FIN 100 Week 7 Discussion
Please respond to the following:
Using the following links to the Frontline videos and then answer the following questions:
Short Version - https://youtu.be/HX6Fg62l0e8
What was the impact of the near failure of Bear Stearns and the failure of Lehman Brothers on Money Markets?
What actions did the Federal Reserve and the Treasury Department take? What were the impacts of the decisions if any?
What was the impact of the near failure of Bear Stearns and the failure of Lehman Brothers on Money Markets?
Bear Stearns was the biggest investment banks and also securities trading firms but in March 2008, they collapsed. The company was going negative in raising private capital to fund and due to the billions of dollars in debts they eventually suffered bankruptcy. Because several financial institutions rely on loans to cover their daily operations, that loss of liquidity struggled many banks to bankruptcy. The failure to receive the regular loans dropped Bear Stearns and also caused the Lehman Brothers bankruptcy.
"Lehman Brothers failed at the same time with Bear Stearns, as massive failures from mortgage-related investments caused “overnight lenders”—who offer short-term financing in exchange for claims on collateral in case of a default to lose faith in promised collateral and to pull back funding." (Anthony Randazzo and Carson Young, Jan 25, 2010)
Lehman was in debt and started to finance all its investments, and was hoping on shortterm financing. Lenders were losing hopes in Lehman, and Lehman Brothers’ creditors considered loans to investment bank was risky, and Lehman was helpless to receive loans they had hope. The Federal Reserve and other banks tried to save Lehman on September 13, 2008. And luckily Barclays bank could manage to purchase Lehman.
"But Barclays was a British bank, and the U.K.’s financial regulators didn't want Barclays to take on the risky debt of Lehman, so the deal fell through." (Anthony Randazzo and Carson Young, Jan 25, 2010)
On September 15, 2008, Lehman had to file for bankruptcy.
What actions did the Federal Reserve and the Treasury Department take? What were the impacts of the decisions if any?
In March 2008, the policy makers stopped the bankruptcy of A.I.G. only couple days following and protected Bear Stearns.
"The Fed’s loans that helped the takeover of Bear Stearns by JPMorgan Chase, $29 billion of Fed money was in danger upon some Bear Stearns assets considered to meriting about $30 billion. JPMorgan would receive the leading $1 billion if the cost of those assets decreased, giving a rest first of the Fed (first of taxpayers). Those assets were safe and Fed refunded with the interest." (Phillip Swagel, September 13, 2013)
The Treasury Department had no legal power to place the government money or support for the debts. The Lehman Brother's had collapsed before the TARP was established or even submitted to Congress.
"At the time that Lehman failed, the Federal Reserve under its Section 13(3) emergency powers could lend money to any firm in the case of “unusual and exigent circumstances.”" (Phillip Swagel, September 13, 2013)
References:
Anthony Randazzo and Carson Young, (Jan 25, 2010). Reason Foundation - What Caused the Meltdown: A Financial ... (n.d.). Retrieved from http://reason.org/news/show/whatcaused-the-meltdown-a-fin
Phillip Swagel, (September 13, 2013). Why Lehman Wasn't Rescued - The New York Times. (n.d.). Retrieved from http://dealbook.nytimes.com/2013/09/13/why-lehmanwasnt-rescued/
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