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Bear Stoearns Failure Essay

Decent Essays

During the spring of 2008, rumors were circulating that the investment bank Bear Stearns would fail due to their massive investments in subprime mortgages, or “toxic assets.” These rumors were able to decline the companyʻs stock from $171 to $57 dollars a share, and bankruptcy was imminent. Ben Bernanke, the chairman of the Federal Reserve, realized that Bear Stearns could not be allowed to go bankrupt because they were deeply connected to many other firms, which would result in major economic failure. In response to the crisis, Bernanke lent money to JP Morgan, which then lent the money to Bear Stearns, as the Federal Reserve could not directly lend money to Bear Stearns as it is an unregulated investment bank. After this process, Henry Paulson, the Treasury Secretary, relied on the principle of moral hazard and notified the other banks that …show more content…

The Lehman Brothers, another investment bank, also encountered failure due to rumors and toxic investments. Due to the Federal Reserveʻs assistance to Bear Stearns, Lehman brothers expected the same treatment, which Henry Paulson denied to them. As a result, markets failed and the entire system was jeopardized. AIG, the largest insurance corporation in the nation, also needed loans to avoid bankruptcy. Ben Bernanke then lent them 85 billion dollars, which meant that the government had 80% of ownership, and essentially controlled, the largest insurance company. By the end of the crisis, Paulson and Bernanke had no other option than to spend $700 billion dollars to aid all of the major banks, which ultimately contradicted their principle of opposition to government intervention. Even after this plan had been implemented, there was still uncertainty on whether or not all of the money spent would suffice to salvage the financial

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