Assignment 1: The Great Recession Of 2007-2009

Ewelina Cachro

Professor Bateman

Fin 320

6 October 2014

Assignment 1 The Great Recession of 2007-2009 was a time of worry, of failure, and of uncertainty throughout the United States economy, as well as the entire world. The bankruptcy of Lehman Brothers added onto to the financial instability of the economy. The causes and effects of this significant event were many, but some of the major ones will be named in the upcoming paragraphs. In the midst of a worldwide recession caused by the financial crisis in the housing market, Lehman Brothers was an investment bank that suffered a striking failure. As an investment bank, Lehman Brothers did “business in investment banking, equity and fixed-income sales and trading, research, investment management,

history, and thus had many effects on the economy. First of all, literally a day after the bankruptcy, after it wrote off the debt that Lehman issued, one money market fund, Reserve Primary Fund, dropped to 97 cents, which led to fear that other money mutual funds would also fall below the net asset value of $1, and thus, investors would lose money. Additionally, production flows in the U.S. fell by approximately 6 percent in the subsequent two quarters following the bankruptcy. The bankruptcy also led to central bank interventions, led by the Fed. The Fed tried to curtail the crisis, by lowering the federal funds rate to an all-time low, and then tried to aid in the recovery of the economy as well. Banks, as well as other financial institutions, became terrified of loaning money, and the overall confidence in the financial system dropped dramatically. In Japan, potential losses of $2.4 billion dollars were tied to the Lehman Brothers’ bankruptcy by bankers and insurers. In the U.S., the unemployment rate went to almost 10% when 6 million jobs were lost. The New York Stock Exchange had to stop trading Constellation Energy after its stock dropped 56%, because it was allegedly connected to Lehman. Because the public came to fear the banking industry, politicians began to support investors instead of banks, which caused the fear and distrust towards the banking industry to increase. Essentially, the bankruptcy of Lehman Brothers caused a spiraling cycle of mistrust and fear that kept weakening the economy. The impacts of this cycle are still felt today and will continue to be felt in the future. In 2016, Bloomberg estimates that creditors will receive only $0.18 for every dollar that