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I also believed that I was potentially really missing the boat, as surely CEO Fuld would pull off a deal, and surely the stock had oversold relative to its real value. I was, for the first time in my career, more focused on the cost of the debt insurance than I was the stock itself.

I left the office Friday afternoon convinced they would secure a deal over the weekend, with the worst case being a government bailout that wiped out the equity but staved off contagion, and the best case being some savior that restored equity value in the company.


I was half-sick at the idea that I missed a chance to benefit from the panic on Lehman opportunistically. By Sunday night, as I sat glued to CNBC in my home office, desperately calculating what collateral damage my clients may face from the Lehman fall, it was clear that Lehman was a goner. They are certainly correct that they lacked the legal basis to do so, but I suppose that is different than saying they could not have done so without some creative will to make it happen.

However, my own estimation is that they knew it was too late. The painful process of debt liquidation was, at this time, inevitable, and no real path existed to will it away. I did not sleep that Sunday night, and obviously, the many fine folks at Lehman Brothers did not either. The inter-connectedness in the financial markets was so opaque and substantial that clarity of exposure and damage was not going to come easy. We will discuss the remaining contagion effects that hit the market the 15th, 16th, and 17th of September in the days ahead.

But what happened on Sunday night, September 14, launched the most infamous week in Wall Street history , and one of the most unforgettable weeks of my career. Counter-parties no one was thinking about faced the threat of extinction. Credit markets were not merely tight; they were utterly frozen.

No one with a remaining brain cell trusted anything from anybody. A spiraling effect had taken down Lehman Brothers, and now was looking for its next victim. In the aftermath of the Lehman bankruptcy announcement, the market closed down over points I will get back to why this announcement actually soothed markets a bit in a moment. First, some history.

Merrill Lynch was Wall Street. No firm better defined the ethos and image of Wall Street than Merrill Lynch. They were an impeccable brand, with an extraordinary legacy, and their financial advisors were 15, of the proudest and well-branded on the street. They were the innovators of so much of what existed out of Wall Street brokerage firms. Bank of America had passed on a deal with Lehman Brothers.

That meant that the street would then wonder who was next — meaning, who would face the liquidity spiral that would escalate into a solvency crisis next. Greg was convinced it would be Merrill Lynch. By , it was not a laughing matter. By , their CDO mortgage exposure brought the company to its knees. Like Lehman, they faced a collapse under their own leverage once the street refused to transact with them, or counterparties demanded more collateral.

Fleming convinced Thain they needed an equity partner to take them on. And that is where Bank of America would do a world of good for Merrill Lynch, while nearly collapsing their own company. Had markets re-opened Monday absorbing the death of Lehman Brothers, while also believing Merrill Lynch faced a demise of confidence, the counter-party systemic risk would have been monumental.

Instead, the markets absorbed a pure investment bank with no real capital backstop being absorbed by a commercial bank with a couple trillion dollars of deposits in its funding base. It was surreal and even today, remains absolutely baffling. The reality is that along the way, Bank of America would desperately try to get out of the deal, but to no avail. Wall Street and Main Street saw a vaulted brand, rich in history and achievement, absorbed by a Charlotte-based commercial retail banking chain.

But the overpayment for the Merrill asset will remain one of the great stories of the crisis, perhaps as much for what it kept us from ever finding out versus what it did reveal. Could the U. Their aggressive efforts to prod that deal along towards closing would become the subject of intense scrutiny and litigation in the months that followed. The week that forever changed capital markets in the United States is only through Monday, September 15 , and two of its most heralded brand names are now gone — Lehman Brothers to bankruptcy, and Merrill Lynch into the arms of Bank of America.

So, we now get to September 16, , the economy in total free fall , the feeling of global credit market collapse in the air, and thus far, the government has not actually become the central player they would eventually become. Like Merrill Lynch, AIG had been founded in the early part of the 20th century, rich in history, heritage, and brand. A leading life insurance and annuity company, AIG was a respected financial products innovator, known for respectable cost management practices, and a true U.

When regular folks on Main Street thought about Wall Street, the stock market, securities trading, corporate finance, and the mortgage market, none would have affiliated such terms with AIG.

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I took my son, Mitchell, then three years old, to Disneyland, the afternoon of the 16th. I had promised him and his mother all Summer long I would take an afternoon off to do so, and I had been working hour days for a week straight as this crisis was fomenting.

Leaving the office near the end of the market day this Tuesday was not easy. The Dow had actually gained back 1. But nothing felt stable and the unknowns were overwhelming. I kept my word and went to Disneyland with my wife and son, with a work-issued Blackberry in one pocket and a personal iPhone in the other the 1. Space Mountain was not as wild as the afternoon of emails, texts, alerts, and news cycle drama would prove to be.

Rewarding Bad Behavior: The Bear Stearns Bailout

Less than 48 hours later, the government was singing a different tune. At the heart of this decision was the reason AIG needed the assistance, to begin with — they were the guarantor of risk for financial institutions all over the globe via the credit default swap market.

Effectively, AIG had been the counter-party in an insurance contract on so many of these mortgage instruments that various financial firms had been writing. For an insurance premium, AIG became an insurer of the securities.

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The domino effect was incomprehensible, not merely because it was hard to measure, but because what could be measured was stupefying. So just like that, the Republican Bush administration and the Federal Reserve were throwing in the towel on the idea of a financial contraction that would not involve the heavy hand of government.

In most countries, we call this nationalization. It was not a bailout of AIG, other than in the literal sense that it obviously was, but rather a bailout of the counter-parties of AIG. This was never adequately explained to the American people, in my opinion.

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All focus had now charged to limiting contagion risk. And as we will see in the days ahead, this contagion was no longer hypothetical. All hell was breaking loose. Money markets were falling. Commercial credit was non-existent. AAA-rated companies were having a hard time rolling over the debt. And trust in the financial system was at the lowest it had been since the Great Depression.

The Repo Market and the Start of the Financial Crisis

Disneyland may have been the happiest place on earth that day. My late father, who passed away in at the age of 47, would have been 60 years old on Sept. That day always involves a certain degree of emotion. This week and season were obviously producing entirely enhanced levels of emotion and anxiety. And on this particular day, a few things were particularly noteworthy.

The stock market dropped points, the second worst day of the year the Monday, two days earlier, had been worse. This represented the market hitting a 3-year low. But in addition to living through the onset of this recession which was growing worse by the day , the macro issues in the U. Until a few months earlier, Morgan Stanley had felt reasonably good about how it had held up throughout the crisis.

Bear Stearns deal: ten years on

Short sales skyrocketed mostly hedge funds betting against the stock price. A controversy persists to this day — are the shorts betting on an outcome, or creating an outcome? We received a company-wide email mid-morning that the firm was a victim of vicious and opportunistic attacks by short sellers. We had a conference call later that morning where that same message was reinforced. Clients were panicked about the safekeeping of their own money. We now know that many hedge funds were bidding up the cost of the credit default swaps signaling distress in the credit quality while simultaneously shorting the stock creating a self-fulfilling prophecy.

The level of hysteria and panic and volatility and insanity in the market can best be demonstrated by this: One of the large rumors circulating that day was that Wachovia was looking to buy Morgan Stanley.