Wall Street Turmoil Forces Change to Banking Landscape

GWEN IFILL:

Now, an in-depth look at the crisis on Wall Street and the fallout, beginning with a report on what transpired today and this past weekend, one of the most tumultuous in Wall Street history.

HENRY PAULSON, U.S. Treasury Secretary:

I hope you all had an enjoyable weekend.

GWEN IFILL:

This morning's rude awakening — news of the disintegration of two Wall Street investment houses — sent Treasury Secretary Henry Paulson to the White House to try to calm the waters.

HENRY PAULSON:

Well, as you know, we're working through a difficult period in our financial markets right now as we work off some of the past excesses. But the American people can remain confident in the soundness and the resilience of our financial system.

GWEN IFILL:

But the markets skidded all day after Paulson and Federal Reserve Chief Ben Bernanke spent the weekend in New York, but would not commit to government aid.

As a result, Merrill Lynch was sold; 158-year-old Lehman Brothers, carrying $613 billion in debt, declared bankruptcy.

HENRY PAULSON:

Nothing is more important right now than our stability of our capital markets. And so I think it's important that regulators remain very vigilant. We're very vigilant. But we do not take — and I don't take lightly — ever putting the taxpayer on the line to support an institution.

JOURNALIST:

Should we read that as "no more"?

HENRY PAULSON:

Don't read it as "no more." Read it as that, you know, it's important, I think, for us to maintain the stability and orderliness of our financial system.

GWEN IFILL:

Lehman gave way as a result of billions of dollars in bad bets on the subprime mortgage market. Paulson declined to use taxpayer dollars to help.

Merrill Lynch was saved only by a late-night agreement to merge with Bank of America. The $50 billion all-stock transaction reassured shareholders and the millions of Americans who use its huge network of stockbrokers.

Bank of America CEO Ken Lewis and Merrill Chief John Thain said the deal came together quickly.

KEN LEWIS, Bank of America CEO: John called me on Saturday morning, and we began to talk about this opportunity over the phone. And then, a few hours later, we were talking about it in person, and then basically went from there.

GWEN IFILL:

This is the second time Bank of America has come to the rescue of another failing institution caught in the grip of the mortgage credit crisis. Earlier this year, it purchased lender Countrywide Financial for pennies on the dollar.

Merrill CEO Thain was asked what he would say to a nervous public.

JOHN THAIN, Merrill Lynch Chairman:

This is probably the most difficult environment in the financial markets that I've experienced in my 30 years in the business. But it is a cycle, and we will get through it. It will get better.

And when it gets better, I think this combination will be incredibly strong and do very, very well. But it is definitely a very, very difficult time, and it's not going to get better quickly.

GWEN IFILL:

With the government-backed sale of Bear Stearns in March, three principal independent investment banks are now going or gone.

Contributing to the uncertainty this weekend was the financial health of insurer American International Group, which is now seeking $40 billion in federal assistance to shore up its faltering balance sheet.

Late today, the Wall Street Journal reported that the federal government had asked two other firms, Goldman Sachs and JPMorgan, to help raise the money.

And last week, the government agreed to take over the congressionally chartered lenders Fannie Mae and Freddie Mac. Together, they hold about half of the outstanding mortgages in the United States.

The underlying concern:

that the slide in the housing credit market has not yet hit bottom.