In 1998, Alan Greenshank was known as the wizard. He was the man behind the curtain who ruled everything. He was the Chairman of the Federal Reserve and he was a believer of no government interacting in Wall Street banking. However with being the Chairman of the Federal Reserve he had to uphold laws he didn’t exactly believe in. Allan Greenshank, Larry Summers, and Bob Reuben formed a trio of pro- business and anti-government support group with Summers being the enforcer. Brokenly Born was the head of the Commodity Futures Trading Commissions. She was like a visionary.
She knew that if they didn’t get government involved and regulate the banking systems it would eventually fail. She knew that some of these banking institutions were supporting these so called derivatives and no one knew exactly what they were. They were known as the black box because only the people who were in the deal knew what they were. She knew early on that those were bad but no one listened. Instead they felt she was the one who was wrong and needed to be stopped from stirring up these issues on Wall Street. In March of 2008, when the housing bubble burst
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Wall Street had gambled very heavily on mortgages especially risky one. On March 10, 2008, a rumor about Bear Stearns started to surface and make people react and at that point stocks started to fall. The SCOFF called down to the report and bond guys asking what was going on and they told him that the rumor was they were running out of cash and might be in trouble. Bears former chairman Allan Greenberg knew that rumors true or false could kill the trust people and other financial institutions had in them. Those rumors were put out by CNN.
They broadcast that they only financial institution in the red as Bear Stearns and it was dragging down the rest of the financial institutions. With that happening more and more people were calling to sell their stock and taking their money out of Bear Stearns. Allan Greenberg called CNN and told them there was no problem. What Bears simply did was buy hundreds of thousands of mortgages then bundled them up and sold them to investor. So the bigger the housing market grew the more mortgages were bought and bundled up into securities and sold to investors. During 05-06 this market was booming.
Everyone was buying houses and eating mortgages they couldn’t necessarily afford. However by 07 that’s when they started to foreclose on some of these mortgages. After all they’re allegations people had no faith in them and every night when Bears would do their rollover repose to lenders and investors, usually they would stay but that night they were cashing in and Bears was losing money left and right. By the morning Bears stocks continued to fall leaving their 18 million dollar reserve to almost nothing. By pm they realized they didn’t even have enough money to open the next day. So they either needed to raise emergency capital or go under. Read which best describes what people could buy on credit in the 1920s?
Their last chance was to go to the Federal Reserve in New York. Tim Eighteenth was in charge. He is like the liaison between Washington and Wall Street but he works for the Federal Reserve System. So Eighteenth and his team went to Bear Stearns headquarters to look through all their paperwork and initially thought they should go under. By 2 am everyone trot lawyers to investors to other well-known banking companies were in Bears headquarters to see what could be done with the company. As they began to dig through all of the accounts they discovered they had so many toxic waste accounts.
They found billions in supreme mortgage loans and worse Credit Default Swaps. Now credit default swaps had been around for a long time. Before they called them derivatives and it was plenty of that going on in the ass’s with Alan Greenshank. Credit Default Swaps (derivatives) were like insurance policies. They were insurance policies on bonds. This is where they would insure investors that if the bonds failed they would pay them for the bonds. But either way it goes they still had to pay a premium for the insurance. Bears made over a 100 million on credit default swaps all over Wall Street and all over the world.
With all of the business and connections they had all over Wall Street and all over the world if they were to fail it would collapse a ton of other businesses as well. Eighteenth got the word that if it was more than what meets the eye with this company. So Eighteenth had no choice but to pick up the phone and call his boss Ben Aberrant because he knew what the failure of Bear going under would mean for the financial economy. However, the Federal Reserve Bank was prohibited from lending money to Bear to bail them out. So Aberrant called up Jaime Domino who was the CEO of JP Morgan and came up with a bailout plan.
They decided to give the money to JP Morgan and have them pass the money to Bear. But that plan failed. Since Bear was the only company to get that treatment it sent a message to the people that it was about to fail. At that time even Henry Paulson, the Secretary of Treasury, was starting to worry about the systematic risk. Paulson believed that it would take a hit but not like the one it did take. Paulson was the CEO of Goldman Cash two years prior to becoming the Secretary of Treasury so he thought he knew the market pretty well. It was not his idea to bail out Bear but after it started to fail he then got involved.
By March 14th hundreds of lawyers and accountants went to bears to pretty much pick apart the company but in the end no one wanted to take over Bears debt. But on March 15th JP Morgan made a shot gun deal that would give a 30 million Dowry to cover bears toxic assets. After that Paulson sent a message about moral hazard saying that if you bail out someone once what would stop them from making risky deals again. Paulson wanted to send a message to Bears that this would be a bailout that they would not like. So he had JP Morgan offer two dollars a share for Bears stocks.
Everyone at Bears thought it had to be some kind of misprint or error and when they found out it wasn’t they were all in shock. Paulson didn’t want anyone thinking that the government was some kind of safety net for them. And after seven days Bear Stearns were no longer. However, this was only the beginning. Paulson and Aberrant continued to tell the public that the problem had been “contained” to ease their minds but it wasn’t. People were getting mortgages on houses they couldn’t even afford. Throughout 08 toxic mortgages began to eat away at every banking system in America.
