Transcripts

"Commentary"-Lehman's Lessons

SUSIE GHARIB: In tonight's commentary, learning from Lehman's demise. Here's Glenn Hubbard, dean of the Columbia University Graduate School of Business and former chairman of the Council of Economic Advisers.

GLENN HUBBARD, GRADUATE SCHOOL OF BUSINESS, COLUMBIA UNIVERSITY: In what has become a familiar weekend drill, a major financial institution, Lehman Brothers, failed to emerge today in its last Friday form. And Lehman's bankruptcy has important lessons for policymakers. Lehman's demise as one of Wall Street's oldest and most well-known independent firms comes on the heels this year of Bear Stearns, Fannie Mae (FNM), and Freddie Mac (FRE), and now Bank of America's acquisition of Merrill Lynch. Just two Wall Street titans remain. And despite aggressive action by the Fed and Treasury, additional write- downs are coming. We cannot and should not try to protect every institution, but there are steps we should take. To limit the further spread of real estate woes to the economy, expanded FHA authority for mortgage refinancing combined with a clean-up agency like the 1930s Homeowners Loan Corporation or the 1980s Resolution Trust Corporation would help. This taxpayer support offers more stimulus than temporary tax cuts or public spending. The financial meltdown that engulfed Lehman also highlights the need for regulatory reform. The problem is actually not too little regulation; both lightly and heavily regulated institutions are in trouble, and some regulations actually encouraged the growth of high-risk mortgage lending. We do need smarter regulation. A key step is to broaden capital and liquidity requirements and increase them during financial booms to lean against risk-taking, and perhaps weekends will be quieter. I'm Glenn Hubbard.