How the Crisis Took Shape
By 2007, Wall Street looked unstoppable. Big banks and investment firms were making enormous profits, and many executives believed they had found a way to spread risk so widely that it had almost disappeared. Mortgages were bundled into complex securities, sold around the world, and treated as safe even when the loans underneath them were weak. The same firms that packaged these products also kept huge amounts of them on their own books, convinced that the danger was under control.
That confidence rested on borrowed money. Many firms were leveraged about 30-to-1, which meant even a small drop in asset values could wipe out their capital. Cheap global money, low interest rates, and faith in rising housing prices hid just how fragile the system had become. Once mortgage losses started to rise, no one could agree on what many of these securities were actually worth, and trust between institutions began to disappear.
The collapse of Bear Stearns in March 2008 was the first clear sign that a giant could fail in days. Its rescue by JPMorgan, backed by the Federal Reserve, showed that markets were no longer able to calm themselves. It also created a dangerous new question. If the government stepped in for one major firm, would it step in again for the next one?
Inside Washington, the people responding to the crisis were trying to solve problems that were moving faster than the rules. Treasury Secretary Hank Paulson, New York Fed President Tim Geithner, and Federal Reserve Chair Ben Bernanke understood that the trouble was no longer limited to housing. The real danger was that panic could spread through the entire financial system. They were forced to improvise, often with incomplete information, while every decision carried economic and political risk.
Jamie Dimon at JPMorgan could already see how bad things might get. He warned his team to prepare for extreme scenarios, including the collapse of several major rivals. The old belief that large institutions were naturally safe was fading fast. In its place came a harsher truth: firms that looked solid could fail overnight once confidence vanished.
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