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

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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,…show more content…
Bernanke, Paulson, and the Fed wanted to make clear that this would not occur again. This relates to the argument of moral hazard, which Joe Nocera describes perfectly, “If you bail somebody out of a problem they themselves cause, what incentive will they have the next time to avoid making the same mistake?” (Inside the Meltdown, 2009). Lehman Brothers, an investment bank, was not bailed out as Bear Stearns was. Although Lehman Brothers were considered “too big to fail,” it was not bailed out because the Fed claimed that Lehman’s collateral was insupportable under section 13(3), which allows “the Fed to lend to a wide range of borrowers using good collateral if at least five Fed governors approve” (Smith, 2011, p. 17). Consequently, investors withdrew their money from “all banks and money-market funds” (Smith, 2011, p. 19). AIG, the largest insurance company in the US, had a major liquidity issue because of its investments in credit default swaps (CDS) (Safa, Hassan, Maroney, 2013, p. 1337). Since AIG was considered too big to fail, the Federal Reserve decided to inject $85 billon to save the company, and an additional $37.8 billion in October (Safa, Hassan, Maroney, 2013, p. 1338, 1346). However,
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