574 ChaPter^11
for, defaults so they could get paid off quickly. In this way, none of the bank-
ers really held much risk, it seemed, as the CDOs and CDSs provided them
with ways out of bad notes. But critics saw these developments as a “shell
game” or a “pyramid scheme,” and in 2007-2008, they were proven right.
While the housing crisis of that era seems confounding, it essentially involved
offering huge numbers of mortgages, taking a massive amount of them and
combining them into a single bundle, a CDO, and selling it to another institu-
tion with the “insurance” of a CDS.
By 2007, however, large numbers of Americans were no long able to pay
their home notes, which meant that the holders of the CDOs and CDSs were
on the line for that debt. In the frenzy to make profits off the housing boom,
bankers had given loans out to people who could never afford to pay them
back or had offered notes to people buying multiple properties as investments.
By 2008, the housing bubble burst as more and more Americans abandoned
or lost their homes and prices took a dive. Banks were, literally, left holding
the notes and in September 2008 Lehman Brothers, one of the more esteemed
and wealthy investment houses, went bankrupt. Wall Street gasped. If
Lehman could go under, any bank could.
September 2008 was the climax of the crisis, though—not the beginning.
In March of that year, the Blackstone Group, which managed other investment
houses and had just bought Harrah’s Casino for $31 billion, showed a 90 per-
cent decrease in profits from the previous quarter. Not only was Blackstone
on the ropes, but the businesses it owned were treading water too. Wall Street
was in a panic, so the Federal Reserve put $236 billion into the market to try
to restore calm. Citigroup, the world’s biggest bank, was in peril too, and had
to spend almost $2 billion to save 6 of its hedge funds. The Carlyle Group, a
well-known, and in some ways notorious, investment group [their connections
to the Bush family and Saudi royal family were often talked about] announced
that one of its funds could not repay its debt. Bear Stearns, Wall Street’s 5th
largest investment bank, had to be bailed out by the Fed and JP Morgan Chase
right before it went under.
Then, in September, Lehman defaulted, and the crisis was in high fever.
Lehman’s in particular had amassed huge commercial property debts and was
looking for a bailout, but the U.S. Treasury Secretary, Henry Paulson, refused
to offer government money to private firms seeking to buy out Lehman.
Fearing the worst, Wall Street prepared for a crisis like 1929. The Bank of