DealBook Briefing: Reliving Wall Street’s Near-Death Experience

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The fallout spreads

As America’s most powerful regulators and bankers huddled in Lower Manhattan, another threat emerged: The American International Group, then the world’s largest insurer, was teetering. It needed billions of dollars to right itself.

If Lehman was expendable, A.I.G. wasn’t. It had ties to many large financial firms, and its failure could send shock waves around the world. On a 3 a.m. conference call on Tuesday, Sept. 16, Mr. Geithner, then the president of the New York Fed, told officials from the Fed and the Treasury Department:

“If they default, you’ll see default probabilities explode on all financial firms.”

A.I.G. owed billions to other firms on trades linked to mortgage-backed bonds. That afternoon, the government bailed it out with an $85 billion loan. Over the coming weeks, that figure grew to more than $180 billion. In March 2009, Mr. Bernanke, then chairman of the Fed, told “60 Minutes”:

“I slammed the phone more than a few times on discussing A.I.G. I understand why the American people are angry.”

Days after Lehman’s collapse, Main Street took a direct hit. Money market funds, which provided financing to Wall Street investors considered to be as safe as bank accounts, were stressed. The Reserve Primary Fund, one of the best known, said on Sept. 16 that its net asset value had fallen below $1 per share. That extremely rare occurrence, known as “breaking the buck,” was caused by losses on Lehman debt. One financial planner told the NYT that week:

“One by one, all of my safe havens aren’t so safe anymore, and that’s a bad thing.”

Investors pulled some $300 billion from prime money market funds in the week after Lehman’s collapse. It wasn’t until the end of the month that the Treasury Department guaranteed them.

Goldman Sachs and Morgan Stanley became particularly vulnerable. The Wall Street firms were not as tightly regulated as bigger banks like JPMorgan, which let them maintain perilously thin capital levels and over-borrow in suddenly tricky short-term debt markets. On Sept. 21, the Fed announced that both firms were becoming fully regulated bank holding companies, giving them full access to its bailout loans.

Authorities also had to save Washington Mutual and Wachovia, two large banks that appeared to be hurtling toward failure. JPMorgan scooped up most of WaMu, while Wells Fargo bought Wachovia. The deals caused longstanding rifts between Mr. Geithner and Sheila Bair, then the chairwoman of the F.D.I.C.

The international impact

The chaos typified by Lehman’s collapse spread far beyond America’s shores. Here were some of the biggest impacts around the world:

Royal Bank of Scotland: Before Sept. 2008, R.B.S. was trying to become an international giant, diving into U.S. subprime mortgages and taking part in a hugely expensive deal for the Dutch lender ABN Amro. The true cost of that quest became clear: R.B.S. struggled to remain capitalized as mortgages soured and clients withdrew money, despite having raised £12 billion over the summer of 2008. By October, the British government began bailing out banks. A month later, it nationalized R.B.S.

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