Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.
|--John Stuart Mill, 1867|
September 2008 started with a bang: Fannie Mae and Freddie Mac were put into conservatorship on September 7, 2008. The following week, Lehman Brothers filed the largest bankruptcy in American history.
The repercussions of setting Lehman Brothers adrift on an ice floe were much worse than either Hank Paulson or Ben Bernanke had contemplated. The complications caromed throughout the financial world, causing panics on trading desks. The cascade quickly froze credit markets.
The month was barely under way, and it was already a September to remember. The same weekend Lehman began its long dirt nap, Bank of America hastily purchased Merrill Lynch for $50 billion. Before the month ended, the Treasury Department would guarantee money market funds; the Securities and Exchange Commission (SEC) would ban short selling; the Troubled Assets Relief Program (TARP) would be unveiled; Goldman Sachs and Morgan Stanley would convert to commercial banks, and Washington Mutual would be taken over by JPMorgan Chase.
Then there was American International Group (AIG).
Once Bear Stearns tumbled, traders' immediate reaction was to identify analogous risk: Who else held similarly bad assets? What other firms had equivalent risk exposure? When Bear fell, the obvious answer was ...