Why The Financial Crisis Was A Specific Law Case Involving...

The year 2008 was a chaotic time in the United States. The investments from companies in collateralized mortgage obligations (CMOs), which were supported by subprime mortgages caught up with them (Poole, 2010, p. 424). Three companies who invested in these CMOs made headlines: Bear Stearns, Lehman Brothers, and AIG (American International Group). The United States is still recovering from the Great Recession that occurred seven years ago, and it will be talked about for years to come. This paper will explore what the causes of the financial crisis were, a specific law case involving Lehman Brothers, the Federal Reserve and Congress’s responses, and solutions to prevent an event like this from happening again. As stated, Bear Sterns,†¦show more content†¦Bernanke, Paulson, and the Fed wanted to make clear that this would not occur again. This relates to the argument of moral hazard, which Joe Nocera describes perfectly, â€Å"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?† (Inside the Meltdown, 2009). Lehman Brothers, an investment bank, was not bailed out as Bear Stearns was. Although Lehman Brothers were considered â€Å"too big to fail,† it was not bailed out because the Fed claimed that Lehman’s collateral was insupportable under section 13(3), which allows â€Å"the Fed to lend to a wide range of borrowers using good collateral if at least five Fed governors approve† (Smith, 2011, p. 17). Consequently, investors withdrew their money from â€Å"all banks and money-market funds† (Smith, 2011, p. 19). AIG, the largest insurance company in the US, had a major liquidity issue because of its investments in credit default swaps (CDS) (Safa, Hassan, Maroney, 2013, p. 1337). Since AIG was considered too big to fail, the Federal Reserve decided to inject $85 billon to save the company, and an additional $37.8 billion in Octobe r (Safa, Hassan, Maroney, 2013, p. 1338, 1346). However, Why The Financial Crisis Was A Specific Law Case Involving... The year 2008 was a chaotic time in the United States. The investments from companies in collateralized mortgage obligations (CMOs), which were supported by subprime mortgages caught up with those same companies (Poole, 2010, p. 424). Three companies who invested in these CMOs made headlines: Bear Stearns, Lehman Brothers, and American International Group (AIG). This paper will explore what the causes of the financial crisis were, a specific law case involving Lehman Brothers, the Federal Reserve (the Fed) and Congress’s responses, and solutions to prevent an event like this from happening again. Bear Stearns Bear Stearns, Lehman Brothers, and AIG invested in subprime mortgage-backed securities, which are loans granted to people with meager credit ratings. Housing prices started falling in 2006, â€Å"melting away the value of the collateral behind those securities† (Smith, 2011, p. 17). In Figure 6 of the appendix, the US household mortgage debt became notably high starting in 2004 (Blecker, 2014, p. 702). Bear Stearns’s stock started to plummet in March 2008 (Inside the Meltdown, 2009). The argument for bailing out Bear Stearns was systemic risk, meaning letting the firm fail would send a shock wave to other companies because the rest of the market is interconnected. Ben Bernanke, then Chairman of the Fed, ordered the Fed and JP Morgan Chase provided funding to Bear Stearns (Inside the Meltdown, 2009). Argument of Moral Hazard Even though Bear Stearns was bailed out, HenryShow MoreRelatedWhy The Financial Crisis Was A Specific Law Case Involving Lehman Brothers1317 Words   |  6 PagesThe year 2008 was a chaotic time in the United States. The investments from companies in collateralized mortgage obligations (CMOs), which were supported by subprime mortgages caught up with them (Poole, 2010, p. 424). Three companies who invested in these CMOs made headlines: Bear Stearns, Lehman Brothers, and AIG (American International Group). The United States is still recovering from the Great Recession that occurred seven years ago, and it will be talked about for years to come. This paperRead Morelending market and its aftermath reflec Essays4750 Words   |  19 Pageson the bubble housing crisis. Describe the stages of the bubble for the aliber-paradigm. Using the paradigm to explain problems in stock market and housing bubble burst. 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