All of the federal government’s efforts to stem the tide in the financial meltdown that began with the subprime mortgage crisis have added hundreds of billions of dollars to our national debt. FRONTLINE reports on how this debt will constrain and challenge the new Obama administration, and on the growing chorus on both sides of the aisle that without fiscal reform, the United States government may face a debt crisis of its own which makes the current financial situation pale in comparison. Through interviews with leading experts and insiders in government finance, the film investigates the causes and potential outcomes of—and possible solutions to—America’s $10 trillion debt.
Airs on television and online starting March 24. Go here to check the schedule.
Michael Lewis is at it again with this long but interesting article in Vanity Fair--Wall Street on the Tundra.
Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are men, and the women seem to have completely given up on them, the author follows the peculiarly Icelandic logic behind the meltdown. by Michael Lewis April 2009
Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.
PBS is airing, FRONTLINE INVESTIGATES HOW THE ECONOMY WENT SO BAD SO FAST. This show has an easy to understand, in-depth explanation, of the financial crisis. I worked on Wall Street for over twenty years and I found the show fascinating and informative. The show is still scheduled for additional airings on PBS, and it is also available for viewing on the Internet. To find out when the show is airing in your market go here and enter your zip code.
FRONTLINE investigates the causes of the worst economic crisis in 70 years and how the government responded. The film chronicles the inside stories of the Bear Stearns deal, Lehman Brothers’ collapse, the propping up of insurance giant AIG, and the $700 billion bailout. Inside the Meltdown examines what Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke did to try and stave off an economic collapse.
The trailers are a bit eerie. However, they should help you determine if you are interested in watching.
FRONTLINE Presents Inside the Meltdown Tuesday, February 17, 2009, at 9 P.M. ET on PBS
www.pbs.org/frontline/meltdown
On Thursday, Sept. 18, 2008, the astonished leadership of the U.S. Congress was told in a private session by the chairman of the Federal Reserve that the American economy was in grave danger of a complete meltdown within a matter of days. “There was literally a pause in that room where the oxygen left,” says Sen. Christopher Dodd (D-Conn.).
FRONTLINE producer Michael Kirk goes behind closed doors in Washington and on Wall Street to investigate how the economy went so bad so fast and why emergency actions by Federal Reserve Chairman Ben Bernanke and Secretary of the Treasury Henry Paulson failed to prevent the worst economic crisis in a generation on Inside the Meltdown, airing Tuesday, Feb. 17, 2009, at 9 P.M. ET on PBS (check local listings).
As the housing bubble burst and trillions of dollars’ worth of toxic mortgages began to go bad in 2007, fear spread through the massive firms that form the heart of Wall Street. By the spring of 2008, burdened by billions of dollars of bad mortgages, the investment bank Bear Stearns was the subject of rumors that it would soon fail.
“Rumors are such that they can just plain put you out of business,” Bear Stearns’ former CEO Alan “Ace” Greenberg tells FRONTLINE.
The company’s stock had dropped from $171 to $57 a share, and it was hours from declaring bankruptcy. Ben Bernanke acted. “It was clear that this had to be contained. There was no doubt in his mind,” says Bernanke’s colleague economist Mark Gertler.
Bernanke, a former economics professor from Princeton, specialized in studying the Great Depression. “He more than anybody else appreciated what would happen if it got out of control,” Gertler explains.
To stabilize the markets, Bernanke engineered a shotgun marriage between Bear Sterns and the commercial bank JPMorgan, with a promise that the federal government would use $30 billion to cover Bear Stearns’ questionable assets tied to toxic mortgages. It was an unprecedented effort to stop the contagion of fear that seemed to be threatening the rest of Wall Street.
While publicly supportive of the deal, Secretary Paulson, a former Wall Street executive with Goldman Sachs, was uncomfortable with government interference in the markets. That summer, he issued a warning to his former colleagues not to expect future government bailouts, saying he was concerned about a legal concept known as moral hazard.
