September the 15th: It was Four Years Ago Today . . .

Monday, September 17, 2012 at 11am
By John Friedman

. . . that Sargent Economy taught the people to feel . . . pain, very deep pain, of the economic variety, and different from what we, here in the U.S. and born after 1940, had ever directly felt before.

Here is a reminder of what awaited us as we opened the Sunday New York Times on September 14, 2008:

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.

But even as the fates of Lehman and Merrill hung in the balance, another crisis loomed as the insurance giant American International Group appeared to teeter. Staggered by losses stemming from the credit crisis, A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive.

The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.

“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

 

At 1:45 a.m. the following Monday morning, September the 15th, 2008 — a day that has lived in infamy ever since — Lehman filed for bankruptcy in lower Manhattan (note for the language-curious: most people pronounce the name of that now-mostly-departed financial-co as LEE’ min).

*  *  *

One day later, the Reserve Fund — the first ever money market fund and, as we would soon learn, the owner of a lot of Lehman IOUs — broke the buck. Breaking the buck is the money market fund equivalent of your bank telling you that the dollars you stored in your checking account are now 97-cent dollars rather than 100-cent dollars, and is tantamount to saying “we are out of business.”

If you were to draw up a list of what constitutes the “mortar” of the brickwork that is our financial system, money market funds, and the investments they own — mostly commercial paper (big company corporate IOUs that must be paid back in weeks or a couple of handful of months at most) and repos (ABC Bank sells something to XYZ Bank, and simultaneously agrees to buy it back from XYZ Bank at a slightly higher price, with that slight difference in price being tantamount to interest XYZ Bank pays to ABC Bank) — would be good candidates for the top of the list.

After that, we — all of us, regardless of degree of financial wonkiness, as this was truly a story of global proportion spreading via the lay level — spent several weeks thinking that the economic world as we knew it was coming to an end. Politicians flailed. More banks failed. Humans near-wailed.

That very acutely-worrying period — when the mortar fell out of the brickwork of the financial world in which we all live and the bricks went all wobbly — lasted into early October; the effects of it remain with us to this day.

*  *  *

Many financial entities bit the bullet back then. Merrill and Countrywide Mortgage were subsumed by Bank of America (the financial-co roll-up monster out of Charlotte, NC), while Washington Mutual done got et up by J.P. Morgan Chase (the financial-co roll-up monster out of Manhattan, NYC).

AIG, putatively more insurance-co than bank, turned out to be very mortar’y as well, and had to be financially bear-hugged by Uncle Sam, the deepest pocket of all, which in this case was surely needed — gosh a’mighty was it ever needed — as it took a promise of roughly $175 billion of Uncle Sam’s backing to keep AIG on life support long enough to avoid it doing a Lehman-squared (cubed?), we’ll-take-the-whole-place-down-with-us, sort of belly-flop of a catastrophe.

So too went Fannie Mae and Freddie Mac, the government’s mortgage-market-making arms; it took a bear hug from Uncle Sam to keep them up and running as well.

*  *  *

Do you remember this? Do you remember where you were/how it felt?

I ask because, I firmly believe that, for the financial part of your brain, the phrase September the 15th should have roughly the same shivers-up-the-backbone, chill-inducing impact that the phrase September the 11th has on the I’m-an-American part of your brain.

Life and death is different from mere money in an absolute way, but that mere money thang has impacted the lives of billions of people during the past four years, and, with very few exceptions, that impact has been bad, very bad.

With some luck, the Powers that Be will never forget, and will continue to proactively take steps to ensure it never happens again — the 11th or the 15th.

It’s wicked complicated stuff, but my hunch is that the Ps that B have done, say, 20% of what probably should already have been done. The banks and other mortar-players, you see, have more power than just about anyone, and power does not take kindly to oversight or regulation or, for that matter, the relinquishing of anything whatsoever. Even if doing so threatens the entire economic system as we now know it.

*  *  *

So, please, do remember September the 15th, the day Lehman went in (and under), and please do keep in mind that the financial ocean, upon which all of us financial boats are a’ bobbin, can swamp everything, you and your loved ones included, before you even know what just hit you.

And then, please please please go about your business, with a lot of joy and a lot of hope, because the world in which we live tends to get better — much, Much, MUCH better — over time, if you take a long enough view.

Yay.

 

893 words (important topic!)

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