of all the global financial centers for its reputation.

In fact, six of the top 10 cities for reputation are in Asia. And New York and London are toward the end of that grouping. Understandably so after all the blame heaped on them for the current financial crisis.

Incredibly, when this study was first conducted just three years ago, Shenzhen wasn't even one of the 46 cities on the list. That's how fast some places are moving up to challenge the dominance of western cities. Now, of course, Shenzhen is a major player. And we will all need to learn more about cities like it in 21st century. So book your ticket to Shenzhen right away. And we will be right back. (COMMERCIAL BREAK)

ZAKARIA: Now for our question of the week. Here's what I want to know. Is the current dust-up in U.S.-Israeli relations serious or is it a minor affair that will blow over? Let me know what you think. As always, you can go to our website to see some great answers to last week's question. And as I do every week, I'd like to recommend a book. This one is from our guest, Michael Lewis. It is called "The Big Short." It is his history of the financial crisis told not through the eyes of the villains or the losers, the masters of the universe on Wall Street who are blind to the facts of this catastrophe that was bearing down on them.

But rather through the eyes of he unlikeliest heroes. The often oddball investors dotted around the country who did see it coming and who shorted that is sold the markets that they saw collapsing. Now for the last look. This week it comes to us from Khakassia. Never heard of it? Maybe that's because it's a Russian republic in the far- off corner of Siberia and admittedly we haven't heard of it either. That is until we saw this picture of Vladimir Putin visiting there. Wearing a sheepskin outfit, and fur hat and mittens.

He was on a working trip, the Kremlin made clear. But he took time out to explore the wilderness, to enjoy a cup of coffee there. To look at a horse. And feed a horse. And ride a horse. When I saw these pictures I was instantly reminded of another photo shoot of Putin and a horse it was apparently warmer when these pictures were taken. So warm that the prime minister was inspired to shed his shirt. There you have it, Moscow's Marlboro man.

Thanks to all of you for being part of my program this week. I will see you next week. Stay tuned for "Reliable Sources."