What the Heck Just Happened. The Causes of the Financial Meltdown in 2008. Paul J. Mahoney
The Government of the United States, in an attempt to appease everyone and level a playing field, as well as stave off a recession created the biggest reasons for the financial meltdown of 2008. “US. Housing policies are the root cause of the current financial crisis. Other players, greedy investment bankers; foolish investors; imprudent bankers; incompetent rating agencies; irresponsible housing speculators; shortsighted homeowners; and predatory mortgage brokers, lenders, and borrowers—all played a part, but they were only following the economic incentives that government policy laid out for them” (Wallison, 2011).
“Investment banks like Bear Stearns are the lifeblood of capital markets, providing the cash flow that keeps economic gears turning. They facilitate short-term loans to businesses, raise money for corporate expansions and IPOs and assist the trading of securities. Without them, financial markets would grind to a halt” (NPR, 2008).
While Government intervention played a huge role in this crisis, Investment banks and their bundling and selling off of mortgages for profit exposed this mess. One of those banks, and the first to fall was Bear Stearns. In 2007, “Bear Stearns, the 5th largest investment bank in the US, announced large losses in 2 of its hedge funds with exposure to subprime assets. Clients were prevented from withdrawing money and the funds were eventually shut down at a $3 billion dollar loss” (Wall Street Oasis, 2012). In an effort to stave off a crisis the Government, “ extended JPMorgan Chase a $30 billion credit line to help it buy Bear Stearns, a firm with an 85-year history on Wall Street that was on the verge of collapsing due to losses in the mortgage market” (Godoy, 2008). The purpose of this paper is to examine how this occurred, what role Bear Stearns, one of many, played in it, and what can be done to prevent this from occurring again.
Bear Stearns has been through a lot. The company, founded by Joseph Bear, Robert Stearns, and Harold Mayer as an equity-trading house, began trading in Government securities in 1923. Bear Stearns had a reputation as an aggressive trading bank willing to take risks. The firm was proud of its reputation as a company run by employees with a “blue collar” background. The stock market crash of 1929 put a lot of companies down but Bear Stearns,” although suffering setbacks had accumulated enough capital to survive quite well. As the country struggled out of the Depression, Bear Stearns entered into the bond market to promote President Franklin Roosevelt's call for renewed development of the nation's infrastructure through the New Deal. During the period following Roosevelt's reform measures, Bear Stearns made its first substantial profits by selling large volumes of these bonds to cash-rich banks around the country” (funding Universe, 2003). “By 1985 the firm's total capital went from $46 million to $517 million; in 1989, it was $1.4 billion. Bear Stearns's willingness to take risks pushed it into the forefront of corporate takeover activity” (Funding Universe, 2003). “Fortune magazine listed the firm as one the most admired securities firms in 2005 through 2007 in its annual survey of most admired from companies. Bear Stearns was one of the most highly leveraged firms on Wall Street. Throughout its history it was both innovative and creative which, at times, caused it to take some risky positions. The firm’s management was known to focus on immediate opportunistic returns with little long term strategic planning” (Rybeck, unknown).
“During the last quarter of 2005, home prices started to fall, which led to a 40% decline in the U.S. Home Construction Index during 2006. Not only were new homes being affected, but many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their...
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