Government Financial Rescues On The Rise

The government stepped in to help Bear Stearns and recently orchestrated a takeover of Fannie Mae and Freddie Mac. How far will the government go to rescue other firms like Lehman Brothers? Business journalist Joe Nocera talks with host Scott Simon about the moral and practical hazards.

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SCOTT SIMON, host:

The federal government completed its takeover of the mortgage giants Fannie Mae and Freddie Mac early this week, but any improvement of the markets was blunted when Lehman Brothers announced loss of nearly four billion dollars. Now, The New York Times reports today that the Federal - that Federal Reserve officials in New York met with the heads of several major Wall Street firms last night and more or less told them to save the investment bank or else. Our friend from the business world, Joe Nocera, joins us from Boston. Joe, thanks for being with us.

Mr. JOE NOCERA (Business Journalist, The New York Times): Hey, thanks for having me, Scott. Ain't cell phones great?

SIMON: Yes, they are. Well, thank you for finding one - I know you buy the kind that you pay for in advance - and calling us. Boy, to be a fly on the wall in that meeting when the head of the Federal Reserve essentially said to the CEOs of Goldman Sachs, JPMorgan, Citigroup, and Merrill Lynch, find an industry solution because, if not, your bank could be next.

Mr. NOCERA: Boy, you know, it couldn't have been fun to hear that. And what's happening here, Scott, is we're entering a giant game of chicken because the banks don't want to bail out Lehman Brothers. Some of them have huge problems, like Merrill Lynch, and they could be next anyway. And they still think - and this gets to the whole moral hazard thing, Scott - they still think that if push comes to shove, the government will blink and figure out a way to put taxpayer money into the deal, into any deal, and give whoever saves Lehman a cushion.

And the federal government and Hank Paulson, the Treasury secretary, in particular are adamant about we don't want to put any more taxpayer money at risk. We already have it at risk in the Bear Stearns deal. We already have it at risk in the Fannie-Freddie deal. And so, you know, basically the question is who's going to blink first?

SIMON: Yeah. Well, it strikes me from that distance that the heads of other major financial institutions are saying, in so many words, how can you bail out Bear Stearns and then be deaf to bailing out other banks that need the assistance?

Mr. NOCERA: That's exactly right. And you know, this - you will never find a better example of moral hazard than this. I mean, remember when the Wall Street types and the government types, many of them were saying, you know, if you - we can't bail you out of your home if you can't pay your mortgage because it would set a terrible precedent for everybody else. Well, guess what? Bailing out Bear Stearns and Fannie and Freddie is setting a terrible precedent for everybody else because now every other bank expects the same thing to happen. And nobody is willing to put up their own capital.

I mean, remember, 10 years ago, long-term capital management was thought to pose huge risks to the system. And the same thing happened, but there had been no precedent. And indeed the Wall Street banks, the Wall Street institutions, did figure out a way to put up their own capital and assume a long-term capital risk and unwind that company without it costing the taxpayer a dime. And maybe in retrospect, that's what should have happened at Bear Stearns. But now, you know, the horse is out of the barn.

SIMON: And you have millions of Americans saying the government won't help me hold onto my house, but the government will help these guys who will order a 300-dollar bottle of wine to celebrate a deal.

Mr. NOCERA: That's exactly right. And people have a right to be upset about that. But they also need to understand that if your house gets foreclosed on, that will not bring down the financial system. Whereas there is a worry - although my sense is there's less of a worry than there was a few months ago - that the failure of one of these big banks, these investment banks, would in fact potentially cause a cataclysm in the financial system. And that's what they're trying to preserve.

But one of the things The New York Times pointed out today is one of the reasons the government is being so tough with the other banks is now they have people embedded at all these banks, and they actually understand a lot better the risks that are being taken, you know, just how much potential losses they still have to go, and so on, so the government actually sort of feels that if push came to shove and a Lehman Brothers had to be liquidated, it would not have quite the same ramification that they initially feared. That's something that has really come through in the last day or so.

SIMON: Joe, thanks very much.

Mr. NOCERA: Thanks for having me, Scott.

SIMON: Joe Nocera who's a columnist with The New York Times speaking with us here on Weekend Edition. And you're listening to Weekend Edition from NPR News.

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