As Credit Crisis Spiraled, Alarm Led to Action - Morningbull
As Credit Crisis Spiraled, Alarm Led to Action - Morningbull
As Credit Crisis Spiraled, Alarm Led to Action - Morningbull
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With the government refusing <strong>to</strong> offer the same financial guarantees that<br />
helped save Bear Stearns, Fannie Mae and Freddie Mac, efforts on Saturday<br />
<strong>to</strong> find a buyer for Lehman Brothers had failed.<br />
Sunday was spent preparing <strong>to</strong> deal with Lehman’s bankruptcy, which was<br />
announced Monday morning. Merrill Lynch, fearing it would be next, had<br />
agreed <strong>to</strong> be bought by Bank of America. The American International Group<br />
was near collapse. (It would be rescued with an $85 billion loan from the<br />
Federal Reserve on Tuesday evening.)<br />
With government policy makers appearing <strong>to</strong> careen from crisis <strong>to</strong> crisis,<br />
the Dow Jones industrial average plunged 504 points on Monday, Sept. 15.<br />
Panic was in the air.<br />
At those weekend meetings, Wall Street executives and federal officials<br />
talked about the possibility of contagion — that the Lehman bankruptcy<br />
might set off so much fear among inves<strong>to</strong>rs that the market “would pivot <strong>to</strong><br />
the next weakest firm in the herd,” as one federal official put it.<br />
That firm, everyone knew, was likely <strong>to</strong> be Morgan Stanley, whose s<strong>to</strong>ck had<br />
been dropping since the previous Monday, Sept. 8. Within three hours on<br />
Tuesday, Sept. 16, Morgan Stanley shares fell another 28 percent, and the<br />
rising cost of its credit-default swaps suggested inves<strong>to</strong>rs were predicting<br />
bankruptcy.<br />
To allay the panic, the firm decided <strong>to</strong> report earnings a day early — after<br />
the market closed Tuesday afternoon instead of Wednesday morning. The<br />
profit was terrific — $1.425 billion, just a 3 percent decline from 2007 —<br />
and the thinking was that would give inves<strong>to</strong>rs the night <strong>to</strong> absorb the good<br />
news.<br />
“I am hoping that this will generally help calm the market,” Morgan<br />
Stanley’s chief financial officer, Colm A. Kelleher, said in an interview late<br />
that afternoon. “These markets are behaving irrationally. There’s a lot of<br />
fear.”<br />
The Spreading Contagion<br />
But contagion was already spreading. The problem posed by the Lehman<br />
bankruptcy was not the losses suffered by hedge funds and other inves<strong>to</strong>rs