Greenspan: Worst Economic Crisis Ever Seen

Greenspan to Stephanopoulos: This is 'By Far' the Worst Economic Crisis He's Seen in His Career

September 14, 2008 11:07 AM

ABC News' George Stephanopoulos Reports: Former Federal Reserve Chair Alan Greenspan said this morning that this is "by far" the worst economic crisis he has ever seen. "There's 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," he said in an exclusive "This Week with George Stephanopoulos" interview.

Greenspan also noted, "let's recognize that this is a once-in-a-half-century, probably once-in-a-century type of event."


Lehman woes threaten AIG and Merrill Lynch

AS the endgame plays out for Lehman Brothers, pressure is rising on two other financial behemoths to take action to convince investors to stick with them.

On Friday, credit ratings firm Standard&Poor's threatened to downgrade American International Group, citing the significant decline in the company's share price and the increase in credit spreads on the company's debt.

Meanwhile, AIG will likely hold an analyst call this morning and could announce a series of steps aimed at reassuring investors, including possible asset sales, a source said.

A rapid plunge during the week in the price of AIG shares -- the stock fell more than 30 per cent on Friday alone -- coupled with equally worrisome signs for the insurance giant in the debt markets appeared to increase the heat on management to act.

Meanwhile, shares of securities firm Merrill Lynch fell 38 per cent in the four trading days since concerns emerged about Lehman's viability as an independent company when talks to sell a stake to a Korean bank ended.

While both Merrill and AIG were roiled as Lehman-generated concerns rippled through the market, each has distinct sets of problems.


AIG plans $20 billion asset sell-off - paper

American International Group, the world's biggest insurer, is planning a $20 billion asset sell-off as it fights to correct a slump in its shares and braces for the impact of Hurricane Ike, the Sunday Times said.

The newspaper, without citing sources, said details of the plan could come as early as Monday.


How big are Lehman, Merrill, and AIG?

In 1998, Long-Term Capital Management nearly collapsed. They had $129 billion in assets and $124 billion in liabilities. But the real problem was that they were counterparty to $1.25 trillion in derivatives trades. Because their collapse might have created a chain-reaction throughout the financial system, then-President of the NY Fed William McDonough called together the heads of the major commercial banks and investment banks and politely asked them to cooperate. The banks bailed out LTCM without any government backstop. (Bear Stearns declined to participate in the bail-out, a fact never forgotten by its peers.)

Bear Stearns (10-Q) had $399 billion in assets (or “assets”) and $387 billion in liabilities (10-Q page 5). But the real problem was that they were counterparty to $2.7 trillion in derivatives trades (10-Q page 36). That was enough for the Fed to give JP Morgan a hand in taking them over last March.

Lehman brothers (10-Q) has $640 billion in “assets” and $613 billion in liabilities (10-Q pages 5-6). But they are counterparty to “only” $729 billion in derivatives trades (10-Q page 40). This weekend, the current President of the NY Fed, Timothy Geithner, has called together the heads of the major commercial banks and investment banks and is politely asking them to cooperate. But this time, they want another deal like Bear Stearns. Think of it as a high-stakes game of chicken, with Hank Paulson representing you. We will know the outcome by 8 P.M. EDT tomorrow.

Merrill Lynch has $966 billion in assets and $931 billion in liabilities. They are counterparty to $4.2 trillion in derivatives trades. They get brownie points for including HTML anchors in their 10-Q. (Do we still use the phrase “brownie points” after Katrina?)

AIG (10-Q) has $1.0 trillion in assets (10-Q page 1) and $972 billion in liabilities (page 2). They are counterparty to at least $447 billion in credit default swaps (page 87). But that does not include the old-fashioned insurance operations, and who knows what else because I am tired of slogging through this stuff. Executive summary: What would happen if an insurer with $1 trillion in assets were to fail? I have no idea; and neither, I suspect, does anyone else.