How Did We Get Ourselves Into This Mess?
Sunday night: “This is looking suspiciously like the last act of Hamlet (or maybe Reservoir Dogs).”
Monday: Market participants trade frantically in a Sunday-afternoon trading session to hedge their Lehman exposures - with the proviso that the trades will be busted if Lehman doesn’t file by midnight NY time.
Lehmans files for Chapter 11 bankruptcy at half past midnight NY time - becoming America’s biggest bankruptcy ever, six times larger by assets than the previous record-holder (Worldcom in 2003). Amid the chaos, Bank of America swoops on Merrill Lynch (or was it a shotgun marriage?) to save it from the same fate.
AIG “has 48, maybe 72 hours to live” after Moody’s and S&P downgrade its credit rating, forcing it to find tens of billions of dollars of extra collateral. The New York state government allows it to lend $20 billion to itself.
A dead cow in a tank of formaldehyde (with golden hooves and horns) sells for £10,300,000 - at what might mark the peak of the contemporary art market, Damien Hirst’s everything-must-go auction at Sotheby’s.
Tuesday: The US government seizes AIG, offering an $85 billion credit line in return for 80% of the company. Singaporean and Hong Kong customers flee AIG in droves.
Banks refuse to lend to each other. Overnight US dollar borrowing rates triple, from 2% to 6%, as money-market traders realise that the money they lend out today may not come back tomorrow. (Funnily enough, most other currencies remain largely unaffected.)
The wholesale funding freeze sends shares of British bank HBOS plunging 31%, and it puts itself up for sale.
Currency markets gyrate wildly, and the price of currency options (which reflects expectations of future volatility) reaches all-time highs.
The Fed refuses to cut interest rates. It wouldn’t have done anything anyhow, if banks were refusing to lend full stop.
A money-market fund “breaks the buck” for the first time in over fifteen years, suspending redemptions and sending investors fleeing.
Wednesday: Investors flee from money-market funds into Treasuries. T-bill yields briefly drop below zero. Interbank lending, however, remains frozen, and overnight interbank US dollar lending rates peak at 10%.
HBOS shares plunge 50% at the open, then rally as the BBC’s business editor publishes a spectacular scoop on his blog: Lloyds TSB announces it’s buying HBOS (for a 200% premium to the market price at the time).
Morgan Stanley puts itself up for sale as the cost of its credit insurance triples, and speculation spreads that previously-invincible Goldman Sachs might have to do the same. Barclays buys the North American assets of Lehmans.
Russia pulls the plug on its stock markets to stop them collapsing.
Investors flee from everywhere into gold, and gold prices spike by an unprecedented 10% in New York trading.
Thursday: Interbank lending remains frozen - until central banks worldwide join forces to inject $160 billion into short-term money markets. Overnight US dollar interest rates plunge from 8% to 3%, but longer-term rates - one month and longer - remain elevated.
Morgan Stanley CEO John Mack says “we need a merger partner, or we’re not going to make it” - or does he?
In Britain, financial shares rally as the government bans short-selling. In America, boring funds manager State Street halves in value, and in Australia, “millionaire factory” Macquarie Bank drops 26% after an article in The Australian casts doubt on its ability to fund its maturing debt.
Friday: The US government launches the ultimate bailout - a government-backed fund to buy the toxic assets destroying banks’ balance sheets. President Bush warns that a “significant” amount of taxpayer money will be put at risk. The Fed declares it will backstop money market funds.
After these two bailouts, and the nationalisations of Fannie Mae, Freddie Mac, and AIG, the USA’s AAA credit rating is in quite serious trouble.
The US’s ban on short-selling financial stocks sends equities roaring higher, and the Dow closes the week almost unchanged, despite trading a 1000-point range over the course of the week.
WaMu puts itself up for sale, and can’t find a single buyer. Oh, wait, yes it can!
Russia and China choose more overt methods to prop up their stock market - China eliminates stamp duty on the buy side - but only the buy side! - of share transactions, and Russia injects $10 billion into a share-buying fund.
Saturday, Sunday:
The battle’s done, and we kind of won