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Blackstone's Peterson: Bailout Size Is Mind-Numbing

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Blackstone's Peterson: Bailout Size Is Mind-Numbing

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Blackstone's Peterson: Bailout Size Is Mind-Numbing

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LINDA WERTHEIMER, Host:

With lawmakers and financial officials here in Washington wrangling over the bailout plan, we spoke earlier with Pete Peterson. He is co-founder of one of the country's biggest private investment firms, the Blackstone Group. He's also a former chairman of the Federal Reserve Bank of New York. And in the '70s, he was CEO of Lehman Brothers. Mr. Peterson, welcome to the program.

PETER PETERSON: Thank you very much.

WERTHEIMER: Now, the government looks like it's going to take on another 700 billion to one trillion dollars in operating this bailout. What do you think this means for the government's finances, for debt in this country?

PETERSON: I think what happened here is Hank Paulson and Ben Bernanke looked at the alternative and said that's not an alternative we can accept. The alternative they came up with is mind-numbing in its size. It's mind-numbing in its concept, really, particularly from a Republican administration that always believed in the market. But I have great confidence in these gentlemen, and I think they decided that letting this develop into panic was totally unacceptable.

WERTHEIMER: You know, the plan calls for the Treasury to hire people to manage these securities that the Treasury will buy. How do you see this? Little financial firms inside the Treasury? What does - what would this look like?

PETERSON: I've wondered, without knowing what I'm talking about, whether there would be some way that we could get the best brains somehow involved in some kind of oversight activity. Warren Buffett knows as much about real values as anyone. Paul Volcker is a person of extraordinary wisdom. In the course of coming up with how you monitor these things, we're going to have to be considerably more imaginative than we were in the case of the Resolution Trust Corporation and turn it over to some rather lowly paid government bureaucrats.

And this may require us thinking very creatively about who actually does this, because the people in the private sector who are trading on these securities are making far, far more, as you can imagine, than a typical government employee.

WERTHEIMER: Mr. Peterson, do you think that there is a chance that this $700 billion bailout that Mr. Paulson, the Treasury Secretary, has proposed - do you think there's a chance that this just won't work?

PETERSON: Well, you notice they've been careful in describing what this is. You notice the words are stopping the bleeding, creating a floor. You don't hear many words like, this is going to restore us to economic health. In other words, it's a defensive action. To me, the most salient fact that we have to be watching about what the effect of this is on the future is what happens to housing prices.

If, God forbid, housing prices should take another big tumble, that would just create a whole new bundle, obviously, of problems. Now, if housing prices stabilize, or over time, go up a little bit, the government could do very well on this. So keep your eye on housing prices if you want to have a metric of what might happen in the future.

WERTHEIMER: Pete Peterson is senior chairman and co-founder of the Blackstone Group.

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