Inside the Meltdown Discussion Questions

Bear Sterns
1. What happened to make the firm Bear Stearns go out of business?
Rumor that they were running out of money because they were
gambling too many mortgages
Market also voted no confidence in the bank
The stock then went into a freefall because people were taking
their money out of the company no faith in it
3. What is the Federal Reserve Bank? What role did it play when Bear
Stearns was in financial trouble?
Regional banks responsible for implementing monetary policy for
the banks under its control
Investigated the issues and found that they were indebted
billions of dollars in mortgages to others thought that if they go
down, everyone goes down
4. What is the Treasury Department? What role did it play with Bear
Stearns' financial troubles?
The executive department in charge of controlling government
revenue
Fed gave loan to FP Morgan to then give to Bear Stearns to pay
off their debt
5. What is systemic risk?
Risk of the collapse of an entire financial market or system
because of one single company all these companies are
interconnected
6. 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?
He didnt want other businesses to rely on the Fed to bail them
out the Bear Stearns bailout was a one-time thing
Whats to stop a company who got bailed out to make the same
mistake again?
7. What was the first deal between the Federal Reserve, JP Morgan,
and Bear Sterns?
The Fed would give FP Morgan to loan to then give to Bear
Stearns so they can pay off their debt
8. Why didnt this plan work?
No one wanted to take on the debt of a failing company
Public found out about this and continued pulling their money out
of Bear
9. What was the second deal between the Federal Reserve, JP Morgan,
and Bear Sterns?

JP Morgan would sell Bear Stearns stock for $2 a share, rather

than a higher money they thought it would be
This was so that Bearn Stearns could pay for the mistake they
made caused Bear Stearns to go out of business

Fannie and Freddie Mac

10. What do these two companies do?
Largest, most powerful mortgage companies
Buy mortgages and hold them in portfolios to make an
investment and gain profit
11. Why were they in jeopardy?
They had the most money invested in these mortgages that were
soon to be failures lost nearly 60% of revenue and held $5
trillion in mortgages
It was inevitable that these two companies would fail, bringing
own the entire market
12. Why did the federal government take over Fannie Mae and Freddie
Mac?
Government fired management and took over because if these
two companies fell, the entire market would crash a last resort
of government
Lehman Brothers
13. The piece indicates that the culture at Lehman may have
contributed to its own demise. How so?
Dick Fold (CEO) worked there for so long very affluent and
arrogant with the company believed he could do anything
Because of this, they invested so much money in the riskiest
mortgages (even employees noticed the large risk the company
was taking)
14. What role did moral hazard play in the governments strategy for
dealing with Lehman?
Lehman Brothers thought that they Fed would bail them out
because they did the same with Bear Stearns
Treasury told them to find a buyer or else they would be in
trouble
Moral hazard prevented the Fed from helping the company
wanted these business to pay the price of their own problems
they started
15. 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?

Lehman Brothers filed for bankruptcy, causing the entire market

to crash and the credit market froze completely
Government didnt think they were as connected as they were,
causing the major meltdown of the market

AIG
16. What is AIG?
Worlds largest investment company had major mortgage debts
So big it has done business with nearly every major bank in the
entire world
17. Why was AIG in such a precarious financial state?
Most of their mortgage policies were based off of Lehman
Brothers and that they would never fail, so they wouldnt have a
problem
Lehman Brothers failed causing AIG to lose nearly everything
18. What role did moral hazard play in the resolution with AIG?
Government realized that if AIG goes down, worldwide economy
will crash
Government loaned $85 billion to the company, and therefor
took over the largest investment company in the world
19. Why did the government treat AIG differently than Lehman?
They knew that if they let AIG fail, the entire market would crash
and there would never be a bottom to the downfall
Mortgages:
20. The film follows people who took out mortgages they couldnt
afford in the hopes that their home values would increase and they
would become rich. Why did the banks give these people mortgages?
Banks knew that if the people didnt make their payments, their
assets would then be taken by the banks and the increase in
home value would then give the banks major profit
21. 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?
After the market crash, there should be laws restricted the
purchase of homes on the bank/mortgage side so people dont
buy something they cant afford
With this, it goes against the practices of a market system
because this involves government intervention in a free market
system
Governments Proactive Strategy
22. What is a toxic Asset?

Financial assets that have decreased significantly and the market

is no longer functioning properly
23. What was the governments plan to protect the public from the
toxic asserts owned by the banks?
The government wanted to put money into the financial markets
to avoid these toxic assets from reaching the public and bailing
out the markets
24. What is capital injection? What does the government get out of
providing capital injections?
The government putting its own money into the market so in turn
they buy stocks and virtually have ownership in a market
25. 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?
This was so the government could hold stakes in the market, in
turn giving them control of the markets
They gained centralized control to continue pumping money into
the markets
After you answer these questions go to:
https://projects.propublica.org/bailout/