1. Financial Shock to Financial Panic

“What does this mean?” asked Moody’s CEO. “And how should we respond to it?” It was Sunday afternoon, September 7, 2008, and the U.S. Treasury had just nationalized Fannie Mae and Freddie Mac, the twin behemoths of U.S. housing finance. On a hastily scheduled call, the CEO was asking Moody’s executives to consider how this previously unimaginable event might affect their research and ratings. Although Moody’s was on the front line of the financial system, CEOs across America would soon be asking their executives these same questions.

Even before that fateful weekend, Wall Street had been experiencing a bear market—the S&P 500 stock index was more than 20% beneath the all-time high it had achieved the previous ...

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