Lehman Likely to File for Bankruptcy Protection

[This Week]

This Week with George Stephanopoulos - ABC
Sept 14 2008

STEPHANOPOULOS: We’re going to end on that point of agreement. Thank you both. I’ll have you back, it was a spirited debate.

And now we are going to turn to the economy and what some are calling a death spiral in our financial markets. All weekend long, Wall Street’s top executives have been holding emergency meetings with government officials at New York’s Federal Reserve, trying to come up with a plan to save yet another battered investment bank.

Lehman Brothers has not found a white knight yet. And despite earlier government action to salvage Bear Stearns and takeover mortgage giants Fannie Mae and Freddie Mac, Treasury Secretary Hank Paulson is signaling that the government is reluctant to step in again.

And so for more on this, we are now joined by the man who knows more about these problems than just about anyone in the country, the former chairman of the Federal Reserve, Alan Greenspan.

Welcome back.

GREENSPAN: Thank you very much, good morning.

STEPHANOPOULOS: Should the government step in and help Lehman Brothers the way they helped Bear Stearns?

GREENSPAN: They’re trying to do it in a different manner. And the reason is obvious from seeing the effect of the bailout of Bear Stearns. When Bear Stearns was bailed out, it drew a line under that level of firm, implying that anything that was larger than that firm was capable of getting federal assistance.

Now if you generalize that, it is very clear that that is an unsustainable situation in the financial markets and in the markets for saving the...

(CROSSTALK)

STEPHANOPOULOS: The government can’t put a floor underneath these firms.

GREENSPAN: They cannot do that. And so what they are trying to do now with respect to Lehman is to find a way in which there is no government money involved in this particular set of negotiations.

STEPHANOPOULOS: And what if they can’t?

GREENSPAN: Well, if they can’t, they have to make a very decision as to whether or not they allow it to liquidate or they support it. And those are very difficult decisions.

STEPHANOPOULOS: What would you recommend?

GREENSPAN: I don’t know enough of what is going on. I would have to have very detailed information of what’s on the Lehman Brothers balance sheet, whom they are counterparties to, and what the repercussions would be with any particular solution.

STEPHANOPOULOS: But I guess the question is, where do you draw the line? You, over the course of your career, have been an advocate of free markets. But in the last year we’ve seen the government step in to help Bear Stearns, the government take over Fannie Mae and Freddie Mac.

STEPHANOPOULOS: And I guess I have two questions. One, where do you draw the line in government intervention? And two, and perhaps more important, how much worse is this going to get?

GREENSPAN: First of all, let’s recognize that this is a once-in- a-half-century, probably once-in-a-century type of event.

STEPHANOPOULOS: Is it the worst you’ve ever seen in your career?

GREENSPAN: Oh, by far. There’s no question that this is in the process of outstripping anything I’ve seen, and it still is not resolved and it still has a way to go. And indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes.

That will induce a series of events around the globe which will stabilize the system.

STEPHANOPOULOS: And you think that will happen early next year?

GREENSPAN: That’s my best guess. In a sense that I’ve always argued that with this excess level of single-family vacant homes for sale, that excess does not have to be completely removed to get prices to stabilize. But you have to get the rate of liquidation of those inventories at a pace which causes the market structure to stabilize.

And once that happens, then the equity in homes in the United States becomes clear, which of course is the ultimate collateral for the mortgage-backed securities issued from the United States that have spread around the world.

STEPHANOPOULOS: In the meantime, though, we see this trouble with Lehman Brothers right now. Washington Mutual, the country’s largest savings and loan, seems to be on the ropes as well. American International Group faced tremendous trouble this week. Even Merrill Lynch facing trouble.

Are we going to see more of these major financial institutions fail?

GREENSPAN: I suspect we will. But in and of itself that does not need to be a problem. It depends on how it is handled and how the liquidations take place. And indeed we shouldn’t try to protect every single institution. The ordinary course of financial change has winners and losers. And the... STEPHANOPOULOS: But it seems like everyone that has come along, at least recently, the government has said, we have to come in and save it.

