Reporters Analyze Wall Street's Downward Turn
MICHEL MARTIN, host:
I'm Michel Martin and this is Tell Me More from NPR News. Coming up, if your child has severe behavior problems, you've probably tried everything from parenting books to punishment to counseling. But could these issues be symptoms of a bigger problem, a mental illness? We'll talk with experts about what to look for and how to cope.
But first, we have more on the country's economic crisis. As we talked about earlier, Treasury Secretary Henry Paulson is asking for $700 billion to devote to shoring up the sinking ships of Wall Street. This bailout package could be the biggest government rescue of private industry in U.S. history. There's intense pressure on Congress to move quickly to calm the jittery markets. To talk more about this and the overall economy going forward we're going to turn to a roundtable of close observers of the economic scene.
Aaron Elstein, he's a senior writer at Crain's New York. Angela Glover Blackwell, she's the founder and CEO of the economic and social equity research firm, PolicyLink. And Alan Hughes, editorial director of business finance at Black Enterprise. Welcome to all of you. Thank you so much for speaking with us.
Mr. AARON ELSTEIN (Senior Writer, Crain's New York): Hello.
Mr. ALAN HUGHES (Editorial Director of Business Finance, Black Enterprise): Thanks for having me.
MARTIN: I wanted to ask each of you, in all of the time you've been covering financial issues, have you ever experienced a period like this? Aaron?
Mr. ELSTEIN: Oh, no, nothing like this at all, and that's because it's never happened before. I mean, even in the 1930s you didn't see institutions of the magnitude of Lehman Brothers or Bear Stearns collapse like this. This is unprecedented.
Ms. ANGELA GLOVER BLACKWELL (Founder and CEO, PolicyLink): Oh, this is stunning. We haven't seen anything like this.
Mr. HUGHES: Yeah, I've got to go with consensus here. This really is unchartered waters. We have not seen this before.
MARTIN: So I'm going to play a clip of Treasury Secretary Henry Paulson. He was just speaking on FOX News on Sunday, just one of the programs he was on. Here he is.
(Soundbite of Fox News interview)
Treasury Secretary HENRY PAULSON (United States): The cost will be determined by how quickly the economy recovers and how quickly housing prices stabilize. I don't like the fact that we have to do this but it's better than the alternative. And once we stabilize the markets - we have a regulatory system that's broken, it's outdated, it's out-moded, it doesn't fit the world we live in. But first we need to stabilize the system.
MARTIN: Aaron, I want to start with you because we spoke just a minute ago to our correspondent, Adam Davidson, and Alvin Hall, who we consult with on personal finance issues. And both of them talked about the kind of aggregation of power that this bill would give to the Treasury Secretary, really unprecedented, sort of unchecked power to intervene in the markets. And for some reason that doesn't seem to be discussed very much. We seem to be talking about the cost of the package and clearly there's a lot of pressure to act quickly, but is there any resistance gathering to this idea of giving this one position so much power over the economy?
Mr. ELSTEIN: I got to think that Barney Frank, who heads the House Financial Services Committee, is going to have a lot to say about this before this is over. You know, we just all heard about this on Friday and it has taken a couple of days to digest just what the government - what the Bush administration is asking for here. And the more you think about it, the more profound it is. You know, it takes a while to digest just what they're seeking here. So there's going to be some questioning in the next couple of days as to just what Hank Paulson is going to get.
MARTIN: Alan, the administration is asking for $700 billion, but Alabama's senator Republican, ranking member of the Senate Banking Committee, Richard Shelby, says that number's too low. It's actually going to be closer to a trillion dollars. Do you think that's true?
Mr. HUGHES: Yeah, I believe that 700 billion is a starting point. This is not - this not going to be the final dollar amount because I believe as they start bailing and they start picking up these toxic assets that they're going to realize that - two things. One, that there's going to be more than they've realized. And two, there's going to be some issues with pricing these things. And I think a lot of that's going to come into play and that 700 billion, asstaggering as that number is, is low - is going to be low-balling.
MARTIN: Angela, let's bring you into the conversation. Henry Paulson warns that without Congress' swift action on this bailout, it could quickly affect average Americans. Is there an effect that you see so far? And how will the effect be felt - how will this be felt?
Ms. GLOVER BLACKWELL: This will be felt all the way from Wall Street to Main Street to people living on the street. The impact of this is not even beginning to be fully seen, and it's going to play out for months, for many months. Just think about it. The people who are on Wall Street, who are losing their wealth, are the ones who poor people depend on for soup kitchens, food banks, homeless shelters, services for children. That's going to disappear right away. And unfortunately, the people who are most vulnerable are going to suffer right away, not to mention all the people who are just struggling to stay out of poverty.
We have 90 million people in this country who are just lay-off, a health crisis out of poverty, living 200 percent below the poverty level, another 37 million living below the poverty level. These people are going to feel it. And I still just have such an anxiety for the people who are losing their homes. Let us never forget, this started off with a housing crisis, the most stunning testament to destructive power of bad debt that we've seen in this country.
