Name: ______Period: _____ “Frontline: Inside the Meltdown”

Answer Questions #1-9 while watching the film. Questions #10-13 may require further research to answer fully. Consulting Enrichment Module A may be of assistance. Complete these for homework. DUE WEDNESDAY, APRIL 6.

1. What happened to make the firm Bear Stearns go out of business?

2. How did the Federal Reserve Bank respond when Bear Stearns was in financial trouble?

3. How did the Treasury Department respond when Bear Stearns was in financial trouble?

4. What is systemic risk?

5. Secretary Paulson was concerned about “moral hazard” after helping Bear Stearns. What did this mean?

6. Why did the banks give mortgages to individuals when indications existed that they would default on these loans?

7. Why did the federal government take over Fannie Mae and Freddie Mac?

8. Secretary Paulson decided not to guarantee a government loan for Lehman Brothers as he had for Bear Stearns with the JPMorgan takeover. What happened as a result of that decision?

9. Why did the government give AIG a loan of $85 billion after refusing to loan money for the Lehman Brothers acquisition? [Type here]

For Homework/Further Research

10. The last scene in the film shows the leaders of the largest banks being told by Henry Paulson that they would have to accept government capital injections. What does this mean, and what was the rationale for that decision? (If we are unable to view the last scene in class, you may do so at http://video.pbs.org/video/1082087546/.)

11. A subprime loan is a loan made to a person who has a lower credit score and/or who is borrowing a larger amount relative to the value of the home price. What incentive did banks have to offer subprime loans to borrowers, and what role did subprime loans play in the 2008 economic crisis?

12. Loan-backed securities are pools of individual loans sold as shares. By selling off loans in this way, lenders were able to regain the loaned amount quickly and share their risk with others. How might this have created an incentive to offer subprime loans, and what role did loan-backed securities (particularly mortgage-based securities) play in the 2008 economic crisis?

13. Which decisions by the U.S. government (Federal Reserve or Treasury) are in accordance with classical economics, and why? Which decisions by the U.S. government are more in accordance with Keynesian/monetarist theory, and why?