Jong Nam Oh: Oh Goodmorning everyone, good evening to New York. Welcome to the session, Live on Wallstreet. I’m Jong Nam Oh, professor at Seoul University and advisor to . I worked for Korean government for 30 years as an economic bureaucrat during Korea’s financial crisis. I’m the chairman of and another as an IMF executive board member. This morning I am honored to be moderator for this session. This session will be live video conference. We’ll get a live view from Wallstreet in New York financial center of current financial crisis. Let me briefly introduce the distinguished panel members. From New York, we have James Wolfensohn, chairman of Wolfensohn & Company LLC. As you may know, Mr. Wolfensohn was the 9 th president of the World Bank from 1995 to 2005, including the Asian Financial Crisis. Mr. Wolfenson, we welcome you. Next person from NY is Mr. Alexander, chief economist of Citi group, he joined Citigroup in 1999. He is one of the most popular economists. Let’s welcome Mr. Alexander. Another economist from New York he is Professor Ken Noble, former Chief Economist to the IMF and professor of Economy and Public Policy at Harvard University. Professor Noble has been widely published including international finance, open economy, policy, budget factors, and development. Professor Noble, we welcome you. Now we have another panel member with us here in Seoul – Mr Jeffrey Shafer, Vice President of he is also for Citigroup. Before joining Citigroup in 1997, he was the assistant secretary and undersecretary from 1993-1997. This session will be run live between the New York and Seoul. I’d like to take advantage of this Live at Wall Street solutions on the financial crisis. Now that we have distinct members from New York, I’d like to start by this question. We have seen so many ups and downs, what happened there in New York? Today here in Korea, our stock market also experiences the same and our exchange rate also experiences the same. Mr. Wolfensohn, I’d like to seek your advice. What happened there? And what are the backgrounds of this Jong Nam Oh: What happened there in New York, today in Korea, are stock markets are also facing the same problems. Mr. Wolfensohn, I’d like to start with you. What’s happening there? What’s the background? James Wolfensohn: Well, thank you very much, professor, can you hear me alright? Oh good. The first thing I want to say is that I’m extremely sorry that I’m not able to keep my promise to be there in person, but as you all know, because of what is happening with the stock market, there’s every reason why I had to stay in New York with my colleagues. The situation is of course very difficult at the moment and it is the result of things that have been happening over the last twelve months. All of the financial markets in our country became very complicated for those who participated in terms of the instruments being traded and used in the U.S. market place is the substantial increase in consumer borrowing, 130%, an enormously high figure, so we were very significantly extended. The negative saving rate combined with overspending, and the tendency to spend more than you earned, puts us into this most difficult situation, which led, first and foremost, to the collapse of Freddie Mac and Fannie Mae, thereafter the collapse of financial institutions, such as the Lehman Brothers, and of course, now companies in your part of the world, such as AIG. And so this led, after a period of three to four months to a critical situation, in which the government sought to intervened to calm the markets, with the emergency economic bailout and the government indicated it would put up $700 billion. And so then many governments and companies came forward with financial programs that would deal wit the crisis. In recent days the program has been expanded from $700 billion by another $250 billion, a 125 billion of which has gone to 9 banks This has received favorable comments and yesterday financial leaders were making a speech in new york describing the strength of the intervention and saying that this was a forthright statement by the government to make sure the commercial paper market and other instruments will be supported They also spoke of the economic activity being restored, and said that it will not happen right away. While you were sleeping, there was a drop of 730 points in the index. I think, one of the largest, if not the largest drop in recent times. And so for the marketplace, where it is day for you, and now night for us. This is a serious fall where there is already the appearance of the steps that will be taken by our government, and there have already been indications that the market has yet to be convinced about the futility of the intervention. What we need of course is to restore confidence after the stock market fall today, and this depends on the results of the rest of this week. Of course we are hoping that things will modulate and things will turn around, but as the chairman of the Fed said today, it will probably not happen today. Jong Nam Oh: Thank you, Mr. Wolfensohn. Next I’d like to ask Mr. Alexander how do you diagnose the current crisis from an economic perspective? Mr. Alexander: Well this current crisis started with a housing bubble in the United States. It reached its peak by the end of 2005, the beginning of 2006. This generated losses in the core institutions in the financial sector. Those loses in turn forced those core institutions to retrench, so they reduced their lending, they tried to shrink their balance sheets, pretty much across the system. That meant higher risk premiums, lower equity prices, higher mortgage rates, things like that. Now, the current financial condition, which really began over a year ago, has had two sets of effects. First of all, it revealed weaknesses of our financial system, which I think were underappreciated. Our system was more dependent on liquidity and leverage, but I think that most of us have recognized. And that has meant that this adjustment has proven to be more difficult to correct and longer lasting than I think was originally expected. Now the US economy was dealing with the correction for the housing for several years before the crisis. But now we’re sort of dealing with the consequences of the tighter financial conditions. Clearly the wealth of housing sector has been diminished and is deteriorating. You’re also seeing credit being tightened. Most recently in the last four weeks or so with this extreme turmoil, we also started to see a sharp loss in confidence and a sharp increase in risk aversion across the economy. Jong Nam Oh: Thank you Mr. Alexander. Let’s move on to Seoul this time. Mr. Shafer, do you have any additional comments on reversing the current financial crisis? Jeffrey Shafer: OK, do you want to move on to “how do we get out?” That’s probably right. Mr. Wolfensohn and Mr. Alexander have given you a great picture of what happened and how we got here. I’d just want to emphasize something Jim said; this is not just U.S. crisis anymore, and it’s not just a spillover of what happened in the U.S., especially in Europe – you look back in many of the same condition we have had in the market in America, and I think, before we think about how we get out, its important to step back from what Jim said and identify three areas of failures that contributed to this. One, in the US, very serious failures of consumer protection, and business practices were allowed to go on unchecked by the authorities. More generally, in mortgage market, buyers were systematically encouraged to take mortgages that were inappropriate; they were often encouraged by mistaken data. The fact is, it would not have created a major crisis, if the buyers have been doing their job. There are also major failures with risk management. There are many elements to that – loss of information when debt and mortgage portfolios were made. There were failures of modeling, which ignored well known features of security crisis – more frequent extreme events than the models presumably assumed. The correlation tends to change in time to stress the major failures of risk management areas. Third, I think there was a failure to recognize, and I have to admit, that I did not recognize it myself, the vulnerability of the modern financial system to lose confidence on the loss of liquidity, and that’s the critical problem we’re dealing with now. I must say that it’s building up but I felt there is nothing it could happen in the market that could prevent it. The freezing of the money market has gotten deeper and deeper. To get out, the first thing we need to do is to get the money market working, then get the credit markets working then get the economy moving ahead again. The focus last weekend at the IMF and World Bank meeting was putting together the global approach to deal with getting the markets functioning again. Appropriate responses from the leaders were putting capital back in the bank, providing additional liquidity mechanisms, and to guarantee deposits. I think that is the right response. It is the way to get things started.