MARTIN: Well, talk to me about that, Angela. You've written about the fact that there's a huge loss of wealth already, particularly in the African-American and Latino communities. Could you talk about that?
Ms. GLOVER BLACKWELL: Yes. According to the Center for Responsible Living - Lending, this is one of - this is the biggest loss of black wealth that we have seen in this country, right there with the loss of black land in the south. And when we think about what has happened to the people who have lost their homes or will lose their homes, we have not seen yet the government response to that crisis.
If the government is going to begin to respond to the financial crisis that we're in, they need to think about the people who've lost their homes and figure out a strategy for them, or who are about to lose their homes, as well as those people who will be impacted by the ripple effects of this housing crisis.
MARTIN: Aaron, are we seeing already job loss on Wall Street? Because it seems so far it's almost like a quiet crisis. We just don't - it's almost like the way the Iraq War is playing out in that you know there is this huge crisis going on but it seems like the effects so far are limited to people who you can't see. Unless you have a member of the family in the military or, you know, and yet - and what about this? I mean, we don't have bread lines, we don't have massive people showing up at unemployment centers and so forth. So are we starting to see the effect on the street - on the ground in your...
Mr. ELSTEIN: Yes, you're going to start seeing it in the next couple of weeks and months. Just Lehman Brothers, for example, which went bankrupt last week, they employed 25,000 people. More than half of them are going to lose their jobs. Some of them will stay on. They'll work for Barclays, which is the bank that bought the remains of Lehman. But most of the 25,000 people are going to be out of work and that's going to have a ripple effect on the New York economy and basically anywhere, anybody who's affected by financial services.
Merrill Lynch, another firm that's about to be acquired, this time by Bank of America, they're going to have job losses there. You're going to start seeing those. It's going to - it takes a while for job losses to sort of - on Wall Street to get felt by everyone else because Wall Streeters, when they lose their job, tend to get nice severance packages. And so people who lost their job early this year are now having their severance packages go away and they're starting to have to look for work in a major way. So it takes - it's not an instant thing, but it's - you're going to start seeing it now in a big way.
MARTIN: So you're saying that the traditional cushions that people are used to seeing on Wall Street are not going to be there this time, it's unlikely that there will be this kind of cushion?
Mr. ELSTEIN: Yeah. The Lehman people, for example, the firm went bankrupt. There's no cushion left for them. It's gone. So their wealth is gone, their - and they're also, by the way, entering the job market in a dismal time. So you're going to see some major difficulty there. I don't see how can be avoided.
MARTIN: Alan, we just talked to the Black National MBA Association, which is meeting in Washington, some interesting timing there. And a number of our producers went over to talk to people who were talking about their job prospects. What was striking to me is a number of these people - these are, you know, first generation college graduates or first generation to get graduate degrees in many cases. And I'm just wondering, what about the effect of this sort of second generation, the post-civil rights generation, and the effect that this will have upon the move into - because a lot of these people are already middle class - but the move into sort of the stable middle class, particularly for people who had not been part of it previously?
Mr. HUGHES: Well, as we said before, this is unchartered territories so it's really hard to see what the full effect is going to be. I mean, you can kind of, you know, surmise what some of them will be. For example, anyone that's looking to buy a home now, they can't just put zero percent down, they can't put 10 percent down. I personally know somebody that had 20 percent to put down and they were still rejected. So we know that the number one way to build wealth is to purchase a home. Those people that are sort of in a position where they could conceivably not even - you know, we're not even talking about subprime credit is pretty good. They are ready to buy. And it's going to be really hard to get into that home, which has long-term repercussions when you start talking about building wealth.
MARTIN: But what about this - the question that we talked about earlier with the fact that this administration philosophically has tended to be opposed to intervention, to market intervention, and Republicans in Congress on the whole have been generally opposed to market intervention. Aaron, I'm just curious, how is this...
Mr. HUGHES: (Unintelligible), didn't they?
MARTIN: Yeah. I mean, obviously, you'd think that the scope of the crisis has kind of changed their minds about this, but is there the possibility of resistance to this, given that you do have a very strong sort of conservative core which has not believed that this is an appropriate thing?
Mr. ELSTEIN: Oh, I think the idea that the market is a pristine thing that should be left alone and will solve its own problems, I think that idea is just shot. And I think that there's going to be significant regulatory overhaul. And it will get bipartisan support, and I think the only question is the details. And I think you're going to see it in three areas.
We saw it with the investment banks this morning. Morgan Stanley and Goldman Sachs are now going to be regulated like commercial banks. You're going to see a significant overhaul on how mortgage companies are regulated. You're going to see significant overhaul in insurance companies, companies like AIG. These are the - these three companies, investment banks, mortgage companies, insurance companies, are where the big problems from this financial crisis are coming from, and those companies are going to be significantly supervised in a different way in the future.
Mr. HUGHES: It's really hard to make an argument for letting the market regulate itself in light of what's happened over the last few weeks, let alone the last six months.
