Greenspan on the Current Financial State
Greenspan Says Crisis Maybe `Once in Century' Event.
By Vivien Lou Chen
Sept. 14 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspansaid the financial crisis that began with the collapse of the subprime-mortgage market last year ``is probably a once in a century event'' that will lead to the failure of more firms.
``There's no question that this is in the process of outstripping anything I've seen, and it is still not resolved,'' Greenspan said in an interview today on ABC's ``This Week with George Stephanopoulos.'' Greenspan, 82, retired from the Fed in January 2006 after serving for 18 years as chairman.
Treasury and Federal Reserve officials are working on a sale of Lehman Brothers Holdings Inc., the 158-year-old investment bank that reported a third-quarter loss of $3.9 billion. U.S. Treasury Secretary Henry Paulson, who spearheaded a government takeover of mortgage giants Fannie Mae and Freddie Mac last weekend, has said he's reluctant to use Federal funds to rescue Lehman.
``What they are trying to do with Lehman is find a way in which there is no government money involved in this particular set of negotiations,'' Greenspan said. ``If they can't, they have to make a very key decision as to whether they allow it to liquidate or support it,'' he said, adding that he doesn't know enough details to recommend the right move.
In March, the Federal Reserve took on a $29 billion portfolio of mortgage-backed debt and other assets when it brokered the sale of Bear Stearns Cos. to JPMorgan Chase & Co. It also opened up cash loans to investment banks, a safety net unavailable to Bear Stearns.
``There are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investments 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,'' Greenspan said.
Asked whether government bailouts should be used to help the auto industry, Greenspan said that would undermine savings and growth of the economy, leading to stagnation.
Shares of American International Group Inc., the largest U.S. insurer, have plunged 46 percent over the past week on concern that the company may be the next big U.S. financial firm after Lehman to fall short of capital.
The federal government took over Fannie Mae and Freddie Mac, the two largest sources of money for U.S. home loans, on Sept. 7, placing them under conservatorship and establishing procedures for buying their senior preferred stock if liabilities exceed assets.
Winners and Losers
``This is a once in a half century, probably once in a century type of event,'' Greenspan said. ``We shouldn't try to protect every single institution. The ordinary cost of financial change has winners and losers.''
Greenspan, since retiring, has returned to his role as a private economic forecaster, speaking at conferences and to groups of bankers and investors, while consulting for clients such as Deutsche Bank AG.
His memoir, ``The Age of Turbulence,'' was released in a paperback version this month, a year after the first hardcover edition. In a new epilogue, the former Fed chief cited a ``critical need'' to create procedures for bank bailouts that ensure there is no impact on the Fed's balance sheet andinterest-rate policy. He also calls for the creation of an organization similar to the Resolution Trust Corp., the agency created in 1989 to dispose of the assets of insolvent savings and loans banks.
Earlier this week, Greenspan told Bloomberg Television that the loss of investor confidence in Lehman would best be resolved by Wall Street firms acting without federal financial aid. The former Fed chairman also said he's ``fearful'' the federal takeover of Fannie Mae and Freddie Mac may be ``extraordinarily expensive.''