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BARTIROMO: PERHAPS, BUT NOW WE SEE THIS ENORMOUS NEED FOR CAPITAL ON THEPART OF OUR FINANCIAL INSTITUTIONS AND OUR VIEWERS ARETHINKING HOW TOUGH IS IT?HOW WORRIED SHOULD THEY BE? HOW CLOSE DO YOU THINK THE GLOBAL FINANCIAL SYSTEM CAME TO REALLY SEEING A HALT OR A SEIZURE IN THE LAST COUPLE OF WEEKS BEFORE THE BEAR STEARNS BAIL OUT?

GREENSPAN: I'M TALKING ABOUT THE NON-FINANCIAL SECTOR OF THE ECONOMY. IT STILL IS AN EXTRAORDINARY GOOD SHAPE AND WE'RE SEEING LITTLE IN THE WAY OF BORROWING REQUIREMENTS, BUT IT IS UNDER PRESSURE BASICALLY NOT BECAUSE OF THE BORROWING, BUT THE REVENUES ARE BEGINNING TO BECOMEDEPRESSED BY PRESSURE I SHOULD SAY. LARGELY BECAUSE THE CONSUMERS ARE BEGINNING TO SHRINK AND THE AUTOMOBILE MARKETS ARE CONTRACTING AND PRODUCTION IS BEGINNING TO EASE. WE ARE IN THE THROWS OF A RECESSION. SO THAT THE REAL PROBLEMS ARE OCCURRING BASICALLY FROM THE AREASASICALLY FROM THE AREAS AND SOURCES OF REVENUES. AT SOME POINT THIS TUG OF WAT IT WILL SOLVE THE FINANCIAL PROBLEM OR PULL DOWN THE REAL ECONOMY AND I DON'T THINK WE HAVE ENOUGH KNOWLEDGE OF HOW THIS SYSTEM WORKS TO MAKE THAT JUDGMENT DEFINITIVELY.

BARTIROMO: REAL QUICK ON THE FINANCIAL SERVICES COMPANIES, THAT'S WHEREI WAS FOCUSED, NOT ON THE NON-FINANCIAL.HOW WORRIED ARE YOU?

GREENSPAN: FOR THE FIRST TIME IN MY MEMORY THAT WE HAD BOTH THE BANKING SYSTEM AND THE SECURITIES MARKETS IN TROUBLE.HISTORICALLY IT WAS ONE OR THE OTHER AND WE FOUND THAT IN 1989 AND 1990 WHEN THE BANKS WERE UNDER SEVERE PRESSURE, THE WHOLE OPENING BEGAN AND THE INTERMEDIATION OF SAVINGS INTO INVESTMENT WAS FACILITATED BY THE SECURITIES MARKETS. OTHER TIMES WHEN THE MARKETS WERE THERE, THE BANKS WERE VIABLE. THIS IS THE FIRST TIME WHEN BOTH WERE UNDER PRESSURE AND AT THIS STAGE, IT'S EVIDENT. WHAT IS HAPPENING IN THE MARKETS AT THIS STAGE IS THAT AN EVER-INCREASING NEED FOR ADDITIONAL CAPITAL IN ALL FINANCIAL INSTITUTIONS FROM BANKS, HEDGE FUNDS AND INVESTMENT BANK, I THINK WHEN WE COME OUT OF THIS, THE MARKETS WILL DEMAND A MUCH HIGHER RATIO OF ECONOMIC CAPITAL AND LOWER LEVERAGE AND A MATTER OF TIME BEFORE THAT THE LINK TO THE OLD SYSTEM WILL BE REVISED AS WILL BE THE REGULATORY REQUIREMENTS IN ALL FORMS OF INSTITUTIONS. FUNDAMENTAL TO RAISE CAPITAL.

BARTIROMO: LET'S LEAVE IT THERE AND CONTINUE OUR CONVERSATION ON HOW THINGS WILL CHANGE AS WE CONTINUE OUR CONVERSATION.STAY WITH US AS WE CONTINUE OUR INTERVIEW WITH DR. GREENSPAN ANDTALK ABOUT THE ENVIRONMENT THAT HAS REACTION TO THE PROPOSED CHANGES.

BARTIROMO: WE CONTINUE WITH OUR EXCUISIVE CONVERSATION WITH DR. GREENSPAN. WE LEFT OFF TALKING ABOUT HOW THE MARKETS WILL CHANGE IN TERMS OF THE REGULATORY ENVIRONMENT. LET ME GET YOUR THOUGHTS BEFORE WE PUT A BUTTON ON HOW WE SEE THINGS IN THE ECONOMY.WHAT DO YOU THINK ARE THE BIGGEST CHALLENGES OR RISKS FACING THE ECONOMY AND THE GLOBAL ECONOMY. THE IDEA THAT THERE IS A DECOUPLING I KNOW THAT YOU ARE NOT A BELIEVEBELIEVEER IN OUR LAST INTERVIEW.WHERE ARE YOU IN TERMS OF THE ECONOMY.

GREENSPAN: THE OBVIOUS PROBLEM IS THAT THE WHOLE FINANCIAL SYSTEM HAS FROZEN. IN THE SENSE THAT THE AMOUNT OF ISSUANCE WITH SECURITIES AND THE OVER ALL DEGREE OF LIQUIDITY THROUGHOUT THE SPECTRUM NOT ONLY IN OBVIOUSLY TRIPLE A OR RISKMENT SECURITIES BUT OUT TO DOUBLE Bs AND TRIPLE Cs. WE HAD A LIQUID SYSTEM WHICH WAS DRIVEN BY I A EUPHORIA THAT BELIEVED THERE WAS NO CEILING TOANYTHING. THAT WAS THE CASE. EVERYTHING TURNS ON A DIME AND WE GO FROM EUPHORIA TO FEAR AND THOSE ARE TWO FUNDAMENTALLY DIFFERENT TYPES OF PHENOMENON. THE FEAR BASE DOMINATING THE ECONOMY NOW IS A CONTRACTION-TYPE PHASE. THE ISSUE FATHAT WE CONFRONT, THE CRITICAL QUESTION IS WHEN WILL THE ESTIMATED EARNINGS, SPECIFICALLY THE WRITE OFFS COME TO AN END? THAT WILL OCCUR BASICALLY WHEN THE PRICE OF HOMES IN THE UNITEDSTATES REACHES BOTTOM. I SHOULDN'T SAY THAT. I WILL SAY THE NECESSARY CONDITION ALTHOUGH IT MAY NOT BE A SUFFICIENT CONDITION BECAUSE AT THE MOMENT WE HAVE WHERE THE REALLY WEAK PART OF THE SYSTEM IS IS IN THE SUBPRIME MORTGAGE-BACKED SECURITIES AND THE ALT A MORTGAGE BACK AND TO A LESSER EXTENT, THE JUMBOS. AS A CONSEQUENCE OF THE PROBLEMS WHICH REST SOLELY ON WHERE HOME PRICES ARE GOING, WE HAVE LITTLE KNOWLEDGE ON THE SIZE OF THE LOSSES.

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