GREENSPAN: That is basically because we have never seen the degree of interconnectedness on a global scale that has occurred in the last decade. And so that these are different from what we experienced in earlier years when they were largely localized.

I mean, for example, you did get some contagion, for example, from the Russia default or from the Long-Term Capital Management default, but they weren’t of the global scope that currently exists largely because the very factors of globalization, which have been so extraordinarily beneficial to the world at large, and have taken hundreds of millions of people out of poverty, has eventually a correction that it must go through.

And this is what we are experiencing.

STEPHANOPOULOS: I know there are a number of you on Wall Street who are concerned that you could see a meltdown -- further meltdown even this week. And one suggestion that has been made is that, you know, the power of short-sellers here is really quite pernicious. And some have said that perhaps the government should step in and suspend the short-selling in these financial institutions until the market can stabilize.

Is that a good idea?

GREENSPAN: Very bad idea, because what the short sellers add to the system is a more realistic view of pricing. Because, remember, short-sellers, by their nature, are not those with investments in a particular company.

And if you only have those with investments in a particular company, and those who are sympathetic to it in the market, you will get distortions which will ultimately create far more problems than allowing short-sellers in which improves the liquidity of a system, enables the adjustments to take place, enables prices to be finely (ph) determined.

Because it’s only when you get clarity in price that markets stabilize.

STEPHANOPOULOS: So at this point, that was clearly a bad idea, you say, stepping in to help Lehman Brothers may be necessary, you don’t know enough right now.

How about at the same time we’re seeing the auto industry saying they need $25 billion in loans in Washington in order to meet the mandates that Washington has set, is that a good idea?

GREENSPAN: I cannot think of a list which is longer than those who would have similar such desires and justifications for government help. To the extent that you do that, to the extent that bailouts, which are the use, basically, of federal funds, are draws on our scarce savings supply.

You undermine the growth of the economy, and ultimately if it’s on a wide scale basis, you get stagnation. And economic stagnation is a very dangerous thing for a democratic society.

STEPHANOPOULOS: To try to make this simple for a lot of viewers at home, I can imagine an auto worker in Michigan, or an auto executive in Detroit, saying, well, wait a second. You think it’s OK to come in and help Bear Stearns -- these financial markets always get the help they need when they are in trouble. But we get nothing.

GREENSPAN: I think the argument has got to be that there are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investment in an economy that on very rare occasions -- and this is one of them -- it’s desirable to prevent them from liquidating in a sharply disruptive manner, because that’s an assistance to the economy as a whole, and those auto workers have got just as much -- they are just as much involved in how the economy as a whole runs as everybody else.

It’s a different type of bailout. It’s not assistance; it’s stabilization.

STEPHANOPOULOS: When you were on the program last December, you said the chances of a recession were about 50 percent. So far, that has not occurred. We have not seen recession this year. I know you think the housing market will start to turn around early next year. What are the chances that the U.S. will escape a recession over the next year?

GREENSPAN: Well, if you had pressed me the last time I was here, I would say very unlikely. The remarkable thing is now well the non- financial part of the economy is done. They -- and the reason, as I said on many occasions, is that we’ve gone through a period of long- term interest rates being very low, and that enabled corporate sector and business generally to take its short-term liabilities and fund them into longer-term liabilities at low interest rates, which meant they did not need to go into the market for money all of the time.

And the result has been that even though there’s been a severe credit crisis, it’s not really impacted the borrowing needs of the non-financial sector, because they don’t need very much to borrow.

What has essentially happened here is a situation where the credit squeeze is beginning to affect the revenues of these companies, and we’re beginning to see the American economy sag along with the rest of the world. And actually, the United States is doing somewhat better than the rest of the world.

(CROSSTALK)

STEPHANOPOULOS: So the chances of escaping a recession now greater than 50 percent?

