Managing Hedge Fund Risk and Financing: Adapting to a New Era

The Global Credit Crisis: 2008–2010

The global economy and capital markets have gone through a number of cycles in the 80 years since the Great Depression but none of the downturns has been as dramatic and severe as the credit crisis of 2008–2010. In the span of just eight weeks beginning in September 2008, a “tsunami” swept through the financial markets. The first ripple began on September 7, 2008, when the U.S. government stepped in to prevent the collapse of two cornerstones of the U.S. economy and took control of Fannie Mae and Freddie Mac in an extraordinary Federal intervention in private enterprise.

A week later, the ripples became waves and on September 14, Lehman Brothers, a 150-year-old institution that had survived the Great Depression, capsized and became the largest company to enter bankruptcy in U.S. history. On the same day, Merrill Lynch agreed to merge with Bank of America in order to avert its own demise. Two days later, AIG, the world's largest insurer, received an US$85-billion bailout package from the U.S. Federal Reserve in order to stave off collapse.

On September 21, with the crisis deepening and just five days after the AIG bailout, Morgan Stanley and Goldman Sachs, the two leading providers of financing to the hedge fund industry, sought shelter in safe harbors and received Federal approval to become bank holding companies. This enabled both firms to gain much-needed access to the Federal Reserve's emergency-lending facilities to ensure their liquidity. ...