inside the meltdown video
What happened to make the firm Bear Stearns go out of business?
Loosing money and stocks declines. People wanted their money out. They had a lot of risk mortgages (toxic assets). Cash reserves declines and confidence in the company was lost.
What are credit default swaps? What role did they play in the meltdown?
Credit default swaps are forms of insurance. They are agreements with a bond. Bear Stearns had these agreements with many people all over the world.
What is the Federal Reserve Bank? What role did it play when Bear Stearns was in financial trouble?
It is the central bank of the country. The fed provided secure reserves to bail out Bear Stearns
What is the Treasury Department? What role did it play with Bear Stearns’ financial troubles?
It is where the money comes from; they were needed to make more money so they could pump it into the economy.
what is a systematic risk?
It is the risk the whole financial system/ economy might collapse
Free-market capitalism dictates that markets create efficient solutions and businesses that fail should be left to fail. Secretary Paulson was concerned about “moral hazard” after helping Bear Stearns. What did this mean?
Moral hazard means that there is no incentive for them to avoid the same mistakes because they though the government would bail them out again.
The film follows people who took out mortgages they couldn’t afford in the hopes that their home values would increase and they would become rich. Why did the banks give these people mortgages?
The banks gave them mortgages because everyone assumed home values would increase
Should there be laws to restrict the value of houses people buy and the amount of leverage used to buy the house? What is the problem with having such laws in a free market?
Yes because if a house is valued at too high of a market price , no one will be interested in buying. the problem with having this law in a free market economy is that it affects the supple and demand of the housing market.
Why did the federal government take over Fannie Mae and Freddie Mac?
Stock was falling and they were going out of business so the government stepped in. They were connected to much of wall street.
Secretary Paulson decided not to guarantee a government loan for Lehman Brothers as he had for Bear Stearns with the JPMorgan takeover. What happened as a result of that decision?
It caused the Lehman brothers to go bankrupt. And almost bankrupted AIG
Why did the government give AIG a loan of $85 billion after refusing to loan money for the Lehman Brothers acquisition?
the government gave AIG a loan because they could not let AIG go bankrupt (economic system would fail with out the company)
What is capital injection?
Capital injection is a full-scale bail out of capital investment
The last scene in the film shows the leaders of the largest banks being told by Henry Paulson that they would have to accept government capital injections. What was the rationale for that decision?
to recreate confidence in the banks and to stabilize the economy.
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