PBS’ great documentary about the U.S. government’s responses to the economic collapse in September of 2008.
From Brendan Wright: Inside Job conveys the fact that large investment banks are to blame for our current economic situation. The film uses the effective metaphor of comparing the banking industry to an oil tanker. An oil tanker is compartmentalized, dividing one large pool of oil into smaller, manageable pools of oil. If the large oil pool was not divided, the ship would be at risk of capsizing or losing all of the oil should something happen. In the case of the banking industry, the economist, who provides the metaphor, that the banking industry should be divided into smaller, more manageable banks, as opposed to a few immense banks. Should these few banks fail, we would all go under. God forbid that day ever comes…
With these few immense deregulated banks, there is ample room for error. As seen in the once model of a sound economy, Iceland experienced the consequences of deregulation before us. The deregulation led to huge borrowing, which led to a bubble. Housing prices skyrocketed and unemployment tripled as the banks went under, shortly after being upgraded to a AAA rating. Government regulators did nothing to help the people.
The United States economy took a turn down the wrong road by starting a process of deregulation. This deregulation allowed for risky investments from speculations with deposits. Banks began to consolidate with the knowledge that if they went under, they would be bailed out by the government to prevent a total economic collapse.
Henry Paulson, Treasury Secretary under the Bush administration and former CEO of Goldman Sachs, found himself in 2008 in a situation which no economic analyst could have predicted. After witnessing Ben Bernanke, former Federal Reserve Chairman, transfer $30 billion to Bear Sterns via JPMorgan Paulson grew wary of government interventions in the economy. As a free marketeer and a previous icon from Wall Street, Paulson dreaded the idea that the firms the government was bailing out would act recklessly in its endeavors to stabilize itself, also known as moral hazard. Paulson finally realized, in late 2008, the dangerous situation that plagued the economy where almost every major firm in the country was intricately linked between one another. As a result, if one firm failed and filed for bankruptcy that would initiate a chain reaction among the firm and inevitably destroying Wall Street. Henry Paulson’s most impressive act during the meltdown was forgoing his conservative beliefs and launched an emergency bailout plan to hopefully stop the wildfire. Watching Paulson approach the podium to deliver the news, it was evident that this plan was the very least thing he expected to install as Treasury Secretary under a conservative administration.
ReplyDeleteWhile some may pity this tragic hero, others will remember one of the uglier moments of his career where he exhibited his previous headhunter Wall Street tactics. Two days following the loan from the Federal Reserve, Bear Sterns was purchased by JPMorgan for simply two dollars a share. Also when the Lehman Brothers appealed to the government to arrange for them to be saved by a deal similar to the one Bear Sterns received, Paulson rejected the proposal, and witnessed the following day as the Lehman Brothers filed for bankruptcy. One can only attribute these misfortunate decisions to the pressure Paulson faced as the only man who could salvage the world’s economy.
After the economic collapse in 2008, America looked all over to find who to blame. It soon became clear that the meltdown stemmed from the recent collapse of the real estate market. The major problem leading up to this collapse had been irresponsible loans, many of which people could not pay back. People's inability to pay back the loans and the resulting foreclosures were bad enough, however matters were made worse by companies such as Bear Stearns that bought these mortgages from banks, bundled them together, and sold them to investors. As a result, when the real estate market collapsed, so did the stock market, as investors had been enthralled in the idea of buying shares of mortgages. What was thought to be a savvy business move turned out to be the downfall of our economy, and for that reason, I dislike the actions Bear Stearns took to make money off of shaky loans from banks all around America.
