A dramatic, shocking series of events that forever changed the U.S. financial markets.
In the past week Wall Street's landscape was transformed and the U.S. government made an unprecedented intervention to bolster chaotic financial markets. The following is a chronology of key events in probably Wall Street's most tumultuous week in U.S. financial history since the Great Depression.
Rescue Attempt [Friday Sept 12]
Lehman Brothers was on the brink of collapse and scrambling for a buyer first surfaced.
The New York Federal Reserve Bank president, Timothy Geithner, convenes an emergency meeting with Treasury Department officials and top executives at all the major Wall Street banks, including Citigroup, JP Morgan & Chase, Merrill Lynch, in an attempt to rescue ailing investment bank Lehman Brothers. A sticking point is the government's reluctance to provide financial support for a deal.
Survival Fights [Saturday, September 13]
Discussions continue at the New York Fed's Lower Manhattan building, and British bank Barclays plc emerges as a leading contender to buy Lehman, even as other major banks drop out of the running.
A few blocks away, troubled insurer American International Group, which insured billions of dollars worth of collateralized debt obligations, begins talks with New York State's insurance superintendent as it fights for its survival.
Trouble Gathered Force [Sunday, September 14]
There were still no suitors for the 158-year-old investment bank, and Lehman Brothers bankruptcy seemed inevitable.
Bank of America unleashed the news that it would pay $50 billion to buy Merrill Lynch, another iconic Wall Street name. Merrill was forced into the deal because of fears that it might also fail because of a loss of investor confidence. The fears center on toxic debt remaining on Merrill's balance sheet and its difficulty in raising new capital.
As if that weren't enough, American International Group, the nation's largest insurer, said that it planned to sell some of its troubled assets in order to raise cash and boost investor confidence.
Concerns about the credit crisis grew increasingly dire, even though the government had already pledged to backstop Fannie Mae and Freddie Mac up to $200 billion just one week ago, and six months earlier engineered JP Morgan's purchase of Bear Stearns with a $29 billion guarantee.
But it looked like that wouldn't be enough, so Sunday afternoon the Federal Reserve, along with a group of 10 global banks and securities firms, including JP Morgan Chase and Goldman Sachs, announced a $70 billion pool of funds that they can tap to help ease a credit shortage and to aid troubled financial firms. The U.S. central bank also loosened its lending restrictions.
The Collapse [Monday, September 15]
As Just after midnight, in Monday's early hours, 158-year-old Lehman files for Chapter 11 bankruptcy.
The Dow Jones Industrial Average tanked more than 500 points in its biggest drop since Sept 17, 2001, the first day of trading following the 9/11 attacks. This is the worst day on Wall Street in seven years after Lehman Brothers' epic collapse and the buyout of Merrill Lynch. Meanwhile the FTSE 100 fell to its lowest level since June 2005.
By night, AIG was in fact hit with a downgrade, as Fitch bumped the insurance group down a notch. With $1.1 trillion in assets and 74 million clients in 130 countries, investors feared AIG's collapse would severely hurt consumers and further tighten already strangled credit.
Also news cropped up that the nation's largest savings bank, Washington Mutual, was in search of a white knight.
The Intervention [Tuesday, September 16]
Several rock-solid money market funds began to falter, dipping below the $1 per share benchmark, which is known as “break the buck”.
In the afternoon meeting, the central bank chose not to succumb to panic and unanimously decided to hold rates steady at 2%.
Markets cheered the decision, and the Dow jumped 140 points at the close after sharp drop in morning as worries mounted that the financial system was broken beyond repair. Investors poured money into bonds resulted in the yield on the benchmark 10-year Treasury note fell to a 5-year low.
After the bell, British bank Barclays agreed to buy up $2 billion worth of Lehman's prime assets, including its Manhattan skyscraper and North American investment banking and capital markets businesses.
Later that night AIG was taken over by the federal government by taking a 79.9 percent stake in the company in exchange for a staggering $85 billion bailout revolving loan it has two years to pay off. New York state would lead a task force to oversee AIG's sale of assets as it pays off that loan
The Free Fall [Wednesday, September 17]
Investors gave an enormous rebuff to the AIG news, sending stocks plummeting, while traders piled funds into safer havens. The Dow dropped 450 points by the end of the day, dragged down by bank stocks in a tail-spin. Despite reporting better-than-expected results, Goldman Sachs shares slipped by 14 percent, dipping below $100 a share for the first time since 2005. Morgan Stanley took a tumble 24 percent as well, as rumors circulated that it would merge with troubled bank Wachovia.
Gold rose $70, a new record. Oil rose $6, its second-largest jump ever. And the yield on the three-month Treasury sank to 0.02%, the lowest level since 1940.
The U.S. Securities and Exchange Commission stepped in and banned naked short selling. Many Wall Street analysts blamed the stock market's collapses on so-called "naked" short sellers, who short stocks without ever buying the security.
The Bailout [Thursday, September 18]
The Fed convinced five other central banks around the world to invest a total of $180 billion in global financial markets.
Meanwhile, AIG was tossed out of the Dow Jones Industrial Average and replaced with food giant Kraft.
U.S. Treasury Secretary Henry Paulson shopped around a plan to Congress that would create an independent federal agency similar to the Resolution Trust Corporation, which was created in 1989 to absorb bad debt in the Savings and Loan. The fund would likely acquire hundreds of billions of dollars of toxic mortgage debt off of bank balance sheets.
The move helped the U.S. stock market to rise 3.9 percent, recover from three-year lows.
The Confidence Boost [Friday, September 19]
The U.S. Securities and Exchange Commission took what it called "emergency action" and temporarily banned investors from short-selling 799 financial institutions to calm the financial markets. The measure was set to end on October 2, but can be extended by another 10 days. Market watchdogs in France, Portugal and Ireland take similar steps to crack down on short-selling.
The Treasury also said it would insure up to $50 billion in struggling money market fund investments at financial companies, guaranteeing that the funds' value will not fall below the standard $1 a share. The Fed also said it would make unlimited funds available to banks to finance purchases of asset-backed commercial paper from money market funds.
In a press conference, Treasury Secretary Paulson outlined the government's plan to put up hundreds of billions of dollars to help stem the crisis, saying "the financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing".
Investors cheered the moves, sending stocks soaring throughout the day. The FTSE rises 8.8 percent, its biggest surge ever.
SmartInMoney.com
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