Paolo Dabandan
SSN187
Behind the Meltdown
The documentary “Behind the Meltdown”, discusses the causes of the financial crisis we
are currently in and how it happened. The movie begins with a serious scene where
Henry Paulson, the Treasury Secretary, and Ben Bernanke, the Federal Reserve
Chairman, suggest a $700 billion bailout plan that they believed would keep the
economy from failing. When the housing markets started crashing in the spring of 2008,
the government bailed Bear Stearns, and then let another bank Lehman brothers file for
bankruptcy and nationalized three of the country’s largest companies.
In the beginning of the meltdown, when the housing market started to crash and
trillions of dollars worth of mortgages began to go bad, many people on Wall Street
feared the economy would crash. By spring 2008 many of the firms were believed to
have billions of dollars worth of bad mortgages. One of the first affected banks was Bear
Stearns. A rumor was spread about Bear Stearns not having enough money to keep itself
alive. With the scare that the company would collapse many people started taking their
money out of Bear Stearns stocks causing the stock prices to drop dramatically from
$171 to $51. With banks selling mortgages and not caring if they were going to be paid
back or not started causing a lot of bad mortgages. Bear Stearns who invests a lot on
mortgages and who have become toxic assets, would buy mortgages and sell them to
other firms as security. With Bear Stearns continuing to go under, they asked the
Federal Reserve Bank of New York for help. Geithner who was in charge of the federal
reserve in New York sent over the Feds to review Bear Stearns and found out about
Bears credit default swaps worth hundreds of billions of dollars. A credit default swap is
a promise that if the bonds fail Bear would pay them back, but as long as the bond
doesn’t go under they would pay Bear insurance. With that, Ben Bernanke decided to
use JPMorgan to indirectly give Bear Sterns money to help them stay alive. The next day
the plan backfired showing that if the Federal Reserve was getting involved that means
the economy is failing. Bernanke then reacted by having a “shotgun wedding” between
JPMorgan and Bear Stearns, with Bernanke promising 30 billion to cover Bear Sterns
toxic assets, with that JPMorgan chase paid around 2$ per share to buy out Bear
Stearns.
The next major company to be affected would be Fannie May and Freddie Mac, the
country’s largest mortgage lenders. On September 5, 2008 the U.S government declared
that it was taking 80 percent of Fannie May and Freddie Mac, replacing both executives
and nationalizing the company. The next couple of days Lehman Brothers, another
investment bank, started to falter because of their toxic assets. This time Paulson wasn’t
thinking about handing out another bailout. Paulson believed in moral hazard where
you cannot depend on the government to help you out when you need help because of
the problem you yourself caused. Still with no buyers with the help of the government,
Lehman Brothers filed for bankruptcy. With that, many of the other banks stopped
giving out loans to other banks fearing that they wouldn’t be able to pay them bank.
This froze the credit markets. No one from small business to car loans were able to
make loans with the fear of the economy collapsing.
AIG the largest insurance company soon started to show signs of risk. AIG was investing
billions of their insurance profits in risky investments tied to the housing market. Buying
a lot of credit default swaps in the hopes that Lehman Brothers wouldn’t collapse ,is
now sitting on around a trillion dollars of credit default swaps. With the fear of the
economy collapsing and with the fall of AIG, Bernanke gave AIG 85 billion dollars causing
the United States to nationalize AIG. Bernanke feeling that the economy would continue
to fail believed that the government should stop helping out each company case by case
but instead help the economy as a whole. On September 18, 2008 Bernanke and
Paulson meets with the congressional leadership to say they needed seven hundred
billion dollar request to buy out toxic assets that are giving banks problems. The bill
failed and the stock market plummeted 778 hundred points. The bill would be brought
up again, this time passing. Within the bill are six hidden lines that would allow capital
injection. On October 13, 2008, Paulson and Bernanke called in the head of the 9 largest
banks saying they have to accept billions of dollars making the United States a huge
share holder of the companies trying to boost confidence in the economy.
In the end the United States has spent over 350 billion dollars trying to help the
economy. Many believe that they would spend trillions more. But who is to blame for
this mess? Was it the banks that gave out millions of risky loans? Or was it companies
like Lehman Brothers and AIG who invested billions of dollars in sub prime mortgages in
the hopes of making billions of dollars but in the end only buying toxic assets, and how
about the people who took out loans they knew they could not pay back? Whatever the
case may be, I foresee the economy to continue to fall like the car manufactures who
would then affect the steel manufactures, the auto repair shops, the company who
specialize in car parts, or the oil company themselves. I believe that the continuous
domino effect that is affecting the economy today won’t stop anytime soon.