ReplyDeleteBear Stearns manipulated a rapidly growing real estate market by bundling mortgages into securities and then selling them, which fatally bonded the stock market with the real estate market. As a result, when houses began to foreclose and the mortgages lost value, the stock market began to take a hit, and when panic set in among investors, many moved to sell all of their assets, setting the economic meltdown in motion. Bear Stearns was aware that these securities could have lost their value, even labeling the mortgages "toxic." Regardless of these fears, Bear Stearns sold the securities anyway, setting up the economy for a collapse tied to the real estate market. When the mortgages lost value, investors who bought these securities had lost their assets, disappearing into thin air. All of these mortgages losing value were bad for the economy by themselves, but that damage could have been repaired. The damage could not be repaired, however, after mortgages were turned into exchangeable assets and the stock market took a hit along with the real estate market. This collapse has taught us to be more responsible with the loans banks give out and to be careful when exchanging assets that could lose value.
Many people argue that the bailout did not work. Part of that was the decision not to bailout Lehman Brothers. I feel, however, that the true reason it did not work to perfection was that there were few regulations put on what the bailout money could be used from. From my understanding, many of the CEOs, the ones responsible for the bad mortgages and predatory lending, granted themselves “bonuses” paid for by the bailout money. Had proper regulations been put in place the bailout would have been more likely to succeed in its purpose of stimulating the economy.
ReplyDeleteInside the meltdown is a Frontline documentary exploring the circumstances leading up to the 2008 financial meltdown. The practice shown in the film which I’d like to further explore is the role of CNBC and the greater media in the collapse. As the film stated companies can be destroyed due to rumors, however unfounded these rumors may be. The film also stated that the CNBC cable network was ubiquitous across trading desks and offices throughout wall street and the world of high finance. This puts CNBC in a unique and never before seen position to drive the rumor mill. It is my belief from seeing this film that the media, especially CNBC, had a hand in amplifying the scope of the meltdown by perpetuating fear and uncertainty in its reporting.
ReplyDeleteIt is the role of the media to expose the truth, however when host David Faber asks the CEO of Bear Sterns, a company in crisis, questions that will further destabilize their stock, CNBC is crossing the line from reporting the news, to influencing the markets. This creates an ethical dilemma as to the role of the media in todays stock market. CEO’s like government officials must be held accountable to shareholders as Presidents are held accountable to voters, however CNBC must step back and realize that when their role goes from reporting the news to holding major influence in markets they need to make a change
“Inside the Meltdown” explains the still recovering economy we are currently experiencing and breaks down each step to our deepest decline. Bear Stearns was taken down by hidden toxic subprime loans, mortgages that had not been paid, this caused there stock to drop. This drop scared everyone out of the Bear Stearns stock, and due to the credit default swaps Bear was not only going down, but also taking the other large banks with it. This fast decline forces a decision by Geitner to use Bernaki’s plan, JP Morgan became a funnel for Bear Stearns funds from the federal reserve, to be used as necessary. Bernaki had to keep Bear Stearns alive to keep the market moving, but underestimated the amount of toxic subprime loans that many companies had agreed to. When Fannie Mae and Freddie Mac began to fail because of these toxic subprime loans the government nationalized Mae and Mac, as they were “to big to fail”. The same action as before was taken and Paulson used the same Band-Aid method of bailing out each failing bank one at a time, when a future efforts should have been considered. Paulson having in ground beliefs in free market refuses to save Lehman brothers fearing moral hazard. Lehman is allowed to go under because it is refused a bail out due to it pushing the envelope on acceptable risk. This demonstration of power causes not only Lehman to go down but also many other large banks, and a full-scale bail out is necessary. Paulson and Bernaki spoke to congress to plead to save the economic system through a bill and asked for it by “Monday”, essentially asking for a blank check. Paulson does not put his free market views aside and allows Lehman to fail to avoid “moral hazard”, If he had acted without bias he would have had more time to assembly a stronger plan. The bailout money plan is strongly anti-free market and capital injection is the proposed answer to their problems. Paulson’s actions as Treasury Secretary were only responses to problems and no formal plan was created. His Bias and political views forced a company to go under and cause one of the largest declines in the market in history.
