Mortgage Meltdown Essay

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The Mortgage meltdown does a great job explaining how the economy failed so bad and so fast and explains why the actions taken by the federal reserve chairman Ben Bernake and Secretary of Treasury Henry Paulson couldn't manage to prevent the worst economic crisis in decades. The housing bubble started to show signs of weakness in 2007 and Wall St. started to panic as they had gambled heavily on home mortgages. By the spring of 2008 rumors began to spread that well known Bear Sterns was about to go belly up as they had invested billions of dollars in the toxic mortgages. These e rumors can act as contagions in the large banking and finance industry especially when you consider the web of systematic risk. Stocks dropped over night and Alan Swartz, CEO of Bear Stearns then realized that he could have been holding to the hot potato, addressing stock holders with reassurance on CNBC was simply not enough and banks such as Goldman Sachs would simply not deal with them anymore. Within days Bear Sterns exhausted their 18 billion dollar reserve and turned to Ben Bernake for help. Bear Sterns went in front of the federal reserve for a plea and mastermind Bernake arranged a deal between the super giant commercial bank JP Morgan and Sterns to accept a loan from the federal reserve for the sum of 30 billion. The reason for this acquisition was because Sterns could not directly accept a loan from the federal reserve but by allowing JP Morgan to accept the initial loan only to loan it to Sterns. Shareholders lost faith in the company which in a turn of events allowed it to trade for two dollars a share. The Leamhan Brothers also began started to show financial strain and Bernake and Paulson (Treasury Secretary) were called to bail them out as well. Unfortunately AIG invested in the housing market insuring these securities would not default and promised to pay if the

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