1. Could the bailout by the Federal Reserve in 1998 and subsequent closing of the fund in 2000 be seen as a precursor of the 2008 Bear Sterns bailout, Lehman Brothers failure, credit crisis and subsequent bank bailout? 1. Please do some outside research on the LTCM failure. How were Henry Paulson, Jon Corzine, & Warren Buffet involved in the failure? Do you think that the involvement of Mr. Paulson had an impact on his actions as Treasury Secretary in 2008? Solution Multiple questions asked. Question 1 is answered below: Yes, the bailout by the Fed in 1998 and the subsequent closing of fund in 2000 can be seen as the precursor of the 2008 Bear Sterns bailout and credit crisis. The bailout by Fed created a problem of moral hazard. Banks and other commercial institutions started giving out money, in the hopes that they would be saved by Fed in case of failure/panic. With more loans being given out, more loans started being taken up by the consumers, creating an inflated boom like situation in the economy. When the time of repayments came, the bubble burst and the lenders defaulted. This created a situation of panic among the investors, who started taking out money from the US economy. Banks runs spread due to panic, resulting in bank failures and credit crisis..

1. 1. Could the bailout by the Federal Reserve in 1998 and subsequent closing of the fund in 2000
be seen as a precursor of the 2008 Bear Sterns bailout, Lehman Brothers failure, credit crisis and
subsequent bank bailout?
1. Please do some outside research on the LTCM failure. How were Henry Paulson, Jon
Corzine, & Warren Buffet involved in the failure? Do you think that the involvement of Mr.
Paulson had an impact on his actions as Treasury Secretary in 2008?
Solution
Multiple questions asked.
Question 1 is answered below:
Yes, the bailout by the Fed in 1998 and the subsequent closing of fund in 2000 can be seen as the
precursor of the 2008 Bear Sterns bailout and credit crisis.
The bailout by Fed created a problem of moral hazard. Banks and other commercial institutions
started giving out money, in the hopes that they would be saved by Fed in case of failure/panic.
With more loans being given out, more loans started being taken up by the consumers, creating
an inflated boom like situation in the economy. When the time of repayments came, the bubble
burst and the lenders defaulted. This created a situation of panic among the investors, who
started taking out money from the US economy. Banks runs spread due to panic, resulting in
bank failures and credit crisis.