Why The Financial Crisis Was A Specific Law Case Involving Lehman Brothers

1317 Words Mar 11th, 2015 6 Pages
The year 2008 was a chaotic time in the United States. The investments from companies in collateralized mortgage obligations (CMOs), which were supported by subprime mortgages caught up with them (Poole, 2010, p. 424). Three companies who invested in these CMOs made headlines: Bear Stearns, Lehman Brothers, and AIG (American International Group). The United States is still recovering from the Great Recession that occurred seven years ago, and it will be talked about for years to come. This paper will explore what the causes of the financial crisis were, a specific law case involving Lehman Brothers, the Federal Reserve and Congress’s responses, and solutions to prevent an event like this from happening again. As stated, Bear Sterns, Lehman Brothers, and AIG invested in subprime mortgage-backed securities. Housing prices started falling in 2006, “melting away the value of the collateral behind those securities” (Smith, 2011, p. 17). In Figure 6 of the appendix, the US household mortgage debt became notably high starting in 2004 (Blecker, 2014, p. 702). Bear Stearns’s stock started to plummet in March 2008 (Inside the Meltdown, 2009). The argument for bailing out Bear Stearns was that it was a systemic risk, meaning letting the firm fail would send a shock wave to other companies because the rest of the market is so interconnected. Ben Bernanke, then chairman of the Federal Reserve, had the Fed and JP Morgan Chase provided funding to Bear Stearns (Inside the Meltdown, 2009).…
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