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BARTIROMO: TREASURY PUTTING IN CAPITAL. HANK PAULSON WANTS AN UNLIMITED AMOUNT OF CAPITAL AT TREASURY'S DISCRETION. IS THIS A BLANK CHECK? IS THERE A DOWN SIDE TO THIS?WHAT ARE YOUR THOUGHTS, DR. GREENSPAN?

GREENSPAN: WELL, I'VE ALWAYS ARGUED FOR -- AND I'VE MADE INNUMERABLE SPEECHES ON THIS SUBJECT. BUT THE MODEL THAT WAS CONSTRUCTED BY FANNIE AND FREDDIE IS AN UNSTABLE STRUCTURE THAT YES YOU CAN PUT CAPITAL IN IT AND SUPPORT IT AND FEECTIVE SECRETARY PAULSON HAD NO CHOICE. IF THEY DIDN'T SUPPORT FANNIE AND FREDDIE AT THE TIME THEY DID, OR MADE THE STATEMENTS THATTHEY DID, THERE WAS A VERY MAJOR DANGER OF UNRAVELING. BUT WE SHOULD REMEMBER HOW WE GOT HERE AND NOT LET IT HAPPEN AGAIN.MY OWN VIEW IS I DON'T KNOW WHETHER PUTTING IN CAPITAL IS GOING TO BE ADEQUATE. I THINK THE SOLUTION HERE ULTIMATELY IS GOING TO BE ULTIMATELY, ONE, A NATIONALIZATION OF BOTH FANNIE AND FREDDIE. AND I HOPE A RESTRUCTURING IN NATIONALIZATION MORE CAPITAL COMING FROM TAXPAYER MONEY.AND THEN SPLIT THEM UP INTO FIVE OR TEN SEPARATE ENTITIES AND SELL THEM BACK IN THE MARKET.YOU CANNOT HAVE A TYPE OF ORGANIZATION WHICH IS HALF PUBLIC, HALF PRIVATE. ESSENTIALLY, THE PROFIT TURNS OUT TO BE FOR THE PRIVATE SECTOR AND THE LOSSES ARE SOCIALIZED. THAT IS NOT CAPITALISM.THAT IS NOT THE WAY OUR SYSTEM FUNCTIONS. AND FANNIE AND FREDDIE ARE A MAJOR ACCIDENT WAITING TO HAPPEN. AN ARGUMENT I'VE BEEN MAKING FORYEARS. AND WHAT THEY NEED IS A VERY MAJOR INCREASE IN COMPETITIVE CAPABILITIES AND CAPITAL, AND THE ONLY WAY IS TO ARRANGE FOR IT ULTIMATELY THAT THEY NO LONGER HAVE THE IMPLICIT SUBSIDY, WHICH LEGALLY THEY DON'T HAVE, BUT NOBODY BELIEVES IT AND WITH BEAR STEARNS THE NOTION THAT SOMEHOW THEY WEREN'T -- FANNIE AND FREDDIE WERE NOT BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT BECAME A SHAM.

BARTIROMO: I'M GOING TO GET YOUR TAKE ON THIS IN A MINUTE AS WELL, BUT THE WHOLE IDEA OF A BACKSTOP AND PUTTING THIS LENDER OF LAST RESORT IN PLACE FOR BEAR, FOR FANNIE AND FREDDIE, I'M NOT GOING TO ASK YOU HOW WE GOT HEREAND -- YOU'VE ANSWERED THOSE QUESTIONS A MILLION TIMES AND YOU WROTE AN OP-ED ON IT.BUT WHAT I WOULD LOVE TO DO IS TAKE YOU ON A HYPOTHETICAL TRIP BACK TO THE FED.I'M NOT ASKING YOU TO COMMENT ONBEN BERNANKE.I KNOW YOU'RE NOT GOING TO DO THAT, AND I DON'T WANT TO. I'M NOT INTERESTED IN IT.BUT LET'S HYPOTHETICALLY SAY YOU'RE CHAIRMAN OF THE FED, YOU'RE THERE DURING THAT WEEKEND, BEAR STEARNS IS ON THE BRINK, YOU'RE FIELDING ALL THESEEMERGENCY CALLS. WHAT DO YOU DO? DO YOU DO THE BACKSTOP?

GREENSPAN: YOU HAVE TO DO THE BACKSTOP BECAUSE ONCE YOU GET TO THAT POINT YOUR PARTICULAR CHOICES ARE VERY LIMITED. THE CRITICAL ISSUE HERE WHICH I'M UNCOMFORTABLE WITH IS THAT IS A FISCAL POLICY OPERATION, ESSENTIALLY SOMETHING WHICH SHOULD BE SET UP IN THE TREASURY DEPARTMENT. IN OTHER WORDS, WE HAD A RESOLUTION TRUST CORPORATION WHICH ACTUALLY WORKED REASONABLY WELL. I'M RECOMMENDING EFFECTIVELY THAT WE OUGHT TO HAVE A STANDBY GROUP OF EX OFFICIO OFFICERS OF A LITTLE ORGANIZATION WHICH WOULD PERIODICALLY SORT OF HOLD THE SECRETARY OF THE TREASURY, CHAIRMAN OF THE FED, AND DECIDE WHETHER A PARTICULAR INSTITUTION WAS AT THE EDGE AND COULD CREATE MAJOR SYSTEMIC RISK IF IT WAS ALLOWED TO LIQUIDATE QUICKLY, AT WHICH POINT A STATUTE WOULD BE INITIATED IN WHICH THAT PARTICULAR INSTITUTION WOULD EITHER BE TAKEN INTO A CONSERVATORSHIP OR RECEIVERSHIP ESSENTIALLY RESTRUCTURED, AS WAS DONE WITH THE RESOLUTION TRUST CORPORATION, AND THEN BASICALLY LIQUIDATED OR SOLD BACK INTO THEPUBLIC.WHAT WE SHOULD NOT DO IS HAVE THE CENTRAL BANK INVOLVED IN ITS BALANCE SHEET BECAUSE THAT BALANCE SHEET IS THE CREATOR OF THE MONETARY BASE AND IF YOU ALLOW MAJOR FLUCTUATIONS IN THATAS A RESULT OF OTHER THAN MONETARY POLICY REASONS I THINK YOU'RE TAKING UNDUE RISK WITH THE NOTION OF THE STABILITY OF THE FINANCIAL SYSTEM AND VERY SPECIFICALLY THE FED'S CONTROL OF INFLATION.

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