FRONTLINE: Inside the Meltdown of Sept. 18, 2008

Below is a very good video called “Inside The Meltdown” about the credit crisis which appeared on PBS FRONTLINE last night. This is must viewing for everyone.

The clip runs just under one hour.

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.). (more »)

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.”

  1. Tony Wikrent says

    I was rather disappointed with the Frontline presentation “Inside the Meltdown” because the first real problems began to appear in the spring of 2007, and by summer 2007 it was clear that there was a systemic series of crises beginning to snow ball (see Jerome a Paris’s diary of last week, When did the financial crisis really start?, And the Frontline program mentioned credit default swaps, but did not do enough to expose them as the high-risk speculative instruments they became, as Michael Lewis did in his Portfolio article a few months ago: CDSs were being written for contracts that did not exist. The CDSs are what blew up AIG – and I’ve seen a few credible assertions in some financial articles the past few weeks that at least around $80 billion of the money being spent by the Fed and the Treasury is going to pay off the bets of CDS buyers of the London unit of AIG.

    The Frontline program also should have gone more into the “shadow banking system”: the role of the hedge funds and sovereign wealth funds, which I suspect may be much of the reason the rescue has evolved the way it has, most particularly the unwillingness to cram down shareholders and bond holders (anyone want to call the Saudis and the Chinese to tell them they have to eat a few hundred billion in losses?). And someone has to explore the role of the offshore financial centers, which from what I’ve seen so far, only the London Guardian is willing to do.

    In short, Frontline did a good job of covering the crises from March 2008 to October 2008, but that is only part of the story.

    What I found interesting was a question never raised: if Paulson could be so tough in forcing Bare Sterns to be sold at two dollars a share to JP Morgan, and so tough in letting Lehman Brothers fail, why was he such a push over for allowing Wall Streeters getting TARP to take bonuses and other perks?

    Finally, the big item missing from Frontline, and from almost all discussions right now, is the underlying problem being the impoverishment of the working class over the past three decades. Again, see Jerome a Paris’s diary of last week, and the past few years. And here’s something I wrote in December 2007: Not Good – We’ve Been Here Before

  2. Edward Harrison says

    Tony, you say “In short, Frontline did a good job of covering the crises from March 2008 to October 2008, but that is only part of the story.”

    I would agree with that 100%. In fact, you can see my timeline of events through January here:

    As far as the public consciousness goes, they really only see what happened during the most acute phases.

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