Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

If You Took The Week Off ... You Didn’t Miss Anything!

The week of September 15th to 19th 2008 will long be regarded as the week that Western finance forever changed. Lehman Brothers filed for largest bankruptcy in history. Merrill Lynch merged into the stronger arms of Bank of America. The world's largest insurer, AIG, was rescued at the last minute with a $85 billion loan from the United States Treasury and Federal Reserve Bank.

For only the second time in history, a major money market fund -- The Primary Fund managed by Reserve Management – broke the proverbial buck as some of its short-term investments were suddenly valued at zero with the bankruptcy of Lehman Brothers. The assets of that fund plunged from $64 billion down to approximately $23 billion. There were reports that other money market funds saw heavy redemptions as well, primarily from institutional clients who feared that the upheaval in the capital markets would cause other financial institutions to fail and file for bankruptcy. The final money market redemption numbers for the week are not yet available, but are likely to have been quite sizeable (north of the $150 billion redeemed through Wednesday).

Thursday was a day of particular mayhem as various fund managers, financial institutions and the two remaining independent investment banks saw their common stocks plunge and then rebound on very high volume. Credit default swaps on those same institutions widened considerably. In some sectors of the capital markets, particularly in the credit sectors, trading came to a complete halt and some securities were unable to trade at all or at any price. The Dow Jones Industrial Average ended up down more than 450 points on the day.

Thursday night came the announcement from Hank Paulson and Ben Bernanke that the government would seek permission from Congress to begin to purchase mortgage-backed securities from various financial institutions, hopefully thereby freeing up their balance sheets so that they can start to lend again. The amount of authorization sought is going to be quite large, maybe as much as $700 billion. Simultaneously, the Treasury announced a new program to guarantee the principal value of registered money market funds. The Federal Reserve provided more liquidity to the primary dealers and banks through new programs to purchase both agency discount notes and asset-backed commercial paper. Finally, the Securities and Exchange Commission ("S.E.C.") banned the short-sale of the common stock for approximately 800 financial institutions through October 2nd.

The net result of all of these actions is that the equity markets soared on Friday, September 19th 2008 and there seemed to be a bit more sanity in the money market sector. Some credit-default swaps narrowed dramatically and the rush for the safety of Treasuries abated somewhat. All in all, it was quite an end to a most stressful and trying week.

The New York Times helped to put the week in perspective with the quote: "In the end, the market closed on Friday at nearly the same price it did last week before all the mayhem. An e-mail message circulating around Wall Street on Friday carried the subject line: “If you took the week off ... you didn’t miss anything.”"