GREENSPAN: No, I think it’s less than 50 percent. I can’t believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring.

There are positives. The decline in the price of oil, the decline in the price of food. Inflation coming down, at least in the short run. May be enough to stabilize this. I’d be delighted if it were to happen. I wouldn’t put my money on it.

STEPHANOPOULOS: So the message today, the bad news is not over? A sobering message, but thank you for your honest views, Mr. Greenspan. Hope to see you again soon.

GREENSPAN: Thank you very much. It’s a pleasure being with you.

http://www.cqpolitics.com/wmspage.cfm?docID=news-000002950389

[Forbes]

Citigroup
Citi Is Big Trustee To Lehman Debt
Liz Moyer, 09.15.08, 11:45 AM ET

Citigroup and Bank of New York Mellon are trustees to $138 billion of Lehman Brothers' bonds, the biggest on the list of unsecured creditors, according to a petition filed in New York bankruptcy court on Monday.

Banks are trying to calm employees and clients in the wake of Lehman's bankruptcy filing Monday. Citi, (nyse: C - news - people ) which is also reeling from exposure to mortgage securities and rising loan losses, said in a memorandum Monday by CEO Vikram Pandit that the firm had strong liquidity and capital positions. Pandit also wants to motivate them to focus on business.

"It is important that we maintain our unrelenting focus on the needs and concerns of our clients and shareholders," Pandit said in the memo. "We are confident about the future despite a very challenging time."

Citi also had a $275 million bank line out to Lehman (nyse: LEH - news - people ), according to the bankruptcy filing.

Bank of New York Mellon (nyse: BK - news - people ) is exposed to $17 billion of bond debt.

http://www.forbes.com/2008/09/15/banking-citigroup-lehman-biz-wall-cx_lm_0915citigroup.html

[Guest]

Your post is full of inaccuracies and bad analogies.

First, you compare her standing up to Roberts as the equivalent of an employee standing up to their CEO. Completely false analogy. In fact, if you really think this way you are contributing to the problem because it suggests you believe the “political boss” system in NJ is legitimate. As an employee I work for the CEO. For someone to go against what their boss orders is dereliction of duty and grounds to be fired for cause, unless it is illegal or immoral. But Greenstein doesn’t work for Roberts and he can’t fire her. She is SUPPOSED to work for US, her electorate. And WE are the only ones who can fire her. So all you do is reinforce my point. To correct your analogy, she has stood up to us, her boss, and blatantly refused to do her duty.

Second, you suggest that all this is just about A500 but that is false. She has done this to us on numerous bills including the previous one’s that encouraged consolidations of townships and schools and supported a County-wide superintendant with the power to re-direct school funds from one district to another and eventually compel mergers. Just as she did later on A500, she came to our meetings and said she “didn’t like the bill” but she actually voted for it (she didn’t even abstain). Again, it was supported by Roberts and that was more important to her.

But I have repeatedly left the door open for you to provide ANY example, in her entire career as a State representative for Cranbury, where she has supported our interests as Township when it didn’t coincidentally align with the party machine’s position. So you don’t have to focus on A500 at all. But no one has yet to answer this challenge with a single specific example of actual votes or actions on her part (versus words and letters). Ever.

Finally, to suggest that the focus has been on Greenstein as worse that DeAngelo is totally false. There have been a number of posters here, not just me. And as far as I can tell ALL of us have said that Wayne is even worse than Linda. Wayne has demonstrated himself as a total tool of the political machine, bought and sold. He was a Union chief before that so he was already part of the corrupt machine and was hand picked by the bosses to run, counting on their money and people’s apathetic voting loyalty to their registered party to carry him and it did. He clearly has no allegiance to his electorate and doesn’t seem to even pretend to. He has yet to bother showing up to a single Cranbury meeting or event despite being invited to them all and as far as I can tell he hasn’t even bothered responding to any local citizen’s letters or calls. He isn’t even trying to represent us. The only good thing I can say about it is at least he’s not being a hypocrite.

