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Summary
The Financial Crisis of 2008 was an event that not many had believed would happen. In a
time of a booming economy, many high level investment managers, CEOs, and government
officials, overlooked many important warning signs that the banking system was headed for
failure. The four episodes produced by Frontline, Breaking the Bank, The Warning, Inside the
Meltdown, and The Untouchables, investigate the events leading up to, during, and the
aftermath of the financial crisis. The early comings of the crisis begin in 2007, when the housing
bubble burst and trillions of dollars of toxic assets owned by banks began to become insolvent.
The toxic assets which were owned by the banks were investments in sub-prime mortgage loans
and default swaps. Banks and investments groups at the time would buy thousands of mortgages
and bundle them into securities and sell them to investors. When the creditors defaulted on their
mortgages, that would be the problem of the investor. The first bank to begin to fail because of
an investment in such assets was Bear Stearns. Stearns had borrowed heavily in order to invest in
sub-prime mortgages and defaults swaps. As a result, Stearns stock price began to fail. With
failure imminent, the Federal Reserve chose to lend funds through J.P. Morgan. However, with
the broadcast of the loan from the government, investors began to panic and Bear Stearns filed
for bankruptcy. The effect of the bankruptcy was systematic. As they failed, another would take
on their debt and fail, and so on. The next banks in line were Lehman Brothers and Merrill
Lynch. Henry Paulson, the Secretary of Treasury, urged for both banks to find a buyer for their
company. Lehman Brothers was unable to find a buyer for their company without the same
treatment as Bear Stearn, and was forced into bankruptcy after Paulson refused to offer a bailout.
Merrill Lynch, however, was fortunate enough to sell their company to Bank of America for
$50,000,000. As a reaction to the merger, everything froze. Credit markets froze, banks stopped
lending, and the Dow Jones was down over seven-hundred points the next day (See Appendix
A). The Paulsons next step was government intervention. He was granted to lend the worlds
nine leading banks a sum of $700 billion dollars in the form of a bailout. As a result of the
bailout the government would take an ownership stake in each bank.
Leading up to the crisis there were many whistle-blowers. The first of the whistle blowers
was Brooksley Born. Brooksley born tried to warn about the danger of these toxic assets as the
head of the Commodities Futures Trading Commission. During the late 1990s and early 2000s
banks and investment groups began to deal largely with over-the-counter derivatives dealing in
real estate, which were left unregulated by government agencies. Without regulation, only the
people dealing the derivatives knew the underlying issues and facts of the trade. Born pushed for
the regulation of such trading in order to provide information for reporting and record keeping.
After numerous attempts to push for regulation, even after a derivative crisis in which a
companys derivative securities had failed, government did nothing.
In addition to the real estate derivatives, there had also been many whistle blowers
regarding real-estate and mortgage loans that were granted as a result of fraud. Mortgage
companies and banks leading up to the crisis granted high value loans to customers who were not
qualified. Loans were granted to customers with no jobs, no source of income, and no assets.
Both banks and mortgage lenders did not correctly institute the fact of due diligence in order to
approve loans to insolvent customers. If a loan seemed to be fraudulent, such as a waiter making
12,000 a month, the rules were bent and the loan was granted. Ultimately, this led to banks
acquiring a large number of toxic assets, trading loans to each other which they knew were
defective.