On September 15, 2008, Lehman Brothers filed for bankruptcy. That was the event that precipitated the peak of the financial crisis. Let’s not just look back at what that event meant for the markets, but also forward to what it means today and what the consequences of the financial crisis may be for the markets in the years to come.
While GDP growth was below average in the first half of 2008, it was positive and credit markets were functioning. The TED spread began 2008 at about 1% then doubled around the time Bear Stearns was bailed out when JP Morgan absorbed it with the Federal Reserve guaranteeing a lot of the toxic assets. The potential crisis appeared to be averted and the TED Spread narrowed to 1% again. During the summer the rate rose again this time as Fannie and Freddie—the two entities that make possible about half of the home loans in America—were bailed out and effectively nationalized. Again, the rate came back down in August. It was widely assumed in the markets that Lehman was next on the list to get bailed out. The general expectation was that Barclays would absorb Lehman Brothers with the Fed guaranteeing them against some of the losses–essentially the same deal that the Fed provided to Bear Stearns. In fact, this was so much a foregone conclusion that the stock market was up in the several days that lead up to the weekend the deal was to take place.
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