The new Wall Street practice of dispersing credit risk among multiple financial institutions, which led to the financial crises of 2008, is the focus of this video segment adapted from FRONTLINE: "Money, Power and Wall Street." Typically, when a bank makes a loan, it needs to set aside reserves of capital for that loan. However, Wall Street bank JP Morgan found a London bank, EBRD, to take on its loan risk. This allowed EBRD to get compensated for taking on the risk while JP Morgan was free to do more business with its available capital. Other banks followed suit, and, in this way, risk was dispersed across financial institutions worldwide and a new financial market was born. However, a wave of lending abuses in the mortgage industry and the reality that the risk still remained within the banking system, no matter where it was moved, ultimately led to the failure of a bank in Germany, followed by the failure of the U.S. bank Bear Stearns, and the start of the 2008 financial crisis. This resource is part of the FRONTLINE collection.
This media asset was adapted from Episodes One and Two of FRONTLINE: "Money, Power and Wall Street."