Within months, however, Paulson would witness the virtual collapse of the giant mortgage companies Fannie Mae and Freddie Mac and preside over their takeover by the federal government.
The episode sent shockwaves through the economy as confidence in Wall Street began to evaporate. Within days, in September 2008, another investment bank, Lehman Brothers, was on the brink of collapse. Once again, there were calls for Bernanke and Paulson to bail out the Wall Street giant. But Paulson was under intense political pressure from conservative Republicans in Washington to invoke moral hazard and let the company fail.
“You had a conservative secretary of the Treasury and conservative administration. There was right-wing criticism over Bear Stearns,” says Congressman Barney Frank (D-Mass.), chairman of the House Financial Services Committee.
Paulson pushed Lehman’s CEO Dick Fuld to find a buyer for his ailing company. But no company would buy Lehman unless the government offered a deal similar to the one Bear Stearns had received. Paulson refused, and Lehman Brothers declared bankruptcy.
FRONTLINE then chronicles the disaster that followed. Within 24 hours, the stock market crashed, and credit markets around the world froze. “We’re no longer talking about mortgages,” says economist Gertler. “We’re talking about car loans, loans to small businesses, commercial paper borrowing by large banks. This is like a disease spreading.”
“I think that the secretary of the Treasury could not fully comprehend what that linkage was and the extent to which this would materialize into problems,” says former Lehman board member Henry Kaufman.
Paulson was thunderstruck. “This is the utter nightmare of an economic policy-maker,” Nobel Prize-winning economist Paul Krugman tells FRONTLINE. “You may have just made the decision that destroyed the world. Absolutely terrifying moment.”
In response, Paulson and Bernanke would propose—and Congress would eventually pass—a $700 billion bailout plan. FRONTLINE goes inside the deliberations surrounding the passage of the legislation and examines its unsuccessful implementation.
“Many Americans still don’t understand what has happened to the economy,” FRONTLINE producer/director Michael Kirk says. “How did it all go so bad so quickly? Who is responsible? How effective has the response from Washington and Wall Street been? Those are the questions at the heart of Inside the Meltdown.”
Inside the Meltdown is a FRONTLINE co-production with Kirk Documentary Group, Ltd. The writer, producer and director is Michael Kirk. The producer and reporter is Jim Gilmore. FRONTLINE is produced by WGBH Boston and is broadcast nationwide on PBS. Funding for FRONTLINE is provided through the support of PBS viewers. Major funding for FRONTLINE is provided by The John D. and Catherine T. MacArthur Foundation. Additional funding is provided by the Park Foundation. FRONTLINE is closed-captioned for deaf and hard-of-hearing viewers and described for people who are blind or visually impaired by the Media Access Group at WGBH. FRONTLINE is a registered trademark of WGBH Educational Foundation. The executive producer of FRONTLINE is David Fanning.
pbs.org/pressroom Promotional photography can be downloaded from the PBS pressroom.
At dinner he described the situation to me. He said, “Where there is smoke there is fire”. He went on to explain that any time a major financial institution gets in trouble you could draw a circle around its location and expect the problem to spread to any other financial institution in a 150 mile radius (keep in mind this was the 1980s and before the Internet). He went on to explain the interconnectivity of financial institutions in a geographic proximity....His trip and fact finding mission convinced him that there was going to be a real financial crisis in Texas and that it would likely devastate the major banks and savings and loans in the region. This was a very unpopular stance that cost him his job....It also was the catalyst of a stock market crash in 1987....I am reminded of other sayings that I heard early in my career on Wall Street—“never try and catch a falling knife”. I find myself thinking right now—“Cash is King”.
