From the 2009 News Archive
Prof. Greenberger Discusses Financial Crisis on Frontline
, JD, a professor at the School of Law who was the director of the Division of Trading and Markets at the U.S. Commodity Futures Trading Commission during the Clinton administration, appeared on PBS' Frontline
on Feb. 17 to discuss the collapse of some of Wall Street's most venerable institutions. The special, "Inside the Meltdown
," gave a blow-by-blow account of the catastrophic decisions that threw Bear Stearns, Lehman Brothers, and American International Group (AIG) into financial turmoil, and followed the federal government’s response as the crisis ballooned on an almost daily basis.
Prof. Greenberger said that AIG's demise was apparent immediately after the U.S. Treasury and the Federal Reserve chose not to rescue Lehman Brothers, a move that contrasted sharply with the billions of dollars spent to save Bear Stearns in March of 2008. It's when systemic risk became a reality.
"AIG [did] not have the money in the bank to support the commitments it made," said Greenberger.
AIG, the world's largest insurance company, sold hundreds of billions of dollars worth of credit default swaps, complex financial instrument that - almost like insurance - are based on the bet that companies like Lehman Brothers wouldn't go bankrupt. AIG also dumped some of their profits into risky investments tied to subprime mortgages, and those bills were coming due.
But at this point in mid-September 2008 the credit markets were frozen because "no one trusted anyone else." Banks refused to lend to other banks or large companies for fear that that institution would be next to fail. AIG needed a loan, but no one stepped to the plate.
Enter then-Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. Both men knew that the ripple effects of AIG's collapse could cripple the U.S. economy because the company's toxic investments tied together most of Wall Street. Drastic action came in the form of a loan from the Fed to AIG - to the tune of $85 billion.
Greenberger called it a shift in ideology, especially for Paulson.
"They had to throw their principles out the door and save the economy, and whatever criticism there would be of government intervention was a small price to pay for the deluge that would have occurred if AIG would have collapsed," said Greenberger.
Days later, Paulson and Bernanke implored congressional leaders to act on the first bailout proposal: $700 billion. If not, Paulson said, the U.S. financial system and the world financial system could melt down in a "matter of days."
"All hell has broken loose, and by that time Bernanke at the Fed is looking at the Great Depression and all he's learned about what should have been done to save the American public from the Great Depression," Greenberger said.
Over the past few years, Greenberger has testified numerous times on legislative reform proposals to bring a regulatory structure to the financial derivatives markets. Most recently, he testified before the U.S. House Committee on Agriculture
at a hearing on the discussion draft of the Derivatives Market Transparency and Accountability Act of 2009.
Greenberger teaches a seminar at the School of Law entitled "Futures, Options and Derivatives," and he is a Technical Expert to the United Nations Commission of Experts on Reform of the International Monetary and Financial System.
Posted by Nick Alexopulos