The fallout spreads

As America’s strongest regulators and bankers huddled in Decrease Manhattan, one other menace emerged: The American Worldwide Group, then the world’s largest insurer, was teetering. It wanted billions of to proper itself.

If Lehman was expendable, A.I.G. wasn’t. It had ties to many massive monetary companies, and its failure might ship shock waves world wide. On a three a.m. convention name on Tuesday, Sept. 16, Mr. Geithner, then the president of the New York Fed, informed officers from the Fed and the Treasury Division:

“In the event that they default, you’ll see default possibilities explode on all monetary companies.”

A.I.G. owed billions to different companies on trades linked to mortgage-backed bonds. That afternoon, the federal government bailed it out with an $85 billion mortgage. Over the approaching weeks, that determine grew to greater than $180 billion. In March 2009, Mr. Bernanke, then chairman of the Fed, informed “60 Minutes”:

“I slammed the cellphone various instances on discussing A.I.G. I perceive why the American persons are indignant.”

Days after Lehman’s collapse, Predominant Road took a direct hit. Cash market funds, which supplied financing to Wall Road buyers thought-about to be as secure as financial institution accounts, have been careworn. The Reserve Major Fund, among the finest recognized, mentioned on Sept. 16 that its internet asset worth had fallen beneath $1 per share. That extraordinarily uncommon prevalence, often known as “breaking the buck,” was brought on by losses on Lehman debt. One monetary planner informed the NYT that week:

“One after the other, all of my secure havens aren’t so secure anymore, and that’s a foul factor.”

Buyers pulled some $300 billion from prime cash market funds within the week after Lehman’s collapse. It wasn’t till the tip of the month that the Treasury Division assured them.

Goldman Sachs and Morgan Stanley grew to become significantly susceptible. The Wall Road companies weren’t as tightly regulated as greater banks like JPMorgan, which allow them to keep perilously skinny capital ranges and over-borrow in abruptly tough short-term debt markets. On Sept. 21, the Fed introduced that each companies have been changing into absolutely regulated financial institution holding firms, giving them full entry to its bailout loans.

Authorities additionally needed to save Washington Mutual and Wachovia, two massive banks that gave the impression to be hurtling towards failure. JPMorgan scooped up most of WaMu, whereas Wells Fargo purchased Wachovia. The offers prompted longstanding rifts between Mr. Geithner and Sheila Bair, then the chairwoman of the F.D.I.C.

The worldwide affect

The chaos typified by Lehman’s collapse unfold far past America’s shores. Right here have been among the largest impacts world wide:

Royal Financial institution of Scotland: Earlier than Sept. 2008, R.B.S. was attempting to change into a global large, diving into U.S. subprime mortgages and collaborating in a vastly costly deal for the Dutch lender ABN Amro. The true value of that quest grew to become clear: R.B.S. struggled to stay capitalized as mortgages soured and shoppers withdrew cash, regardless of having raised £12 billion over the summer time of 2008. By October, the British authorities started bailing out banks. A month later, it nationalized R.B.S.

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