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17 January, 22:09

Why did Lehman Brothers declare bankruptcy and Bear Stearns have to be bailed out by the federal government?

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  1. 18 January, 00:58
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    Basically when Lehman Brothers went bankrupt, nobody thought that things were going to get so bad so quickly. If you analyze Lehman Brothers vs Bear Sterns, Lehman had better collateral that could have been used to secure a loan from the Fed, but its size was too large and nobody was willing to take the risk.

    The Fed's bail out was crucial for Bear Stearns to be acquired by JP Morgan. But there was no bank willing or able to acquire Lehman Brothers, which made the bail out much more risky.

    Many times the Fed's former heads and the former Secretary of the Treasury say that Lehman was different than Bear Stearns, or Fannie Mae or Freddie Mac, but its bail out would not have been very different actually. 2008 was an election year, and no politician wanted to take the risk of upsetting the public more than they already had.

    Under current law, Dodd-Frank Act, such a bailout would be illegal, but back then it wasn't.
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