Inside the Meltdown - PBS

PBS ^ | February 17, 2009

[WheresMyBailout]

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. Federal Reserve Chairman 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, Treasury Secretary Henry 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."

[WheresMyBailout]

As you can tell by my username (I joined beginning of this year at FR), I am opposed to all bailouts, not only including TARP, but also including the Bear Stearns and AIG bailouts. However, after watching this documentary (bearing in mind it was from PBS), I actually sympathized with Henry Paulson and George Bush a lot more than I have in the past.

The real culprits for government intervention were Tim Geithner, when he was still at the New York Fed, and Ben Bernanke. Henry Paulson tried to hold the conservative line until he realized that the entire banking system would crumble if the government did not bail out the banking system.

And there may be no disputing that would have happened. The banks and insurers were so intertwined, that one bank's default would have (and did) created a domino effect of other bank failures, ultimately leading to no credit and a run on the banks.

I still don't agree with the bailouts, but I respect Henry Paulson for standing up for most of last year against bailing out and creating a moral hazard for the big banks. (Of course, Tim Geithner never had a problem bailing out banks.) Paulson made a call when he saw the credit markets freeze to go along with Bernanke's plan to buy back (at a subsidy of course) the toxic subprime assets the banks had.

I disagree with that decision, and McCain's support of the bailout eventually put Obama in office, but Paulson wasn't a crook as people (including me) have painted him to be. Ironically, Tim Geithner seemed to have had more control over the entire banking crisis than Henry Paulson or George Bush ever had. The Bush Administration was backed into a corner by the Federal Reserve (Tim Geithner and Ben Bernanke) and they acted accordingly.

[spodefly]

BTTT

[Virginia Ridgerunner]

So, are you on Paulson’s payroll, trying to salvage his reputation?

[abclily]

It’s the Barry/Barney market.

[wita]

Bush Administration was backed into a corner by the Federal Reserve (Tim Geithner and Ben Bernanke)

So, If I am reading you correctly, the very folks fingered in this “deal” Bernanke, geithner, and the Banking oversight committee chairs Chris and Barney, as well as their committee’s remain fingered.

Not only that but they remain in charge of the henhouse even though fingered in the destruction of trillions in private wealth, and that number is just a wish because their system “affordable housing” is still not through with the destruction.

[scooby321]

So this is Tim and Bennie market. Now they are in charge.

[CommieCutter]

I saw the video for this. It’s absolute BS that Barney Frank and Chris Dodd got a say in the narrative. I stopped watching it when I saw Marble-mouth Frank started speaking.

[Petronski]

...saying he was concerned about a legal concept known as moral hazard.

That concept comes to us from economics, not law.

[Virginia Ridgerunner]

I still don't agree with the bailouts, but I respect Henry Paulson for standing up for most of last year against bailing out and creating a moral hazard for the big banks.

I don't...

Looting America: Treasury Secretary Paulson Threatened Senators with Martial Law

Senators to Paulson: You lied, TARP died

Schieffer: Paulson Pleaded for McCain to Come In to Save Bailout

The man's a liar and a Rat.

[jwparkerjr]

re: “Rumors are such that they can just plain put you out of business,” Bear Stearns’ former CEO Alan “Ace” Greenberg

Especially when they are based on fact and later prove to be accurate.

[lentulusgracchus]

It’s absolute BS that Barney Frank and Chris Dodd got a say in the narrative.

Your statement is ambiguous. Do you mean that it is a false, "BS" assertion that they had a say, or do you mean that, okay, they had a say -- but you don't like it?

[TADSLOS]

(bearing in mind it was from PBS), I actually sympathized with Henry Paulson and George Bush a lot more than I have in the past.

Bottom line: They caved and purchased a huge slice of socialism in the bargain. The end. No sympathy here, just disdain.

[REPANDPROUDOFIT]

Your statement is ambiguous.

I don't think it is ambiguous. Poster is saying that it is a slap in the face for Bawney to appear in the video. Makes him look like an expert on the subject - how ironic! Yeah, he is an expert allright, but only because he was right in the middle of causing the whole mess.

[lentulusgracchus]

Well, that's my appreciation of Barney Frank's role as well, and I see the folly of asking the cook to explain his bad hash, when the cook is a liberal DemRat.