Financial Meltdown--Where there is Smoke, there is Fire
Back in the 1980s I learned an important lesson. At the time, I was with Bear Stearns and working in their Dallas, Texas office. The head of credit came to Texas, from New York, to visit the state’s major banks and Savings and Loans. He was there to discuss their financial statements. Specifically, he was trying to get a handle on their financial viability and credit risk. There was a growing concern about the quality of credit and soundness of financial institutions in the southwest and California. The head of credit spent a couple of days in Dallas and Houston talking to the CFOs of these banks. Late in day, at the end of the trip, I saw him sitting alone in the office and asked him what he was doing. He informed me he was done but was not scheduled to fly out until the next morning. I saw this as an opportunity to “pick” his brain and learn something. So, I invited him out to dinner.
At dinner he described the situation to me. He said, “Where there is smoke there is fire”. He went on to explain that any time a major financial institution gets in trouble you could draw a circle around its location and expect the problem to spread to any other financial institution in a 150 mile radius (keep in mind this was the 1980s and before the Internet). He went on to explain the interconnectivity of financial institution in a geographic proximity. His trip and fact finding mission convinced him that there was going to be a real financial crisis in Texas and that it would likely devastate the major banks and savings and loans in the region. This was a very unpopular stance that cost him his job. At the end of the day he was right. Both of the major banks in Dallas failed (Republic and First Interstate) and all of the major S and L’s in Texas failed (Sunbelt and Bright Bank to name two). This resulted in the formation of the Resolution Trust Corporation, a government agency set up to dispose of the massive amount of defaulted loans owned by these financial institutions. It also was the catalyst of a stock market crash in 1987.
For years I have been telling my friends that the derivatives and swaps markets would turn out to be the equivalent of the savings and loan fiasco but on a scale that could never be imagined. Let me ask you, do you know anyone that predicted that Bear Stearns, Lehman Brothers and AIG would go up in smoke? That Merrill Lynch would be offered at a fire sale? Have you heard prior discussions about the interconnectivity of all these financial institutions? Are they within a 150 mile radius?
AIG, the next to go, is a good example of the direness of the current situation. AIG has been racking up enormous profits for a very long time. Just last week they were considered to be solvent. They are loaded with cash. They are claiming $1,000,000,000,000 in assets (Trillion). They operate world wide. If you ask, AIG will tell you their problem is not a solvency issue it’s a liquidity issue. It seems that the financial community is no longer buying this argument and no one is willing to stand up and throw money at the problem. AIG does not have the necessary assets to collateralize the $75 billion in loans it needs right now to keep operating. If they go down someone will be on the hook for the insurance side of the business. I bet you thought as an insurance company there were being regulated. Partially true, but this does not include the part of the business that is all wrapped up in the credit default swaps market and other derivatives designed to leverage the balance sheet and create “monster” profits. It appears the Fed and government regulators have finally decided that bailouts aren’t working and decided to say no to Lehman and AIG. Lehman is bankrupt and it appears that AIG will declare bankruptcy soon. The too big fail rule is no longer in effect.
It would be foolish to believe that once AIG goes over the cliff it will bring an end to the financial crisis we are seeing today. You should be thinking of the interconnectivity of AIG, and all the counterparties that are doing business with AIG worldwide. Companies doing business with them will get wounded, maybe mortally wounded. What looked like a US problem is now a global problem. This will spill into financial markets world wide.
It appears it is finally being recognized that this is not smoke, it’s a FIRE. It appears that “too big to fail” is no longer a workable strategy to fix the problem. It appears the reality of the credit swaps derivatives market is finally being recognized. It’s likely that much of this paper is worthless or only worth cents on the dollar. This financial crisis is not likely to go away over night. There is more to come before all this “paper” can get unwound or find a home. In the interim there is an enormous risk in the stock and other financial markets.
The Fed will address this issue by adding massive liquidity to the markets. The world’s central banks will do the same. It is the right thing to do. But, it is a short term fix that is like prescribing an aspirin for a major infection. It might lower your fever but it won’t cure your illness.
In closing, I am reminded of other sayings that I heard early in my career on Wall Street—“never try and catch a falling knife”. But, right now I find myself thinking—“Cash is King”.