ReplyDelete2008 proved to be an extremely eventful and unpredictable year for the business world. The sudden turmoil of investment banks and the housing markets (thanks to poor business tactics such as “toxic subprime mortgages”) created an immediate financial crisis, with the well-being of the world’s economy held hostage by the giants of Wall Street. Starting with the investment bank Bear Sterns, businesses that were previously thought to be unsinkable began to dive, leading to a previously unthinkable situation in which it all returns to nothing. With systematic risk ensuring every business was interconnected, it was more or less a guarantee that should one business fail, it all comes tumbling down, tumbling down, tumbling down. At the center of this mess stood Henry Paulson, the Secretary of the Treasury.
ReplyDeleteCreating a forced matrimony with Bear Sterns and JP Morgan, Paulson managed to rescue the drowning investment bank. This, however, came at the crippling cost of JP Morgan purchasing shares in Bear Sterns for the punishing rate of $2 each. Paulson specifically engineered this deal to send a clear and admirable message stating that the government will not provide a safety net for businesses, eliminating the valuable lessons gained from failure. His personal belief that government ought to keep its hands out of business synergizes extremely well with the principle of moral hazard, which is as Joe Nocera puts it, the question of “
If you bail somebody out a problem they themselves caused, what incentive will they have the next time to avoid making the same mistake?” Unfortunately, Henry Paulson becomes a living contradiction as the rest of the year unfolds. Despite using the Bear Sterns incident to demonstrate his philosophy on government noninvolvement in business, when faced with the failure of Fannie Mae and Freddie Mac, Paulson responds with full government force and nationalizes them. Mere days later, in perhaps the biggest contradictions one may perform against themselves, Paulson becomes the public face and leader of the U.S. Government’s $700 billion economic bailout. Although he prevented a total collapse of the global economy, Henry Paulson sacrificed his word and honor, becoming quite possibly the greatest hypocrite in the business world.
Inside the Meltdown
ReplyDeleteHank Paulson faced some of the toughest economic decisions as Secretary of the Treasury. He was responsible for making the decision to bail out some of the biggest banks in our country that nobody would have ever thought to have failed. The banks such as Bear Sterns, Lehman Brothers, Fannie Mae, and Freddy Mac were all responsible for making poor loans in the housing market, which caused them to go under. During the Bear Sterns bankruptcy situation Hank Paulson made the proper decision to bail out the bank with JP Morgan for 2 dollars a share because it showed that the Bear Sterns had to be punished for the faulty decisions, In addition, the deal allowed for the bank to not go completely bankrupt exposing the web of faulty loans and deals of insurance between many different banks and organizations. Paulson’s decision saved Bear Sterns, but the purchasing of bad mortgages spread throughout companies such Freddy Mac, Fannie Mae, and Lehman brothers.
On the other hand, Paulson also made a poor decision regarding the troubles of Lehman Brothers. Paulson did not allow the treasury to bail out Lehman Brothers because of Dick Fuld’s arrogance that he was so sure he would be bailed out. The refusal to bail out Lehman brothers caused bankruptcy and AIG to be dragged down with it. Also, the failure of Lehman Brothers caused the stock market to drop, banks to stop lending, and the credit market to freeze. Paulson made his decision based on his principals to allow Lehman Brothers to be punished when he specifically told them to sell. In reality, Paulson is a man of high knowledge and he should have foreseen the results of letting Lehman fail and how it would have hurt the economy but instead he made his decision to hurt Lehman than help the country.
