Lehman and the Bailout

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LEHMAN AND THE BAILOUT….Was last week’s financial crisis caused by the Fed’s decision to allow Lehman Brothers to go into bankruptcy? I’m not sure, but here’s the basic argument in favor of this scenario:

  1. Monday: Fed allows Lehman to go bankrupt.

  2. Tuesday: Reserve Prime, a money market fund with exposure to Lehman securities, announces that it has “broken the buck.” Money market funds are supposed to be the safest places possible to park your cash outside of T-bills, so this causes a panic.

  3. Wednesday: Depositers start making large-scale withdrawals from other money market funds. Banks need to service these withdrawals, so they begin hoarding cash and calling in their short-term loans (excess reserves held by banks increased last week from a normal $2 billion to nearly $200 billion). Every bank is doing the same thing, so no money is available for normal interbank loans. LIBOR skyrockets.

  4. Later Wednesday: with everyone hoarding cash, the credit markets seize up completely. The commercial paper market, which funds actual operations of actual companies, is close to death. The entire financial system is near collapse.

  5. Thursday: Bernanke and Paulson announce their bailout plan. This reduces the panic that banks will go bust and thereby frees up the credit markets a bit.

More details here. If I understand everything correctly, Bernanke and Paulson basically took a look at what happened after they allowed Lehman to collapse and decided it couldn’t happen again. Hence the bailout.

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DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily bluster—Mother Jones' journalism is driven by one simple question: Will America move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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