Greenspan: Tough decisions await in Lehman case

Without offering a recommendation, former Federal Reserve Chairman Alan Greenspan said Sunday the government faces tough choices as it tries to help arrange a rescue of Lehman Brothers without using public money.

He cautioned that more major U.S. financial institutions may fail in the future, but the government should not protect them all.

The weight of the housing and credit crises, he added, "is in the process of outstripping anything I've seen" and has yet to run its course. "It will continue to be a corrosive force until the price of homes in the United States stabilizes," perhaps next year, he said.

The immediate challenge for the Bush administration is resolving the fate of Lehman Brothers. Global fears intensified over the weekend that Lehman's collapse would stagger markets and undercut confidence in the U.S. financial system. The field of possible buyers has narrowed; how to finance the rescue was the key issue.

Germany's finance minister appealed for a resolution before Asian markets opened Monday, and more discussions involving officials from the Federal Reserve and Treasury Department were expected.

"They're trying to do it in a different manner" than the Bear Stearns model, Greenspan noted. The Fed in March agreed to provide a loan of nearly $29 billion as part of JPMorgan Chase & Co.'s takeover of the firm.

"The reason is obvious from seeing the effect of the bailout of Bear Stearns. When Bear Stearns was bailed out, it drew a line under that level of firm, implying that anything that was larger than that firm was capable of getting federal assistance," Greenspan said in a broadcast interview.

But, he said, "if you generalize that, it is very clear that that is an unsustainable situation in the financial markets." The government cannot set a floor below these firms, Greenspan said.

Asked what would happen if the government cannot find a way to reach a deal on Lehman without public money, Greenspan said, "They have to make a very key decision as to whether or not they allow it to liquidate or they support it. And those are very difficult decisions."

He would not make a recommendation about what to do.

"I don't know enough of what is going on. I would have to have very detailed information of what's on the Lehman Brothers balance sheet ... and what the repercussions would be with any particular solution," he said.

The presidential nominees, Republican John McCain and Democrat Barack Obama, favor a private solution to Lehman's troubles, aides said.

The government has acted aggressively in taking over the struggling mortgage companies Fannie Mae and Freddie Mac in addition to the Bear Stearns rescue. The fallout from risky investments is dragging down companies such as American International Group Inc., the world's largest insurer, and Washington Mutual Inc., the nation's biggest savings bank.

"Let's recognize that this is a once-in- a-half-century, probably once-in-a-century type of event" - the worst "by far" in his career, Greenspan said.

"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. And indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes. That will induce a series of events around the globe which will stabilize the system," he added.

His best guess for that happening in early in 2009.

With more financial companies under stress, Greenspan said he suspects more institutions will fail.

"But in and of itself that does not need to be a problem. It depends on how it is handled and how the liquidations take place. And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers," he said.

Some types of institutions - financial ones in particular - are so essential to the economy that they cannot be allowed to fail, Greenspan said. He did not seem to put the auto industry in that category, declining to endorse a request by Detroit's car companies for Congress to provide money for a $25 billion loan program.

"I cannot think of a list which is longer than those who would have similar such desires and justifications for government help," Greenspan said. Such assistance "draws on our scarce savings supply," undermines growth and causes economic stagnation, a danger to a democracy, he added.

Greenspan was interviewed on "This Week" on ABC.