Finance September 2008

September 2008 stands as a pivotal month in modern financial history, marking the intensification of the global financial crisis. What began as a subprime mortgage crisis in the United States rapidly spiraled into a systemic meltdown, threatening the very foundations of the global financial system.

The month opened with Lehman Brothers, a venerable Wall Street investment bank, teetering on the brink of collapse. Heavily invested in mortgage-backed securities, Lehman was unable to weather the escalating losses as the housing market deteriorated. Negotiations for a bailout orchestrated by Treasury Secretary Henry Paulson faltered, and on September 15th, Lehman Brothers filed for bankruptcy, the largest in US history. This event sent shockwaves through global markets. Trust evaporated, interbank lending froze, and the Dow Jones Industrial Average plunged.

The Lehman bankruptcy triggered a chain reaction. American International Group (AIG), the world’s largest insurance company, was revealed to be deeply exposed to the crisis through credit default swaps, insurance contracts that protected investors against losses on mortgage-backed securities. The government, fearing AIG’s failure would trigger a complete collapse of the financial system, intervened with an $85 billion bailout on September 16th, effectively nationalizing the company. This unprecedented intervention highlighted the severity of the situation.

Adding to the turmoil, Washington Mutual (WaMu), the largest savings and loan association in the United States, failed on September 25th and was seized by the government. Its assets were subsequently sold to JPMorgan Chase. The FDIC intervened due to WaMu’s heavy exposure to risky mortgages, further demonstrating the widespread contagion within the financial sector.

The crisis was not confined to the United States. European banks, heavily invested in American mortgage-backed securities, also faced mounting losses and liquidity problems. Governments across Europe were forced to step in and provide emergency funding to their financial institutions to prevent systemic collapse.

In response to the escalating crisis, the US government proposed a $700 billion bailout package, known as the Troubled Asset Relief Program (TARP), intended to purchase toxic assets from banks and stabilize the financial system. The initial proposal faced resistance in Congress, leading to further market volatility before eventually being passed in October.

September 2008 served as a stark reminder of the interconnectedness of the global financial system and the devastating consequences of unchecked risk-taking. The events of that month triggered a global recession, led to significant job losses, and had a profound and lasting impact on the global economy.