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In the past, whenever the financial system came close to a breakdown, the authorities rode to the rescue and prevented it from going over the brink.That is what I expected in 2008 but that is not what happened.On Monday September 15, Lehman Brothers, the US investment bank, was allowed to go into bankruptcy without proper preparation. It was a game-changing event with catastrophic consequences.For a start, the price of credit default swaps, a form of insurance against companies defaulting on debt, went through the roof as investors took cover. AIG, the insurance giant, was carrying a large short position in CDS and faced imminent default. By the next day Hank Paulson, then US Treasury secretary, had to reverse himself and come to the rescue of AIG.But worse was to come. Lehman was one of the main market-makers in commercial paper and a large issuer of these short-term obligations to boot. Reserve Primary, an independent money market fund, held Lehman paper and, since it had no deep pocket to turn to, it had to “break the buck”-stop redeeming its shares at par. That caused panic among depositors: by Thursday a run on money market funds was in full swing.The panic then spread to the stock market. The financial system suffered cardiac arrest and had to be put on artificial life support.By George Soros
To read more go to:
http://www.ft.com/cms/s/0/49b1654a-ed60-11dd-bd60-0000779fd2ac.html
As in the days of Noah...
