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    Inside The Meltdown Discussion Questions

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    Bear Stearns collapsed due to rumors it had overinvested in risky mortgages, causing investors to lose confidence and withdraw funds. The Federal Reserve and Treasury Department arranged emergency loans to prevent systemic risk from Bear Stearns' failure. However, JP Morgan then acquired Bear Stearns at a heavily discounted price. Similarly, Fannie Mae and Freddie Mac were taken over by the government to avoid collapse, as they held trillions in mortgages. Lehman Brothers filed for bankruptcy after being denied government assistance, deepening the crisis. AIG's bailout avoided its potential to trigger global economic failure through its extensive business dealings. The government implemented measures like capital injections and toxic asset programs to stabilize the markets

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    Inside The Meltdown Discussion Questions

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    ryanfitz97
    4K views4 pages
    Bear Stearns collapsed due to rumors it had overinvested in risky mortgages, causing investors to lose confidence and withdraw funds. The Federal Reserve and Treasury Department arranged emergency loans to prevent systemic risk from Bear Stearns' failure. However, JP Morgan then acquired Bear Stearns at a heavily discounted price. Similarly, Fannie Mae and Freddie Mac were taken over by the government to avoid collapse, as they held trillions in mortgages. Lehman Brothers filed for bankruptcy after being denied government assistance, deepening the crisis. AIG's bailout avoided its potential to trigger global economic failure through its extensive business dealings. The government implemented measures like capital injections and toxic asset programs to stabilize the markets

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    Bear Stearns collapsed due to rumors it had overinvested in risky mortgages, causing investors to lose confidence and withdraw funds. The Federal Reserve and Treasury Department arranged emergency loans to prevent systemic risk from Bear Stearns' failure. However, JP Morgan then acquired Bear Stearns at a heavily discounted price. Similarly, Fannie Mae and Freddie Mac were taken over by the government to avoid collapse, as they held trillions in mortgages. Lehman Brothers filed for bankruptcy after being denied government assistance, deepening the crisis. AIG's bailout avoided its potential to trigger global economic failure through its extensive business dealings. The government implemented measures like capital injections and toxic asset programs to stabilize the markets

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    4K views4 pages

    Inside The Meltdown Discussion Questions

    Uploaded by

    ryanfitz97
    Bear Stearns collapsed due to rumors it had overinvested in risky mortgages, causing investors to lose confidence and withdraw funds. The Federal Reserve and Treasury Department arranged emergency loans to prevent systemic risk from Bear Stearns' failure. However, JP Morgan then acquired Bear Stearns at a heavily discounted price. Similarly, Fannie Mae and Freddie Mac were taken over by the government to avoid collapse, as they held trillions in mortgages. Lehman Brothers filed for bankruptcy after being denied government assistance, deepening the crisis. AIG's bailout avoided its potential to trigger global economic failure through its extensive business dealings. The government implemented measures like capital injections and toxic asset programs to stabilize the markets

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    The document discusses several major events of the 2008 financial crisis including the collapse of Bear Stearns and Lehman Brothers and government intervention to bail out other large financial institutions like AIG.

    Bear Stearns faced a liquidity crisis as rumors spread that they had taken on too much risk and were overleveraged in mortgage-backed securities. This led to a loss of confidence and a run on the bank as clients withdrew their funds.

    The Federal Reserve facilitated a loan from JP Morgan to Bear Stearns to prevent its collapse, citing concerns over systemic risk. The Treasury also worked to address Bear Stearns' debt obligations.

    Inside the Meltdown Discussion Questions

    Bear Sterns
    1. What happened to make the firm Bear Stearns go out of business?
    Rumor that they were running out of money because they were
    gambling too many mortgages
    Market also voted no confidence in the bank
    The stock then went into a freefall because people were taking
    their money out of the company no faith in it
    3. What is the Federal Reserve Bank? What role did it play when Bear
    Stearns was in financial trouble?
    Regional banks responsible for implementing monetary policy for
    the banks under its control
    Investigated the issues and found that they were indebted
    billions of dollars in mortgages to others thought that if they go
    down, everyone goes down
    4. What is the Treasury Department? What role did it play with Bear
    Stearns' financial troubles?
    The executive department in charge of controlling government
    revenue
    Fed gave loan to FP Morgan to then give to Bear Stearns to pay
    off their debt
    5. What is systemic risk?
    Risk of the collapse of an entire financial market or system
    because of one single company all these companies are
    interconnected
    6. 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?
    He didnt want other businesses to rely on the Fed to bail them
    out the Bear Stearns bailout was a one-time thing
    Whats to stop a company who got bailed out to make the same
    mistake again?
    7. What was the first deal between the Federal Reserve, JP Morgan,
    and Bear Sterns?
    The Fed would give FP Morgan to loan to then give to Bear
    Stearns so they can pay off their debt
    8. Why didnt this plan work?
    No one wanted to take on the debt of a failing company
    Public found out about this and continued pulling their money out
    of Bear
    9. What was the second deal between the Federal Reserve, JP Morgan,
    and Bear Sterns?

