Business: Inside Meltdown

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Inside Meltdown
Question One
Bear Stearns started running out of money. This made the clients and the trading partners to withdraw from the firm because it had made huge investments on mortgages that turned out to be toxic. It had massive investments in subprime mortgages and bundled them into securities and later sell them to investors. Their stock started to decrease which led to many people withdrawing their money from the company. Due to this crisis it ended up being sold at a heavily discounted price thus losing the business to JPMorgan. The market also gave a vote of no confidence to the bank losing people to serve. Bear Stearns was subject to rumors that it would fall soon and rumors can easily put you out of business.
Question Two
Credit default swap is a form of insurance against a default risk by a company. It involves two counterparties exchanging the risk of default that is associated with a loan which entails periodic payment throughout the loan’s lifespan. They are agreements with a bond. To buy a credit default swap you don’t have to own the asset being securitized. Bear Stearns had made agreements with many people over the world before it ran out of business. The credit default swaps on the Lehman Brothers led to the 2008 financial crisis and the banks also used the swaps to cover the complicated financial products.
Question Three
Federal Reserve System is the united state central bank that is responsible for regulating it financial and monetary system. It provided a loan indirectly to Bear Stearns through JPMorgan. It also provided secure reserves which intentions were to bail out Bear Sterns which backfired because the Fed people know that it was in trouble. Together with the U.S government it also approved all stock deals to show the urgency of the completion of the deal before the opening of the world markets. The fed also extend JPMorgan chase to enable it buy Bear Stearns to prevent it from collapsing. It also carried out an investigation on the issues and found out they had debt worth billions of dollars in mortgages to others and thought that if it collapses everyone else goes down too. The fed also offered 29 billion dollars credit to JPMorgan and took to hold collateral that was an estimated 30 billion dollars worth of mortgage that relate to the assets owned by the Bearn Sterns.
Question Four
The treasury department is the federal department in the united state government which is responsible for tax collection and management of the government revenue and also administering federal finances. The treasury department was needed to make more money so as to pump liquidity in the economy leading to expansion beyond the commercial banking sector. To achieve this, Paulson was working with the Federal Reserve Bank to fix the economy. It prepared a letter showing clearly the assets that Fed had taken from Bear Stearns. The assets taken consist of hedge investments and mortgage backed securities.
Question Five
Systematic risk which is also known as market risk refers to the possibility of loss which is associated with the entire market segment or the entire market due to one single entity. All the companies inside the meltdown are interc...