Black September 2008

Many thought that the collapse of Bear Stearns in March 2008 signalled an end to the banking crisis. But it only proved to be a lull in the storm. It was in August that the action again started to pick up. Fannie and Freddie announced their fourth consecutive quarterly loss. On September 7, the US Treasury was forced to bail out the two agencies. Meanwhile, the fortunes of Lehman Brothers, another investment banking icon on Wall Street, had fluctuated wildly in the past few months. Lehman came close to bankruptcy, a couple of times but was saved at the last moment by some desperate measures. On September 15, Lehman threw in the towel and filed for bankruptcy. A big surprise followed the next day when the US Treasury announced a $85 billion bailout of AIG, the respected, global insurance company. AIG had taken huge positions in CDS without realising that credit default insurance was a completely different business compared to its traditional insurance activities. Meanwhile, Merril Lynch, realising it would be difficult to survive as an independent entity, decided to merge with Bank of America. Many of the deeper problems plaguing Merril would become evident only later. At the same time, Goldman Sachs and Morgan Stanley accepted a proposal from the US Treasury to convert themselves from pure play investment banks into bank holding companies. In short, the complexion of Wall Street changed completely in a week.