Inside The Meltdown is an extremely informative piece that I believe every American that wants to understand the country's current economic situation should watch. Frontline tells the story of the collapse of investment bank Bear Stearns (which was caused by its possesion of toxic subprime mortgages and credit default swaps) and its effect on the economy by systemic risk. The collapse began when rumors of hard times for Bear Stearns began to circulate around Wall Street; Bear's stock price began to fall and the company seemed to be on the verge of collapse, unless they asked for a bailout from then head of the New York Federal Reserve, Timothy Geithner. Geithner soon realized that if Bear went down then the economy could collapse due to systemic risk. He then called his boss Ben Bernanke who agreed to bailout Bear through a loan mediated trough JP Morgan. Secretary of the Treasury Hank Paulson also began to worry about the crisis and cooperated with Bernanke’s plan to merge JP Morgan and Bear, but issued a warning about Moral Hazard or the incentive to repay someone who bails you out of trouble. The plan is a huge issue for Paulson as a Wall Street veteran who opposes intervention and regulation. To make his point, Paulson forces Bear Stearns to sell for $2 a share to JP Morgan, so that Wall street will recognize that the government would not be there with a safety net.
ReplyDeleteAs the crisis unfolded, Paulson had to change his stance against intervention as he realized that intervention was absolutely necessary in order to save the economy. His obstinacy and hesitation was displayed when he made the decision to let Lehman Brothers fall. In the end I think that Paulson acted to the best of his ability, considering how he was initially opposed to intervention, but then changed his opinion once he realized the effect that systemic risk would have. I see the crisis as a trying time for Paulson and can almost feel the conflict that he had between his principles and what was necessary. --Nevin Zheng
The overarching theme in this film is that the stock market is brittle. Opinions can be swayed by the smallest rumor, true or not. The whole concept of a bubble seems very unstable. Everyone puts all their buck into one sector and sooner or later that sector blows up and everything goes down the toilet. Two main concepts introduced in "Inside the Meltdown" was moral hazard and systemic risk. Systemic risk is similar to the domino effect or butterfly effect, companies on wall street are so interconnected that if one fails then they all fail. People on wall street assured themselves that there was no way any large company could go bankrupt and they didn't provide any fallout precautions incase one did. So when one did fail, Bear Stearns, the government had to step in. However, the damage had been done, no matter how much money the government gave to Bear Stearns or any other company on wall street, the faith and confidence in the market had been lost. I feel the biggest problem that wall street has is that wall street is run by people and the system is totally dependent on people. People are naturally flawed so wall street will inherently be flawed. There needs to be more control over the market...a more concrete system needs to be implaced...stricter policies.
ReplyDeleteResponse to Others:
ReplyDeleteInside the Meltdown
From what I've read about this movie, it seems to go hand-in-hand with Inside Job in the sense that it talks about how both the selling of extremely risky sub-prime mortgages and big banks destroyed the once prosperous U.S. economy. I find it interesting that Paulson realized what was happening and how his political point of view influenced his decision to let Lehman Brothers fall. As a Republican under President Bush, his political views do not call for government intervention in business. But when he realized that if J.P. Morgan fell, so too would Lehman Brothers and Goldman Sachs etc. From what I've read, Inside the Meltdown seems to resinate with the ideas of Inside Job, so I may have to look into seeing this movie.
Corruption appears to keep tyrants of all sorts "fat and happy." Goldman Sachs, through the technical definition of a corporation is an individual lacking any sort of moral or ethical standard. Their mode of conduct in the financial industry as outlined by the film The Inside Job, appropriately named, described just that which countless blue-collar, average-joes have learned to despise about banks and big business.
ReplyDeleteTurning a blind eye to the needs of their customers and their duty to accurately explain that which they sell noting any possible faults in the product, the creation, selling, buying, and trading of sub-prime mortgages, CDO's, and credit default swaps demonstrated a ruthless, cutthroat game of "Hungry Hungry Hippo's." Testifying before congress, it could not have been more evident that executives in the business realized the "crap" products they produced, yet, once again, they abandoned any modicum of valor and denied and avoided owning up to their knavery and selfishness. Not only did they double cross "John Smith," making him think it was proper to buy a house with a 99.3% loan, but they took those loans and enticed ratings agencies such as S&P and Moody's to give them high ratings in order to sell large amounts of those loans in a confusing chain of investors and banks in which accountability was lost. Worse yet, the true sickness lies in that they insured against the predicted failure of those aforementioned loans through companies such as AIG so that they reaped profits from the squalor of "peasants" twice.