The difference is no one is defending Wayne or putting official praise for her abstentions in the Cranbury public record. Linda is telling us she supports us with her mouth but never following it up with action. That makes her a typical politician and not the rare great one (like Baroni seems to be – and I say that as a Democrat). That’s fine. But let’s stop feeding the machine by passively accepting that and justifying it for them. I will not support her. I will not vote for her. If possible I will wear batches and pluck signs in my yard supporting her opponent. Unlike her I will be consistent between my words and actions and not be a hypocrite.

You are right about one thing. COAH is our priority and our timing is short. But stop wasting your time with her and let’s focus on real results. Although I agree with others that is it inevitable this will end up in court.

[James]

I agree with the above poster.

As I said we have to be civilized and we do have to work with Linda. Wayne is a lost cause and we need to moblize as many people as possible to vote him out. The fact that the TC is not publicly calling Wayne out for his irresponsable actions is a huge concern to me as well. You'll note, I have never said Linda needs to be voted out (yet, that depends on what happens going forward.)

What annoys me actually is not so much Linda's votes and actions, but people not holding her accountable for those actions and rather defending them. She's playing her role in the system so while I'm disappointed as long as people condone it she's doing what the majority of people in Trenton are doing.

What I'm interested in knowing is what these individuals feel Linda needs to do to be considered serving in her role at this point. To me, I am interested in seeing her author and sponsor an amendment that remedies the affects of COAH on Cranbury and towns like Cranbury where land preservation is critical or she gets a one off exemption for Cranbury (i.e. the Highlands agreement).

I don't think simply gathering data is good enough. It's a step, but I'd like I think the action is that the data gathering leads to an action and implementation.

Those that defended Linda and thanked her for her help previously and have issue with my prior comments. What do you consider to be the requirements to show she's working with us?

[Cranbury Conservative]

Here is Assemblywomen Greenstein's voting record for all to see.....

http://www.votesmart.org/voting_category.php?can_id=22544

[Guest]

[Guest]

[Guest]

[Guest]

[Guest]

Um . . . isn't this thread suppose to be about Lehman and AIG. If you want to talk about our politians - Start a new thread.

[Guest]

[James]

[Guest]

Sorry James - I keyed on "Condoned" - just tired tonight (it was really meant for the other negative remarks); AND really worried about how COAH is going to change this town to predominate low-moderate subsidized housing. Especially since Corzine signed off on the Highlands Master Plan, the Meadowland is getting exemptions due to Xanadu, and we are still looking and planning for 269 more homes (already have 96 - this is to start). Then the State is paying companies to employ more people in Cranbury that will raise our COAH obligations. We have a huge commercial presence that spends millions in NJ - we need to use that to our benefit - BUT I don't see that happening. We are more wrapped up into holding people accountable - When, Maybe we need to march on over to see the governor to show our disatisfaction. Time is ticking away and I am getting nervous.

[Jersey Dad]

It is my understanding that Baroni and Greenstein are working together with Township and COAH officials. As a moderate, I admire their ability to put their partisan differences aside in the best interests of their constituents. As a resident voter, I expect both to make a meaningful difference.

[James]

No problem, COAH honestly has me both scared for the town and angry at how the politicans in Trenton seem to feel immune to anyone outside of their inner circle and donors. It's a fight that Cranbury and town's like ours have never seen before. It's not the old days of Inverso(R) and Cimino(D) in Trenton.

I grew up here, returned here and plan to raise my family here. I want my kids to see the same town I knew where I rode my bike to school alone in 1st grade with no worries. Where if I was seen misbehaving on Main St. someone would have called my mom, uncles, aunts, dad or grandmother so there was no escaping being in trouble . Jeck we even replaced Harold's with Gil and Berts. The COAH situation really puts this all into jeopardy and gives the potential for the town I knew to be non-existent.

[Guest]