Week 7 Discussion Question

3 Oct No Comments

View the following Frontline video, “Inside the Meltdown”:

Short Version: FRONTLINE | Inside the Meltdown | Sneak Peek 2 | PBS [Video].

Long Version (42min 30sec): Best Documentary of the Housing Market Crash (of 2020?) | Inside the Meltdown | Behind the Big Short [Video].

Then, answer the questions below in your discussion:

What was the impact of the near failure of Bear Stearns and the failure of Lehman Brothers on Money Markets?

What actions did the Federal Reserve and the Treasury Department take? What were the impacts of the decisions, if any?

What was the impact of the near failure of Bear Stearns and the failure of Lehman Brothers on Money Markets?

Bears Stearns was one of the most respected investment as well as security trading companies before the 2008 meltdown. It was after they had subprime mortgages collapsed and impeding liquidation which made their balance sheets negative that banks did not want to do business with them. It led to a crisis in banks’ liquidity since they got to a point were reluctant to loan each other. This was after these banks gathered that the bad debts had been hidden in the file of respected businessmen. When J.P Morgan bought Bear Stearns, he inherited its sketchy assets, failed trades and it cost him a lot in legal fees and consequently making its stock price depressed for about seven years (Diaz, 2014). Besides, their customers heard the rumors that banks were becoming bankrupt and some managed to withdraw their cash before any further damage. Very many people lost their jobs while others were rendered homeless (Garcia, 2013). Also, Lehman Brothers bankruptcy affected the financial market globally, a lot of money was eroded during market capitalization from equity markets globally and this was the largest decline that was recorded during that month in 2008.

What actions did the Federal Reserve and the Treasury Department take? What were the impacts of the decisions, if any?

The federal reserve created a credit line worth billions for JP Morgan to allow them to buy their rival company whose value was less at the time since their price rate was low for 2 per share. Bear Stearns without assistance from the federal reserve lost retired funds as well as thousands of customers since it was a platform for trading millions (Ryback, 2015). A new program was created that allowed customers to receive emergency funds if they had primary investments and also access treasury security. The Lehman Brothers who had mainly invested in the real estate market crashed due to low sales at the time of crisis consequently losing its value. Thousands of Americans lost their jobs, money, homes but the financial sector suffered the most.

References

Diaz-Espino, O. (2014). How wall street created a nation: JP Morgan, Teddy Roosevelt, and the Panama Canal. Primedia E-launch LLC.

Garcia-Appendini, E., & Montoriol-Garriga, J. (2013). Firms as liquidity providers: Evidence from the 2007–2008 financial crisis. Journal of financial economics, 109(1), 272-291.

Ryback, W. (2015). Case Study on BEAR STREANS.




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