    JP Morgan would sell Bear Stearns stock for $2 a share, rather


    than a higher money they thought it would be
    This was so that Bearn Stearns could pay for the mistake they
    made caused Bear Stearns to go out of business

    Fannie and Freddie Mac


    10. What do these two companies do?
    Largest, most powerful mortgage companies
    Buy mortgages and hold them in portfolios to make an
    investment and gain profit
    11. Why were they in jeopardy?
    They had the most money invested in these mortgages that were
    soon to be failures lost nearly 60% of revenue and held $5
    trillion in mortgages
    It was inevitable that these two companies would fail, bringing
    own the entire market
    12. Why did the federal government take over Fannie Mae and Freddie
    Mac?
    Government fired management and took over because if these
    two companies fell, the entire market would crash a last resort
    of government
    Lehman Brothers
    13. The piece indicates that the culture at Lehman may have
    contributed to its own demise. How so?
    Dick Fold (CEO) worked there for so long very affluent and
    arrogant with the company believed he could do anything
    Because of this, they invested so much money in the riskiest
    mortgages (even employees noticed the large risk the company
    was taking)
    14. What role did moral hazard play in the governments strategy for
    dealing with Lehman?
    Lehman Brothers thought that they Fed would bail them out
    because they did the same with Bear Stearns
    Treasury told them to find a buyer or else they would be in
    trouble
    Moral hazard prevented the Fed from helping the company
    wanted these business to pay the price of their own problems
    they started
    15. 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?

    Lehman Brothers filed for bankruptcy, causing the entire market


    to crash and the credit market froze completely
    Government didnt think they were as connected as they were,
    causing the major meltdown of the market

    AIG
    16. What is AIG?
    Worlds largest investment company had major mortgage debts
    So big it has done business with nearly every major bank in the
    entire world
    17. Why was AIG in such a precarious financial state?
    Most of their mortgage policies were based off of Lehman
    Brothers and that they would never fail, so they wouldnt have a
    problem
    Lehman Brothers failed causing AIG to lose nearly everything
    18. What role did moral hazard play in the resolution with AIG?
    Government realized that if AIG goes down, worldwide economy
    will crash
    Government loaned $85 billion to the company, and therefor
    took over the largest investment company in the world
    19. Why did the government treat AIG differently than Lehman?
    They knew that if they let AIG fail, the entire market would crash
    and there would never be a bottom to the downfall
    Mortgages:
    20. The film follows people who took out mortgages they couldnt
    afford in the hopes that their home values would increase and they
    would become rich. Why did the banks give these people mortgages?
    Banks knew that if the people didnt make their payments, their
    assets would then be taken by the banks and the increase in
    home value would then give the banks major profit
    21. 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?
    After the market crash, there should be laws restricted the
    purchase of homes on the bank/mortgage side so people dont
    buy something they cant afford
    With this, it goes against the practices of a market system
    because this involves government intervention in a free market
    system
    Governments Proactive Strategy
    22. What is a toxic Asset?

    Financial assets that have decreased significantly and the market


    is no longer functioning properly
    23. What was the governments plan to protect the public from the
    toxic asserts owned by the banks?
    The government wanted to put money into the financial markets
    to avoid these toxic assets from reaching the public and bailing
    out the markets
    24. What is capital injection? What does the government get out of
    providing capital injections?
    The government putting its own money into the market so in turn
    they buy stocks and virtually have ownership in a market
    25. 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?
    This was so the government could hold stakes in the market, in
    turn giving them control of the markets
    They gained centralized control to continue pumping money into
    the markets
    After you answer these questions go to:
    https://projects.propublica.org/bailout/

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