But that isn't exactly what the poster said. It could be taken a couple of ways.

[WheresMyBailout]

Absolutely not, it’s just that I view Tim Geithner and Ben Bernanke, mainly Tim Geithner, as much bigger culprits in this whole fiasco compared to Henry Paulson and George Bush.

I’m cognizant this is a documentary from PBS, but after watching it, I shifted my blame from Paulson pretty much to Tim Geithner. It’s almost as if the Treasury Department is bullied by the Federal Reserve.

Of course, it was people like Barney Frank that foisted the mess of Fannie Mae and Freddie Mac on us.

[WheresMyBailout]

The main culprits who orchestrated this entire fiasco are still in charge. In fact, now that Tim Geithner is at Treasury, he and Bernanke have a blank check to do whatever they want. I’m not trying to absolve the Bush Administration totally, but compared to the role Tim Geithner and gang played, their roles were negligible. The fear mongering started with the Federal Reserve, not with the Treasury Department.

[Western Phil]

“I’m cognizant this is a documentary from PBS”

PBS and the liberal media in general (always) leaves out any information that will incriminate their side. You have to scratch quite a bit to determine the actual facts. I watched this program & was quite disappointed when they left out the federal requirement for the lenders to take on the poison mortgages.

[nathanbedford]

On September 30, 2007 I posted the following reply which I repost here having just seen the documentary. I am convinced that that the players in this drama had no more idea as to the answers to these cosmic questions then did I.

I will add one more thing to that which I do know: ideology should never obscure fact-finding. We have seen the liberals do this with respect to global warming. I do not know, and neither does any poster on this thread, if the system would have melted down but for the interventions described in this documentary. Our ideology helps us not at all in answering that question.

Here is the September reply:

I have not yet posted on the wisdom of the bail out because, frankly, I do not know what to say. I do not know what to say because of the things I do not know. First, I do not know if the bailout plan will work. Second, I do not know if the entire world system will crash without such a plan. Third, I do not know what the odds are of either a successful bailout or a world crash so I cannot weigh the severity of potential harm against the likelihood of the harm occurring.

I know what my ideology is, I am opposed to government meddling in the economy on the way up and on the way down either by picking winners or by rescuing losers. On the other hand, I recognize the extreme danger to the very survival of my ideology should the country descend into a depression. I am well read enough to know about the Great Depression and what it did to other democracies around the world and how close our own American democracy came to descending into communism. So, I do not know in which direction lurks a greater danger to the ideal of conservatism.

he I do know that the Constitution as written prohibits virtually every facet of the proposed bailout plan. I know that no federal court that I can think of will conceivably declare any part of the plan to be repugnant to the constitution. Therefore, I know I cannot rely on the courts to protect the Constitution. However, I also know that the political will will triumph regardless of the Constitution and it is bootless to fall on one's ideological sword to no purpose.

I do not know what it is like to live through a depression although my father has described what it was like in the rural South when people literally had no money and had to contrive a barter economy. On the other hand, I do not know what it is like to live through a raging inflation such as was sustained here in Germany during the Weimar and even today in Zimbabwe. I do not know if doing nothing will generate a depression. I do not know if these bailouts will generate hyperinflation.

I do know that if abandoning my ideology long enough to countenance the bailout would save the country from a depression, I would do it in a heartbeat.

I am not sure that those people on these threads who claim to know the answers to all these questions really know what they're talking about. I do not know if they are so sure about their facts only because they are so certain in their ideology. I do not know all if those people who are so certain in their support of the bailout do so because otherwise their ox gets gored. So I do not know how to come down on one side or the other based on the motives of the partisans on either side of the bailout question. I simply do not know what their motives really are.

It is a list is know that economics is called the dismal science and now I know why.

Given the state of my ignorance, I am going to embark on a new course, I am going to practice humility.

[CommieCutter]

Why don’t you read the whole quote again below:

“I SAW the video for this. It’s absolute BS that Barney Frank and Chris Dodd got a say in the narrative. I STOPPED WATCHING it when I SAW Marble-mouth Frank started speaking.”

---

If you take the time to read this you will see that I say I actually SAW one of the two speak (actually I saw both). This would indicate question B) Okay, they had a say—but you don’t like it?

Maybe you’re predisposed to ambiguity in your head?