Markets slammed by Lehman collapse
Tuesday, September 16, 2008
Markets slammed by Lehman collapse
Producer: Carlo Basilone
CARLO BASILONE: US stocks were slammed on Monday after a stunning upheaval on the Wall Street landscape. The Dow Jones fell more than 504 points, or 4.42 percent, the largest one-day drop since September 2001, this as investors reacted badly to a shake-up of the financial industry that took out two storied names: Lehman Brothers Holdings Inc. and Merrill Lynch & Co. Lehman Brothers, which $60 billion in soured real-estate holdings, filed a Chapter 11 bankruptcy petition in court after attempts to rescue the 158-year-old firm failed. The Federal Reserve building in downtown Manhattan was used for weekend-long weekends with top bankers, with Treasury Secretary Henry Paulson in attendance. Another Wall Street icon, Merrill Lynch, was snapped up by Bank of America in a $50 billion all-stock transaction in what was essentially a forced sale. Merrill Lynch was said to have 80-plus billion dollars of risky asset exposures. The disappearance of the two firms could mean the loss of up to 50,000 jobs in the financial sector. That industry has already lost 100,000 jobs since the start of the credit crisis a little more than a year ago. The market remains anxious about American International Group, or AIG, which is seeking emergency funding to shore up its balance sheet. A faltering of AIG, the world’s largest insurance company, would likely have financial implications far beyond that of Lehman, the largest US bankruptcy. Washington Mutual, the largest savings and loan in the US, is also in danger of faltering. Earlier in the day, both President Bush and Secretary Paulson had tried to calm fears.
GEORGE W. BUSH, US PRESIDENT: We’re working to reduce disruptions and minimize the impact of these financial market developments on the broader economy.
HENRY PAULSON, US TREASURY SECRETARY: As you know, we’re working through a difficult period in our financial markets right now, as we work off some of the past excesses. But the American people can remain confident in the soundness, in the resilience of our financial system.
BASILONE: But when the closing bells rang in New York, investors didn’t seem to have heeded the advice.
DOUG HENWOOD, EDITOR, LEFT BUSINESS OBSERVER: This is an experiment in real time. We just don’t know where this is going to go. It could be that this was a bad decision if this results in a chain reaction of failures and just more financial crisis. It could be that this is, you know, the big storm that marks the end of all this. It’s very, very hard to read. This is very strange territory. If we look to earlier precedents, for example the late 1980s, early 1990s savings and loan crisis in the US, it’s going to take years to get through this. It’s going to take the expenditure of probably a few hundred billion dollars of government money. We’re going to have a bad economy for three or four years. If it’s worse than that, you know, it could be more of the same, it could be deeper, but the precedents are that this takes a long time to get through.
BASILONE: Former Federal Reserve chairman Alan Greenspan appeared on ABC’s This Week on Sunday, where he told host George Stephanopoulos that this was the worst financial crisis he’s ever seen.
ALAN GREENSPAN, FORMER US TREASURY SECRETARY: This is a once-in-a-half-century, probably once-in-a-century type of event.
GEORGE STEPHANOPOULOS, HOST, ABC’S THIS WEEK: Is it the worst you’ve ever seen in your career?
GREENSPAN: Oh, by far. There is 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.
HENWOOD: I think the US economy’s in trouble. I think we’re going to have years of a stagnant economy with a gradually rising unemployment rate and just a feeling of falling incomes—a very unpleasant economy for a lot of people.
BASILONE: Could this have an effect not only on the financial sector but on the real economy? On everyday people’s lives? If they keep playing what Paul Krugman called in The New York Times financial Russian roulette?
HENWOOD: Well, absolutely. And the mechanism by which that would happen would be if—you know, we’ve seen the collapse of the mortgage market, and so far most of the financial problems have been centered around mortgage-related things in the United States. But we’re also seeing a growing reluctance of creditors to lend to households in general, and they’re very reluctant to lend to businesses. And if that credit seize-up spreads beyond the mortgage market into the broader credit markets, that could shut down the economy very quickly. And we saw some version of that in the early 1990s, when after the crazy leveraging mania of the 1980s a lot of financial institutions went bust, and those that survived became very reluctant to part with their money. And that resulted in three or four years of a very stagnant economy. We’re quite possibly in the middle or in the early stages of something like that again, and it’s quite possible it could be worse, in the sense of either deeper or longer or both, than it was in the early 1990s. So there’s a considerable degree of risk. You know, it could be that the authorities will contain the damage with all these rescue schemes, and, you know, it could be that the Federal Reserve will cut interest rates and that’ll improve the situation somewhat. It could be able to come up with another stimulus package. But things are not going to return to—happy days are not right around the corner, that’s for sure.
Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.