Pt. 2 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

[19fluid75]

9:15 that is retarded! Punish Bear Stearns for what they were doing by rewarding JPM for doing the same. What a propaganda piece this video is to try and make out that the Fed and Treasury did the right thing. BS!!!

[Armysmithaz]

wow, geight is sitting saying we don't have time, this things gonna explode, tommorrow the markets open and its gonna happen all over again. Then there's me, no economic experience whatsoever. Fuck em, Tim, There a bunch of sluts and they need to be fucked.

[sazajac77z]

@sazajac77z And did I forget to mention that Ron Paul is the only hope for extricating our world from this?

[sazajac77z]

What a crappy video this is. Pure propaganda. They make these guys look like honest businessmen, who needed to be rescued. These people are the parasites of the world, and have been so for centuries. These are the guys Jesus got REALLY pissed at.

Should have let them all crash, then expelled them all to an isolated island forever. Anyone involved in helping them is either a crook or an imbicile.

[rdority]

@1Littleagger I fully concur and I too am afraid for Ron Paul. We should be afraid for ourselves also, however, for if we as a people, as a species do not start standing up to these evil ones that have hijacked our country and much of the world, well then there won't be much future left for us anyway. Still, I can sure appreciate your concern for him. Check out THE MUSIC INDUSTRY EXPOSED ON HERE, just one example.

Peace, Love, Freedom and Justice to you as well.

Merry Christmas and HNY!!

[1Littleagger]

@73mandala I agree.I don't understand why Bush 1 and Bush 2 and Clinton's and Obama are not being on trial for treason.I think someone is trying to collapse America and their doing it within.I have been trying to figure out which country it is but I hard because Britain, France and the Europe counties are so married into each other.

[1Littleagger]

@rdority I am scared someone will kill Ron if he won like they did Kennedy.Somehow American people need to learn a system to survive that dont profit them.But I dont know one yet.Love and freedom and justice to you.

[gopconservative78]

Bear Should have gone down........period, let the markets take care of itself and get government out of it

[translationwiz]

See, the reason why I get so horny,&hit on all these women is that they wear bikinis and tight jeans. And it drives me crazy.. Sooooo, we need de-regulation. I say if you guys just allow me and them to live naked; in the same apt. all the time, the aire of freedom and lack of control, fear about rules, will straighten things out! Yeah, something is gonna get straight alright. I'm gonna bang everyone of them. And thats what these wall st. guys do when they're deregulated. They fuck us all.

peace

[rdority]

Ron Paul means Sound Money, the only true Constitutionalist out of the otherwise phony lot of candidates. Rick Perry is a muderer of little girls and boys, literally because he advocated the Gardisil vaccine be mandated which has led to the demise of so many innocent children. He claims he just didn't know better and finally no longer supports the vaccine but he's too late. Obama is a complete fraud.

Ron Paul 2012

[princeofswine]

Your problem is the Rothschild their coming after your country ,research Rothschild youtube. 99% of people do not know they exist the jewish money lenders are the worlds problem they are undermining countries economies,and earning interest on loans to waring countries.They do not give a damm for anyone except the family bisiness,they own 3/4 of the worlds assets,THEY WANT AMERICA IN THEIR CONTROL and that day is near approaching

[life0is0just0a0ride]

Ben Bernanke just adds fuel to americas burning economy.