Sticking the knife in and turning it, those at the top of the food chain escaped their "get rich quick" schemes unscathed (lack of litigation), joined the "good guys" (obtained federal advisory positions), made the process easier for the friends they left behind (deregulation), and finished richer (immense bonuses, and sale of company stock). It is hard to find a single favorable aspect of Goldman Sach's reign.
The film Inside the Meltdown documents Henry Paulson’s decisions during the financial meltdown of 2008. Throughout the film, it is clear that Paulson is involved in many difficult decisions and that he makes positive and negative choices when dealing with these dilemmas.
ReplyDeleteAfter Bernanke gives a loan to JP Morgan to save Bear Stearns, Paulson states that this should be a onetime deal, as the loan encourages moral hazard because if any big business is in trouble, the precedent is set where the government would bail the company out. I like that Paulson states this, however, it is not the fairest system to agree to save one company, but not save others in similar situations. Furthermore, I also really like that Paulson told JP Morgan to pay $2 per share, half of what JP Morgan was going to offer for the shares of Bear that were valued around $30 each. Here, Paulson wants Bear to pay for its greed, which is another action of his that I like Also, I like that Paulson gave fair warning to Dick Fuld of Lehman Brothers to find someone to buy Lehman Brothers as there would not be more government intervention. Paulson wanted Fuld and Lehman to pay for their own greed, which they should do. I also like that Paulson realized the severity of the situation and brought together the nine CEOs of big banks and offered to buy a major part of the banks for $125 billion as this helped turn around the economy.
Although Paulson makes many good decisions in my opinion, he also makes some decisions that I dislike. I do not like that those Bear employees who owned Bear shares were severely punished. While some of the Bear employees definitely contributed to the greed and destruction of the company, others just did what they were told and ended up losing a lot of money that the employees thought they had. I also dislike that Paulson did not follow precedent when it came to bailing out banks. While he shouldn’t bail out every bank, he shouldn’t originally help save one (Bear Stearns) and then let others, such as Lehman fail.
During the economic meltdown, Paulson makes choices that I both like and dislike, but I believe that he makes many more good decisions than poor ones.
“Inside The Meltdown”
ReplyDeleteThe film “Inside The Meltdown” appears to be very similar to “Inside Job” which I viewed because it also explores the financial bubble and explains the meltdown of 2008. From what I have read, this film seems to explore risky and falsely rated mortgages, blaming deregulation for the economic downfall. Bear Stearns’ practice were clearly not just practices and should have been monitored by other government policies. The packaging of loans which could not be paid back was very irresponsible, and marking these loans ass sound investments seems illegal. It confuses me how this went on for so long without consequences before it blew up. The film sounds very interesting and I would like to watch it, to further understand the economic meltdown we are still experiencing.
Inside the Meltdown documents the exact reason why companies ought to stay away from toxic assets. Throughout the financial world, businesses had discovered that it had became profitable to provide loans to middle to low income families who could, in all reality, never fully pay the entire loan back but simply meet monthly payments and interest rates. In the eyes of the homeowner, their property's value could only supplement their wealth as its' value increases. The system appears mutually beneficial: both banks and homeowners gain in the end. Until the year 2007, when the bubble burst.
ReplyDeleteBear Sterns was the first to crumble. Once it became clear that the business had invested too heavily in toxic assets, their shareholders began to sell. In large numbers. Which caused the price of the shares to plummet, which in turn encouraged more selling of shares and a further decrease of stock value. Despite former chairman Greenberg's “confidence restoring speech”, the public remained skeptical. The business' reserve soon became depleted, and several secrets were leaked. Bear had strong connections with a plethora of other businesses who would go down with the giant. Government intervention was forced upon wall street, and upon the supervision of the secretary of treasury Hank Paulson, JP Morgan bought out Bear for $2 a share. Within the course of a week, Bear's stock had gone from $171 a share to $2 a share.
