inside the meltdown video – Flashcards
Unlock all answers in this set
Unlock answersquestion
What happened to make the firm Bear Stearns go out of business?
answer
Loosing money and stocks declines. People wanted their money out. They had a lot of risk mortgages (toxic assets). Cash reserves declines and confidence in the company was lost.
question
What are credit default swaps? What role did they play in the meltdown?
answer
Credit default swaps are forms of insurance. They are agreements with a bond. Bear Stearns had these agreements with many people all over the world.
question
What is the Federal Reserve Bank? What role did it play when Bear Stearns was in financial trouble?
answer
It is the central bank of the country. The fed provided secure reserves to bail out Bear Stearns
question
What is the Treasury Department? What role did it play with Bear Stearns' financial troubles?
answer
It is where the money comes from; they were needed to make more money so they could pump it into the economy.
question
what is a systematic risk?
answer
It is the risk the whole financial system/ economy might collapse
question
Free-market capitalism dictates that markets create efficient solutions and businesses that fail should be left to fail. Secretary Paulson was concerned about "moral hazard" after helping Bear Stearns. What did this mean?
answer
Moral hazard means that there is no incentive for them to avoid the same mistakes because they though the government would bail them out again.
question
The film follows people who took out mortgages they couldn't afford in the hopes that their home values would increase and they would become rich. Why did the banks give these people mortgages?
answer
The banks gave them mortgages because everyone assumed home values would increase
question
Should there be laws to restrict the value of houses people buy and the amount of leverage used to buy the house? What is the problem with having such laws in a free market?
answer
Yes because if a house is valued at too high of a market price , no one will be interested in buying. the problem with having this law in a free market economy is that it affects the supple and demand of the housing market.
question
Why did the federal government take over Fannie Mae and Freddie Mac?
answer
Stock was falling and they were going out of business so the government stepped in. They were connected to much of wall street.
question
Secretary Paulson decided not to guarantee a government loan for Lehman Brothers as he had for Bear Stearns with the JPMorgan takeover. What happened as a result of that decision?
answer
It caused the Lehman brothers to go bankrupt. And almost bankrupted AIG
question
Why did the government give AIG a loan of $85 billion after refusing to loan money for the Lehman Brothers acquisition?
answer
the government gave AIG a loan because they could not let AIG go bankrupt (economic system would fail with out the company)
question
What is capital injection?
answer
Capital injection is a full-scale bail out of capital investment
question
The last scene in the film shows the leaders of the largest banks being told by Henry Paulson that they would have to accept government capital injections. What was the rationale for that decision?
answer
to recreate confidence in the banks and to stabilize the economy.
