Pt. 6 America's Bankrupt Banks (Inside the Meltdown)

On Thursday, Sept. 18, 2008, the astonished leadership of the U.S. Congress was told in a private session by the chairman of the Federal Reserve that the American economy was in grave danger of a complete meltdown within a matter of days. "There was literally a pause in that room where the oxygen left," says Sen. Christopher Dodd (D-Conn.).

As the housing bubble burst and trillions of dollars' worth of toxic mortgages began to go bad in 2007, fear spread through the massive firms that form the heart of Wall Street. By the spring of 2008, burdened by billions of dollars of bad mortgages, the investment bank Bear Stearns was the subject of rumors that it would soon fail.

"Rumors are such that they can just plain put you out of business," Bear Stearns' former CEO Alan "Ace" Greenberg tells FRONTLINE.

The company's stock had dropped from $171 to $57 a share, and it was hours from declaring bankruptcy. Federal Reserve Chairman Ben Bernanke acted. "It was clear that this had to be contained. There was no doubt in his mind," says Bernanke's colleague, economist Mark Gertler.

Bernanke, a former economics professor from Princeton, specialized in studying the Great Depression. "He more than anybody else appreciated what would happen if it got out of control," Gertler explains.

To stabilize the markets, Bernanke engineered a shotgun marriage between Bear Sterns and the commercial bank JPMorgan, with a promise that the federal government would use $30 billion to cover Bear Stearns' questionable assets tied to toxic mortgages. It was an unprecedented effort to stop the contagion of fear that seemed to be threatening the rest of Wall Street.

While publicly supportive of the deal, Treasury Secretary Henry Paulson, a former Wall Street executive with Goldman Sachs, was uncomfortable with government interference in the markets. That summer, he issued a warning to his former colleagues not to expect future government bailouts, saying he was concerned about a legal concept known as moral hazard.

Within months, however, Paulson would witness the virtual collapse of the giant mortgage companies Fannie Mae and Freddie Mac and preside over their takeover by the federal government.

The episode sent shockwaves through the economy as confidence in Wall Street began to evaporate. Within days, in September 2008, another investment bank, Lehman Brothers, was on the brink of collapse. Once again, there were calls for Bernanke and Paulson to bail out the Wall Street giant. But Paulson was under intense political pressure from conservative Republicans in Washington to invoke moral hazard and let the company fail.

"You had a conservative secretary of the Treasury and conservative administration. There was right-wing criticism over Bear Stearns," says Congressman Barney Frank (D-Mass.), chairman of the House Financial Services Committee.

Paulson pushed Lehman's CEO Dick Fuld to find a buyer for his ailing company. But no company would buy Lehman unless the government offered a deal similar to the one Bear Stearns had received. Paulson refused, and Lehman Brothers declared bankruptcy.

FRONTLINE then chronicles the disaster that followed. Within 24 hours, the stock market crashed, and credit markets around the world froze. "We're no longer talking about mortgages," says economist Gertler. "We're talking about car loans, loans to small businesses, commercial paper borrowing by large banks. This is like a disease spreading."

"I think that the secretary of the Treasury could not fully comprehend what that linkage was and the extent to which this would materialize into problems," says former Lehman board member Henry Kaufman.

Paulson was thunderstruck. "This is the utter nightmare of an economic policy-maker," Nobel Prize-winning economist Paul Krugman tells FRONTLINE. "You may have just made the decision that destroyed the world. Absolutely terrifying moment."

In response, Paulson and Bernanke would propose -- and Congress would eventually pass -- a $700 billion bailout plan. FRONTLINE goes inside the deliberations surrounding the passage of the legislation and examines its unsuccessful implementation.

"Many Americans still don't understand what has happened to the economy," FRONTLINE producer/director Michael Kirk says. "How did it all go so bad so quickly? Who is responsible? How effective has the response from Washington and Wall Street been? Those are the questions at the heart of Inside the Meltdown."

Category:

News & Politics

Tags:

• Bear
• Sterns
• Fannie
• Mae
• Freddie
• Mac
• Bankrupt
• Financial
• banking
• economy
• markets
• bailout

[philwarinsky]

TOTAL BS. This is fiscal propaganda at its finest.

[princeofstockmarket]

most people are stupid. just go out and look around. everyone you see is stupid. it is logical that the rich gets richer and the poor gets poorer.

[stumptownbro]

@philwarinsky Fiscal policy has to do with government revenue and taxation. Monetary policy has to do with controlling interest rates, employment etc. These were monetary moves by the Fed and Treasury to prevent a systemic economic collapse. There was nothing fiscal mentioned in the doc. and for the most part it was just a play by play of what happened. If you want to discuss 'why' it happened that is another topic and documentary all together. But this was not 'fiscal propaganda'.

[NunoSav]

You can't go through the 2008 crisis without showing this: /watch?v=HaG9d_4zij8

There's better documentaries out there!

[philwarinsky]

@uzair17raza Imagine a movie, you watch it and then you watch a version with commentary. Yes the commentary is truth and correct, all of the things the voice over highlights did happen, yet you are still watching an 'imagination' rather then anything that actually happened. Same applies to this film.

[philwarinsky]

@StanleySweet14 where to start? This doco is full of half truths and outright lies. If you cannot see them then I cannot point them out to you, for your mind is already made up?

[uzair17raza]

@philwarinsky Can you please give us a hint of what you mean by propaganda. This is explaining in detailwhat happened perhaps what you mean by BS is the very fact that the system they were running was designed to come this way eventually. I mean who the fuck studies the depression and yet avoids making a mistake like this. These people are not ignorant, they're cowards. Quantitative easing will only postpone their cowardly acts

[StanleySweet14]

@philwarinsky how is this propaganda? This is just a documentary explaining what happened. What part of this did not happen?

[dreamEternal]

@jscottupton lol that was funny.

We've brought the world to the brink of financial armagedon, now it's all down to you to save us, better not let us down ok! you better do your job properly!!

Captalism in the western hemisphere's a funny thing.

[73mandala]

@lonelytrixter So the question must be asked, why repeal this Glass-Steagall Act that supposedly would stop this type of mess from happening?

[lonelytrixter]

The biggest problem I have with this 'documentary' is it completely misses how the same right wing, free market ideology that Paulson et all espoused was what allowed the mess to be created in the first place. If regulations like the Glass-Steagall Act and leverage caps were not removed, if the banks were not allowed to operate in secrecy and keep this junk off their balance sheets and if the regulators were doing their jobs properly the mess probably would not have been created.

[devinseven11]

@princeofstockmarket that is true. Most people dont even understand how stocks work.