Bear Sterns, however, was not the only business to fall victim to toxic assets. The government created, privately owned corporations Fannie Mae and Freddie Mac began to follow a similar path. They two businesses, which had been profitable throughout the first six years of the new millennium, lost 60% of their stock shortly after the Bear dilemma in 2007. The government nationalized the industry, out of fear that if this corporation that owns $5 trillion in mortgages fails, the rest of the market would follow suit.
This series of government takeovers that occurred throughout the housing crisis are brought upon by a simple axiom that businesses ignored: do not loan what you can not be repaid back. Toxic assets are, by definition, inherently a liability to a business and should be ignored, even if in some perverse way they appear profitable. They are detrimental and therefore I dislike the business practice of creating toxic assets.
response to classmates responses:
ReplyDeleteThe reviews on this film really highlighted the decisions of Hank Paulson, when he was Secretary of the Treasury, earlier in our recession. From what I have read, it really seems that Paulson made a very poor decision, in regards to not bailing out Lehman Brothers. For Hank Paulson to not bail out such a huge investment bank, simply based off of the arrogance of its CEO seems a little strange. From what I have read, it seems that Paulson was making an effort to “punish” the investment bank for its arrogance. To me, this seems very unintelligent, because Lehman Brothers was tightly connected to AIG, which, if I’m not mistaken, was at the time the largest insurance agency in America. As Lehman Brothers went under, AIG went under. From what I have heard, AIG going under was one of the most significant factors of this recession starting.
I respectfully agree with Henry Paulson's response to Bear Sterns, trying to make sure that the deal he made was one that Bear Sterns would not like in the movie Inside the Meltdown. Additionally, I agree with his thought that Bear Sterns should not think they were just to get a government bailout.
ReplyDeletePaulson wanted to make sure he was taking care of moral hazard. Joe Nocera says, “Moral hazard poses the question: If you bail somebody out of a problem they themselves cause, what incentive will they have the next time to avoid making the same mistake?”
Representative Barney Frank (D-MA), Financial Services Committee Chairman says, “Thirty years ago, if you got a mortgage, you went to the bank and that bank frisked you pretty good before giving you the money because the bank expected you to pay the bank back. In 2005, a mortgage lender lends money to a lot of people and does not expect to be repaid by them, but bundles up the right to be repaid by them and sells it to a lot of other people.” This is exactly the kind of business Bear Sterns was involved in.
Paulson wanted to send a message that this was not okay and this would not happen again. At the end of the week of Bear Sterns downfall, that stock was at $30 a share, however, J. P. Morgan was offering $4. Charles Duhigg says Paulson said to J. P. Morgan, "No, I want you to do it for $2 a share. We don't want anyone in America, particularly on Wall Street, to think that the government has a safety net for you whenever you need it. I want it to be so, so painful for any Bear Stearns shareholder that it's almost as if they went out of business."
I like how Paulson wants responsibility on Wall Street and how he does not want this type of behavior tolerated and ignored. Because he made it a deal that the company and its employees did not like (most of whom owned a large share in the company itself), his message was clear and he hoped Wall Street would listen up.
replying to Inside the Meltdown
ReplyDeleteIn Inside Job the toxic assets were also made. The main problem I got from that was that they had too much levderage in the system to buy the subprime loans an when they couldn't sell them were in trouble for a lot more money they could possibly have. Some companies had leverage of 33-1 if I recall correctly and even a 4% drop would be more than they had and catastrophic for them. Unfortunatly several were too big to fail and so they had to be bailed out instead of paying for their foolishness.
Inside the Meltdown examines the causes of the economic crisis in 2008. Its hard to believe that the failure of one of the smaller companies on Wall Street could lead to the downfall of major companies like Goldman Sachs and AIG. The demise of Bear Sterns basically created a domino effect that took down any company that was connected to them in the smallest manner. Eventually the government was forced to nationalize many of the big hitters on Wall Street in order to avoid a cataclysmic destruction of the economy.
