Credit Crisis Part 1: The First Signs

This video is the first in a six-part series about the events of the credit crisis.

In July of 2007, two hedge funds within Bear Stearns, a global investment bank, collapsed. These funds held a large number of subprime mortgages. At first, investors thought this was an aberration, and the market continued to climb through the second half of 2007.

By the beginning of 2008, Investors had realized that the Bear Stearns mortgages were very similar to those held on the books of other financial firms. In January of 2008, Bank of America agreed to acquire Countywide, a mortgage lending company, for approximately $4 billion dollars. This led to a frenzy of selling. From January through early March, financial stocks fell rapidly due to losses on bad mortgages. To fight the negative economic spiral, President Bush signed into law a $168 billion dollar economic stimulus packages, paid out in the form of tax rebates.

In March of 2008, panicked investors started withdrawing money from Bear Stearns at an extraordinary rate. This rapid withdrawal is called a “run on the bank.” Within a few days, Bear Stearns capital base, which was needed to finance short-term transactions, had dwindled from $17 billion to less than $2 billion. On March 14^th, 2008, the Federal Reserve gave Bear Stearns billions in a short-term loan, with the intention of finding a buyer for the firm. That weekend, Bear Stearns, teetering on bankruptcy, was sold to JP Morgan Chase for the price of $2 a share.

Although the price was later amended to $10 per share, this was a staggering fall for Bear Stearns. The company’s stock had traded at more than $170 per share less than two years earlier, and its collapse sent shockwaves through the market. Investors rapidly sold financial stocks on fears that other banks had similar toxic assets on their books.

I’d like to pause here and take a moment to talk about executives and their responsibility. While these unprecedented events were going down, Bear Stearns CEO Jimmy Cayne was busy playing bridge in a tournament in Detroit. When he was called about the collapse, he took a moment to sit in on the conference call. Halfway through the call, he actually left to go finish his bridge tournament. A company’s future hangs in the balance, and the CEO leaves to go play cards. Cayne’s inexcusable apathy cost employees thousands of jobs, and the shareholders billions of dollars. Such lackadaisical CEOs will rise again; when they do, I hope that you, as the common shareholders, will punish them by selling their stock. Don’t let these people get away with this kind of thievery and deception.

In April and May of 2008, the markets staged a modest recovery. Many thought that the worst was over and that the markets would stabilize and continue to climb throughout the summer. But this confidence had a dangerous side effect. The summer of 2008 saw a dramatic increase in the prices of commodities such as oil, rice, and wheat. As oil topped $100 a barrel, investors started becoming very concerned. Their reasoning was simple: if commodities prices held up, people would have to spend a greater percentage of their money on food and energy. Thus, they would have less money to spend on other things, eventually leading to a severe slowdown of the economy. Investors started selling their stocks and pouring money into commodities.

In July of 2007, two hedge funds within Bear Stearns, a global investment bank, collapsed. These funds held a large number of subprime mortgages. At first, investors thought this was an aberration, and the market continued to climb through the second half of 2007.

By the beginning of 2008, Investors had realized that the Bear Stearns mortgages were very similar to those held on the books of other financial firms. In January of 2008, Bank of America agreed to acquire Countywide, a mortgage lending company, for approximately $4 billion dollars. This led to a frenzy of selling. From January through early March, financial stocks fell rapidly due to losses on bad mortgages. To fight the negative economic spiral, President Bush signed into law a $168 billion dollar economic stimulus packages, paid out in the form of tax rebates.

In March of 2008, panicked investors started withdrawing money from Bear Stearns at an extraordinary rate. This rapid withdrawal is called a “run on the bank.” Within a few days, Bear Stearns capital base, which was needed to finance short-term transactions, had dwindled from $17 billion to less than $2 billion. On March 14^th, 2008, the Federal Reserve gave Bear Stearns billions in a short-term loan, with the intention of finding a buyer for the firm. That weekend, Bear Stearns, teetering on bankruptcy, was sold to JP Morgan Chase for the price of $2 a share.

Although the price was later amended to $10 per share, this was a staggering fall for Bear Stearns. The company’s stock had traded at more than $170 per share less than two years earlier, and its collapse sent shockwaves through the market. Investors rapidly sold financial stocks on fears that other banks had similar toxic assets on their books.

I’d like to pause here and take a moment to talk about executives and their responsibility. While these unprecedented events were going down, Bear Stearns CEO Jimmy Cayne was busy playing bridge in a tournament in Detroit. When he was called about the collapse, he took a moment to sit in on the conference call. Halfway through the call, he actually left to go finish his bridge tournament. A company’s future hangs in the balance, and the CEO leaves to go play cards. Cayne’s inexcusable apathy cost employees thousands of jobs, and the shareholders billions of dollars. Such lackadaisical CEOs will rise again; when they do, I hope that you, as the common shareholders, will punish them by selling their stock. Don’t let these people get away with this kind of thievery and deception.

In April and May of 2008, the markets staged a modest recovery. Many thought that the worst was over and that the markets would stabilize and continue to climb throughout the summer. But this confidence had a dangerous side effect. The summer of 2008 saw a dramatic increase in the prices of commodities such as oil, rice, and wheat. As oil topped $100 a barrel, investors started becoming very concerned. Their reasoning was simple: if commodities prices held up, people would have to spend a greater percentage of their money on food and energy. Thus, they would have less money to spend on other things, eventually leading to a severe slowdown of the economy. Investors started selling their stocks and pouring money into commodities.