Flashcards in Hank: Five Years from the Brink Deck (11)
Did the fall of Lehman Brother's create the great recession?
The fall of Lehman Brothers collapsing in December of 2008 did not cause the great recession, but it was a crucial moment.
Why did we not enter into a depression as bad as the 30's?
Damage was contained through some acrobatic work of governmental officials
• Thanks to these efforts we did not enter a depression on the scale of the 1930s
What is a subprime mortgage?
• Less than premium mortgages that was written by people for banks that aren't viewed as safe bets in terms of their earning
• Essentially people that might not be able to pay back their mortgages.
Over decades innovation in the mortgage markets led to __________ and these led to ________.
Significant complexities and these led to a lack of transparency
What is this entire movie's story about?
The whole story is the federal government's bailout of the banks.
What is a moral hazard? What was Paulson worried about?
Moral hazard = if market participants, banks, assume that there is always going to be a government rescue, if the bank engages in excesses, then market participants will not subject firms to enough due diligence. By engaging in the bailout of banks Paulson was worried about encouraging bad behavior.
When the banks failed what happened around the world?
Everyone was nervous and uncertain about the future
How do investment banks compare to commercial banks?
Investment banks = banks loaning to other banks
Commercial banks = what we use
What was the rescue of banks designed to do? What was at stake?
Recapitalize, restore, and get money flowing in markets. His effort was recapitalizing banks and giving them tax payer money, which would bring about more liquidity in markets which would reinsure markets. The greater good was at stake.
What is Fannie may and Freddie Mac?
• Fannie may = quasi public/private intimate to help Americans get home loans after WWII
• Freddie Mac - created in 1970 to do the same thing
• They were both government sponsored banks that backed big banks in their efforts to write loans to homeowners. Sometimes they bought these loans from these big banks. This meant the banks were confident that they could both buy and sell.
• They got too bloated, big, and reckless and started selling awful loans to some of the most vulnerable and weakest people in America.
○ These loans had low interest rates which were "teasers", and then after a few years they would reset and go to very high interest rates.