ReplyDeleteIn my opinion credit has to go to Henry Paulson and Ben Bernanke for really saving the economy from complete free fall. Many people did not agree with their decisions and maybe better options could have been chosen if given the time. They thought that simply helping Bear Sterns this one time would fix the problem and the economy could go back to where it was a few days ago, however unbeknownst to them was how intricately intertwined the banks were with each other and how much damage selling the company at two dollars a share would cause. Eventually Paulson and Bernanke hit a fork in the road that forced them to take huge and immediate action or allow the economy to completely collapse. I have to agree with their choice and their efforts to force the bailout bill through the house or the American economy as we know it may not exist today and we could be in the midst of the Second Great Depression.
I wonder how these companies could not see a hint of impending doom, for a whole company to dissolve in the matter of a week there must have been some signs of failure. Everything seemed to great that I guess nobody figured that a country that seemed to be rising at a decent pace could plummet so quickly and so drastically.
Inside the Meltdown
ReplyDeleteI found this movie to be the most interesting and informative movie that I watched. I obviously do remember the meltdown in 2008 however I did not know the causes and steps that the government took to get out of the meltdown. I believe that the meltdown was caused by the false assumption that the housing market would stay at an outrageously high level. The meltdown all started from a rumor which caused a great scare amongst investors in the stock of Bear Sterns. This company would buy huge amounts of mortgages and then bundle them together and sell them off to investors. The Federal Reserve steeped in by lending money to JP Morgan who would then lend to Bear Sterns. However Sterns kept plummeting and final was forced to file bankruptcy. Next came the fall of Fannie Mac and Freddy Mae which in the matter of a day dropped some 60%. Then came Lehman Brothers and finally the economy was on the point of complete disarray when billions of dollars where invested into these nine banks to sustain them. The economy still today has not yet recovered from the horrible meltdown of 2008 and lets as Americans keep them accountable for their actions.
Drew Houser,
ReplyDeleteI definitely agree with the central premise of your movie: toxic assets are inherently bad and must be ignored. The movie, Inside Job, addressed the same issue. It explained how toxic assets were aggregated into Collateralized Debt Obligations (CDOs) and how rating agencies such as Moody’s and S&P were paid to give these CDOs triple-A ratings. However, Credit Default Swaps (CDSs) could be purchased on CDOs which in effect allows a company to bet against the toxic assets and allows them to profit from the failure of CDOs. Inevitably, one company takes the loss and pays to the purchasers of CDSs. This system was clearly risky and a terrible investment from the very start.
Inside the Meltdown
ReplyDelete“Inside the Meltdown” chronicles the days leading up to the economic crash in 2007 and the factors that led to the eventual downfall. Among the reasons listed were the poor practices exhibited by the large credit companies, issuing loans to those with a high risk of not being able to afford said loans and then selling them off, the entanglement of the United States government and their determination to not allow these companies to fail, and others. It also had interviews in which some of the people on camera were obviously very flustered with the direct approach the reporters were taken.
I choose to focus on the credit market, how the companies handled these bad loans, and the repercussions on society as a whole. For those that did not watch the movie, the barebone facts are these: people who could not afford homes wanted to buy them anyway, so they went to the bank to take out a line of credit. This line of credit was often times a ridiculous amount with a high interest rate that the aforementioned consumers could hardly make even the minimum payments on. The credit companies then proceeded to sell these bad loans to other banks on the open market, which just recently (under the Clinton administration) became legal leaving the banks liable to problems. The people who were making the payments had a slight change in their financial situation, be it a death, a lost job etc…, and were then unable to make even the minimum payments on their mortgage now. This led to the banks having to foreclose on the houses, a process in which they would lose hundreds of thousands of dollars on each time. This process, which had driven the housing market sky high since everyone was able to buy their dream house, destroyed real estate. Prices plummeted, interest rates changed, companies failed, and everything based around the housing market was made basically worthless (demonstrated by one company obtaining two dollars per share in bankruptcy court). The bailout has been somewhat successful, but the housing market was set back a good 20 years.
