Black Monday Anniversary

September 15th 2008 was another historic black monday for the USA market. Fannie Mae (FNM) and Freddie Mac (FRE) were both taken over by the government just the week before and the worlds largest (market capitalization) insurance company, AIG needed billions to stay afloat.

September 15th is the one year anniversary of Lehman Brothers' demise. The bankruptcy filing represents the end of a 158-year-old company that survived world wars, the Asian financial crisis and the collapse of hedge fund Long-Term Capital Management, but not the global credit crunch.

Lehman was the 400 pound gorilla that broke our over leveraged financial camel's back. Lehman was the nuclear bomb that set off a world-wide financial winter. Fortunately that nuclear winter ended this spring. Now we've begun the long economy road to employment recovery.



Lehman Brothers was the biggest investment bank to collapse since 1990, when Drexel Burnham Lambert filed for bankruptcy amid a collapse in the junk bond market. Based on assets, Lehman also far surpasses WorldCom as the largest U.S. bankruptcy ever.

Lehman had assets of $639 billion at the end of May, while WorldCom had $107 billion when it filed for bankruptcy protection in 2002.

At the end of August 2008, Lehman had $600 billion of assets financed with just $30 billion of equity. Having so little capital meant that a 5 percent decline in assets would wipe out the value of the company, which investors saw as a real risk due to the company's billions of dollars of mortgage securities.



The Lehman failure was the straw that broke the fragile USA financial camel's back. In 2008, a series of bank and insurance company failures triggered a financial crisis that effectively halted global credit markets and required unprecedented government intervention. Fannie Mae (FNM) and Freddie Mac (FRE) were both taken over by the government. Lehman Brothers declared bankruptcy on September 14th after failing to find a buyer. Bank of America agreed to purchase Merrill Lynch (MER), and American International Group (AIG) was saved by an $85 billion capital injection by the federal government.[1] Shortly after, on September 25th, J P Morgan Chase (JPM) agreed to purchase the assets of Washington Mutual (WM) in what was the biggest bank failure in history. In fact, by September 17, 2008, more public corporations had filed for bankruptcy in the U.S. than in all of 2007. These failures caused a crisis of confidence that made banks reluctant to lend money amongst themselves, or for that matter, to anyone.



The crisis has its roots in real estate and the subprime lending crisis. Commercial and residential properties saw their values increase precipitously in a real estate boom that began in the 1990s and increased uninterrupted for nearly a decade. Increases in housing prices coincided with a period of government deregulation that not only allowed unqualified buyers to take out mortgages but also helped blend the lines between traditional investment banks and mortgage lenders. Real estate loans were spread throughout the financial system and world in the form of CDOs and other complex derivatives in order to disperse risk; however, when home values failed to rise and home owners failed to keep up with their payments, banks were forced to acknowledge huge write downs and write offs on these products. These write downs found several institutions at the brink of insolvency with many being forced to raise capital or go bankrupt. These firms had become so highly leveraged that just a small 5% to 10% decline in asset values required masses amounts of new capital to be raised or file for bankruptcy.

For those wishing a refresher course in the fall of 2008 financial crisis, CNBC has an excellent summary of the headline stories of that time. Wall Street in Crisis.