CHAPTER 1The Financial Market Wildfire

ON SEPTEMBER 16, 2008, THE CONSEQUENCES OF FIVE YEARS’ worth of unchecked lending excesses in the U.S. residential mortgage market flared up to ignite the worst financial crisis in modern history.

Barely a week earlier, the Treasury Department had put the mortgage giants Fannie Mae and Freddie Mac into conservatorship—effectively nationalizing them—expecting that this would contain the spreading effects of the mortgage market collapse. It did not.

The investment bank Lehman Brothers came under pressure almost immediately. Treasury and the Federal Reserve worked feverishly to find a buyer for Lehman, but having already put taxpayer money at risk in the rescue of another investment bank, Bear Stearns, six ...

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