The Bailout That Didn't Help

Frontline on PBS “Money, Power, and Wall Street” 

Episode 2

After the housing bubble burst, banks began to feel the strain. Bear Stearns was the first to fall due to massive investments in subprime mortgages. As analysts looked into the fall of Bear Stearns, they discovered they were frighteningly connected to other banks up and down Wall Street and everyone became afraid of what a bank failure would lead to. The Chairman of the Financial Crisis Inquiry Commission, Phil Angelides, said, “What became clear as you look at the records is the extent to which the people who were charged with overseeing our financial system really didn’t have a sense of the risks that were in the system, they didn’t see the fundamental rotting that had manifest itself for years.” As the risk of failure increased, regulators continued to ignore evidence that Wall Street was flirting with disaster. “They had deliberately turned a blind eye to those problems,” was explained by Phil Angelides.

The response to this imminent failure was to bring in analysts. These analysts believed that, just as in the Great Depression, a lack of confidence in the banks could bring down the economy. Richard Fisher, President of the Dallas Federal Reserve, explained, “The market was telling you something was wrong.” The government’s response was a 30 billion dollar bailout.

After the bailout of Bear Stearns, the Lehman Brothers began to have difficulties. Because of the precedent set with the Bear Stearns situation, the Lehman Brothers were convinced that the government would come to their rescue because the country couldn’t survive without them at the center of the banking industry. Instead of helping, the government allowed the Lehman Brothers to fail. They followed the sentiment that if you don’t let some people go belly up, the discipline of the market will be lost. Other Wall Street banks decided they weren’t going to help either and it was over for the Lehman Brothers.

Secretary of Treasury, Hank Paulson, thought the stock markets would take care of themselves after the loss of the Lehman brothers. He was wrong. Charles Duhigg, The New York Times, elaborated, “Everything freezes, and that’s what causes the crisis. And it really started because Lehman Brothers went into bankruptcy.” Shockwaves from the collapse of Lehman Brothers is felt everywhere as no bank wants to lend to another bank for fear of inability to be repaid. The decision not to bailout the Lehman Brothers is now at the heart of the market failure.

AIG, the world’s largest insurance company, begins to fall apart shortly thereafter. Analysts decided that if the government didn’t do everything possible to save AIG, the outcome would be devastating. The government decided they couldn’t let AIG fail, so, in order to save the economy, AIG was bailed out. And so began the biggest government bailout in U.S. history. 

Kirk, Michael, dir. "Episode 2." Writ. Michael Kirk, and Mike Wiser. Money, Power and Wall Street. Frontline on PBS: 24 Apr 2012. Television.