There has, however, been a good result about all of this. The economy is on its way to more regulations, housing is now far more affordable with people having to take out smaller and smaller loans, and the quality of home improving. It is now very much a buyer’s market, and with our economic system, we can be assured that the housing market will “boom” again someday.
Throughout the financial crisis in America, many politicians were faced with difficult, and very important, decisions that could either destroy or save the economy in our country. Among these politicians was Ben Bernanke, Chairman of the Federal Reserve. Bernanke was responsible for a financial bailout that helped Bear Sterns get back on its feet after suffering crucial losses in the market, but he did not insure the same treatment for other failing banks, such as Lehman Brothers.
ReplyDeleteAlthough I believe that Bernanke had the right intentions by bailing out Bear Sterns, he should have known that other banks were also on the brink of crashing and taken into account the fact that if he bailed out one bank other banks would also request the same treatment. I like the notion of using federal money to bail out deteriorating businesses and companies, but I do not like the fact that Bernanke only aided Bear Sterns and not other failing institutions. I understand the fact that bailing out Bear Sterns helped to quell the distress of the public towards the stock market, and I do not believe that is a just cause for loaning billions of dollars to a company. Inevitably the thoughts and concerns of the public did play into the decisions involving the crash of the stock market, and I believe that the bailing out of Bear Sterns was done in part to persuade the public that nothing was wrong with the market.
The recent stock market crash imposed many complicated situations upon Ben Bernanke, and I believe that he should have used the same solutions to financially aid all failing organizations. Instead of loaning thirty billion dollars to Bear Sterns, the money could have been evenly split up to help a number of other failing banks, such as Lehman Brothers, down the road. Personally, I feel as though helping one bank with federal loans and then not doing the same for others is very unfair.
The video Inside the Meltdown points to exact problems in our financial society. Everyone in this situation is to blame and none of the large financial companies are innocent. The companies I believe are most responsible and or most at fault are the credit rating agencies. These large agencies such as Moody's, Standard & Poor's, and Fitch Ratings are in place to assign credit ratings for issues of certain types of debt obligations. When other companies buy this debt they are trusting in the rating issued by the credit rating agencies to be accurate. During the buildup to the recession these agencies inaccurately rated credit in order to make profit. These inaccurate ratings leave the companies that buy the credit in immense debt. These credit rating companies were brought to court and questioned about whether or not they believed it was morally acceptable to rate this poor credit so highly. Their defense is stating that their ratings are simply based on opinion. If this is true than that occupation as a whole is completely unnecessary. But, of course it’s not true and they know exactly what they are doing. If these companies change their ways of rating from greed to honesty then the system as a whole would change.
ReplyDeleteResponse to Andrew Sparks
ReplyDeleteI agree that Paulson and Bernake were acting on good intentions to stop the economic downfall of the United States. However, they fixed short term problems rather than finding the cause and fixing the long term problems. By bailing out the banks they only delayed the crash of the market and spent billions of tax payer's dollars. Instead of bailing out the banks they should have left the economy to fix itself. The weaker banks would fail and would not be bailed out and other banks would fill the gaps and the economy would have eventually recovered on its own. Instead the government interfered and may made the crash worse. I believe that the United States government should not have taxed the people as much and used the tax money to create jobs rather than bail out failing banks.
In Response To Joe,
ReplyDeleteMaxed Out does seem to be an incisive and scathing look at one of the most diminutive agencies in Providian. You did a nice job at describing the illicit practices with a tone of subtle satire. How appalling and horrendous are the decisions made by federal officials to appoint the people who create such damage and destruction in the lives of everyday people. It is a sad state of affairs, today, in the all-too-closely connected government and financial sector. I also appreciate your detailing of the Providian practice of shredding checks to create and manufacture falsified late payments. Well done, Joe.