TOO BIG TO FAIL
Jamie Dimon, CEO, of JP Morgan Chase, attended an emergency meeting at the Federal Reserve Bank of New York on September 17, 2008. A dozen CEOs from rival firms were present-the meeting’s goal was to devise a plan to save Lehman Brothers, the nation’s fourth largest investment bank, from bankruptcy. Dimon knew Merrill Lynch and AIG were also in trouble.
Many present at the meeting thought the government would step in and rescue Lehman Brothers.
Dimon held a conference call with his top management team and said to prepare for a filing not just of Lehman Brothers, but also for Merrill Lynch, AIG, Morgan Stanley, and possibly Goldman Sachs. Fear and disorder gripped the market-the financial sector seemed to unravel. Yet, in 2007 the financial services sector accounted for more than 40% of corporate profits. The mortgage industry was an important piece of the sector. Mortgage loans served as components for complicated financial products that Wall Street bought and sold. People knew that Goldman Sach’s was going to go under. It would be bad and becomes the Great Depression.
In 2007, those working in the financial sector received compensation in the aggregate worth 53 billion. The CEO of Goldman Sachs, Loyld Blankfein, took home 68 million. Wall Street used a lot of debt to finance its activities. There was cheap money from savings glut in Asia and ease in Fed Policy in response to the 2001 recession. Cheap money found its way into the subprime mortgage market-Wall Street firms believe they had a way to slice up mortgage loans and sell them, thereby removing a log of the risk off their balance sheets. They also bought a lot of mortgage back securities from each other. Bank gave out loans but know they couldn’t pay back.
People claiming they were making lots of money but it wasn’t true.
Bernanke believe in April 2007 that problems in the subprime mortgage market could be contained. By August 2007 in the $2 trillion subprime mortgage...
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