MARTIN: If you're just joining us, you're listening to Tell Me More from NPR News. We're talking about the economic crisis and the proposed administration bailout of the financial sector with Angela Glover Blackwell, Alan Hughes and Aaron Elstein. I wanted to talk more about this - this whole - this question of the last two independent investment firms asking to be converted to bank holding companies. Aaron, how significant is...
Mr. ELSTEIN: Asking, huh?
MARTIN: Asking to be - or do you think that's not true? I mean, it was - it was reported.
Mr. ELSTEIN: Certainly. I mean, what was reported is that they agreed to it. I think what happened is that the Fed came to them and said, look, in exchange for all this money that we're giving you, you have to agree to some rules and here they are, and I don't think those banks had a choice. This is a significant change because these banks are now going to have to have bank examiners sort of crawling around their offices looking at the deals they make, the loans they make. This is a significant shift. This is the kind of thing that commercial banks like Citibank and Chase and Bank of America, they've lived with this sort of thing for years. But what made Wall Street different was they were gunslingers who could speculate and do what they wanted pretty much on their own.
There was the SCC that, you know, was nominally in charge of them, not particularly aggressively so the last several years, but now you've got a new regulatory regime on these banks and they will have to take a lot less risk. They will have to have a lot more capital on their books and they will very likely have to pay their people less.
Mr. HUGHES: Yeah, I agree. They definitely have to build up their deposits because you know, that's going to be - that's rule one. They're going to have to convert from being investment banks to being, you know, true banks. And you know, the haze of Gordon Gecko, you know, and the deal making, you know, sort of in backroom deals, those days are over. And you know, the investment banks, whether it was their choice or whether the Fed - which I agree, I believe it was in return for a lot of money - they've got to go along with it. Their model is just not going to work now.
MARTIN: What questions does each of you have of going forward? What are the questions that we should be thinking about in the weeks ahead in sort of evaluating this bailout package and what impact it's going to have? Because there's so much pressure to move quickly. You know, you have to wonder whether the lawmakers are even going to have time to evaluate this package fully because at every day that they don't act they're under pressure, so, oh, you know, you're making the problem worse. On the other hand, I think, you know, taxpayers do deserve sort of considered judgment here. So what questions does each of you have? Aaron, you can start.
Mr. ELSTEIN: My first question would be this. How are you going to decide what these assets, these toxic assets on the books of all these investment things, how are you going to decide what they're worth? Because these banks don't know, and what the government - what Paulson is saying he wants to do is buy these assets. Well, what price? How are you going to figure out what the price is? Some of these assets are extremely complicated: credit derivatives, collateralized debt obligations, credit defaults swaps. And if your eyes haven't glazed over yet...
And these are very complex instruments. They are very hard to value. There is no market place for these things, and so I'm afraid that they're going to guess, and they're going to guess badly. And this will wind up causing the taxpayers a lot of money.
MARTIN: Alan, what questions do you have?
Mr. HUGHES: Yeah, in addition to that, I'd like to know what all of this is going to mean to, you know, Joe taxpayer. I mean, 700 billion is a lot of money. We don't know what the final sticker price is going to be on this thing. You know, what does that mean for me? Can I expect more taxes going forward, to pay more taxes? Also, I want to know what this means for a potential homebuyer. You know, I'm thinking about the individual right now, and it's not looking good in terms of the opportunities to get into a home. Even though housing prices are going down, the lenders are getting stricter and with government oversight - is essentially going to be everywhere now. I mean, what does this all mean?
Ms. GLOVER BLACKWELL: I am curious about the alternatives. Henry Paulson keeps saying, this is better than the alternative. I think the American people have the right to know what that alternative is. We need to know how much of a meltdown we were on the verge of having. And I want to know what the government is going to do for all of the vulnerable, hardworking people in this country who are going to be impacted by this. The government cannot stop with the $700 billion bailout for the people on Wall Street. They have to keep going and make sure that all the people have the support that they deserve to get through this crisis as hurt as little as possible.
MARTIN: What would that look like? What would a package like that look like?
Ms. GLOVER BLACKWELL: Well, a package like that would certainly continue to focus on the foreclosure crisis and make sure that people have access to the lending that they need to be able to get homes in the future and that those people who got caught up in this greed period are not having to suffer unnecessarily, but we haven't finished doing the package for people who have been impacted by foreclosure.
MARTIN: And of course, one of the things we have not talked about is the presidential contest. And I wonder if this - well, clearly, it's already elevated the economy to the top of the list of issues. I'll be very interested to see how this sort of plays out as we go forward.
We're going to - we're going to have to leave it there. Angela Glover Blackwell is the founder and CEO of PolicyLink. She joined us on the line from Oakland, California. Alan Hughes is the editorial director of business finance at Black Enterprise, and Aaron Elstein is a senior writer at Crain's New York. They both joined us from our New York studios. I thank you all so much for speaking with us.
Mr. ELSTEIN: Thank you.
Ms. GLOVER BLACKWELL: Thank you.