That’s when Fannies May and Freddie Mac, the largest mortgage lenders in the world stated to drop and lost 60 percent of their stock value. They held over 5 trillion dollars in mortgages. Everyone on Wall Street had a part in them. Now their failure would be a “systemic risk” Paulson and Aberrant knew that I t they went under this would be a major catastrophe and they needed to do something before it was too late. On September 7th, Paulson went on television firing the managers and announcing a government takeover. This sent a major shock wave to the people. They felt like if they could fail anyone could fail.
At that point no company that large could fail from the housing bubble. The next day someone else was in trouble. The investment bank Lehman brothers CEO Dick Full was the person who ran this company and inspired loyalty. He took them into risky loans and those investments were dragging them under. At this time Paulson wanted to make an example and decided not to bail them out. So Paulson told them to find a buyer but Full never thought the government would let them fail. But he was wrong. So a few days later Paulson and Aberrant met with the heads of the largest firms on Wall Street at the Federal Reserve.
They wanted to make sure they knew it would no longer be any more bail outs. Eighteenth said they need to figure out who was going to buy Lehman or Lehman would go bankrupt. By the next weekend Lehman thought they had a deal from either Barker or Bank of America but neither of them wanted to do the deal without out the same deal that was offered to Bear. But the government said no. It was clear that moral hazard overruled systemic risk and Lehman brothers failed. On September 15th Paulson made the statement about the failure of Lehman Brothers. He told the public it was terrible but wouldn’t hurt the economy too much.
As soon as he stepped away from the cameras he was told that the stock market was crashing. Lehman Brothers were more connected then Paulson believed and the systemic risk became a reality. Next was Alga on the chopping block. They also had all of these default swaps in the trillions from Lehman Brothers and now they didn’t have the money to pay on it. So they turned to Paulson and Aberrant. At this time moral hazard was out the window. They couldn’t afford to let Alga fail as well. Congress was called and they were told that they were told that the Treasury department was giving Alga 85 billion dollars. By now Aberrant called
Paulson telling him they needed to do something big or this would be the end of our financial economy. Aberrant told the Secretary of Treasury they needed a full scale financial bailout and they had to go to Congress. On September 18th 2008, Secretary of Treasury Henry Paulson and Chairman of the Federal Reserve Ben Aberrant arrived at the Nation’s Capital for a meeting with Senior Legislators. In the past few months they have bailed out one bank and let another bank fail. Aberrant and Paulson told Congress that unless they acted right now the entire financial system in this country and in the world would fail in days.
Paulson had a 700 billion dollar bailout plan from the tax payers to be used to bail out toxic mortgage securities that were creating problems from the banks as soon as possible. But that’s not the way it’s done in Washington. They had to send it up as a bill for that plan to be approved. Many of the conservative republican were upset and against it. They felt like it was Paulson and Bracken’s attempt at trying to bail out their friends on Wall Street and they weren’t having it. On September 29th the house voted and failed. By that time the stock market was under 500 plus points and was continuing to drop.
With the market crashing to over 700 points, Congress decided to revisit Paulson plan to bail out the financial economy. However, by this time another plan that got the government more involved was being introduced with capital injections. This was just a tee inns n o e bill that was already being put out. It you didn’t read it carefully you would have missed it all together. So they quietly injected 6 lines into the bill about capital injections and the revised bill was finally accepted. But before it could get going the financial crisis had found its way around the world to other countries.
Ireland, England, Iceland, and China who was the highest gross country became the almost no gross country. Paulson decided he had to do something so he called the Coo’s of the top nine largest banks to come to his office at the Treasury Department. He decided to give them all a capital injection of money to become a major stockholder. This was not a question of if they wanted to take it or not it was being requested that they were going to take it and they had no other choice. Paulson told them they had to sign the one page contract before they were to leave the city to go back to where they had come from.
No one really wanted to take this injection especially if they weren’t in financial risk from going under but they all knew that they really didn’t have a choice in the matter so they did what they were told and signed the contract and took the injection. This was a crisis no one thought would ever happen. It was almost like Brokenly Born had seen into the future and predicted this would happen. She told them from the beginning that things were going to fail and they have probably more than what she predicted. Still to this day she believes that things are going to get a lot worse before they get any better.
She thinks this crisis is far from over and they government is still not learning from the past. Allan Greenshank never thought he would live to say this but he admits now that he was wrong in what he believed and wished they would have all listened to Born more and maybe this crisis could have been prevented. He retired in 06 with the thought that this would never have happened. He is now a believer in government regulation. When Barrack Obama became President, he replaced Henry Paulson with Tim Eighteenth as the Secretary of Treasury and Ben Aberrant stayed on at the Federal Reserve until 2010.
By this time they had spent well over 250 billion dollars in trying to get this financial economy back to some order. This is only the beginning. They will eventually spend over a trillion dollars more to get things back in the right order and hopefully they will learn from their mistakes this time since they didn’t learn from the Great Depression. If it’s one thing we should take away from this is that history repeats itself and if you don’t make some drastic changes it will happen again and it will be worse than this time. Well at least that’s how Brokenly Born sees and she was right the first time.