2008 Market Crash Should be Investigated

Worth Readingby Jeff Lukens

Almost two years after the mortgage crisis and stock market crash, no one seems to wonder about the "September surprise" that shifted the 2008 presidential election to an unknown leftist politician who had been elected to the Senate only two years before. A pulp-fiction writer could hardly have created a more contrived and bizarre story. But this was not make-believe. No, it is now our own gritty reality show that we only wish we could turn off.

The week of Sept. 15, 2008, was a debacle of huge proportions. On Monday, Lehman Brothers filed for bankruptcy while other lending institutions lined up like dominoes teetering on the edge of bankruptcy. But the week was hardly over. On Thursday, an electronic run on the banks occurred. In an unprecedented move, the Treasury and the Federal Reserve had to act together to stop what had become a full-fledged panic. On Saturday, Sept. 20, The Wall Street Journal recounted events of that previous Thursday:

“Instead of lining up at bank windows, investors were unloading financial assets on their PCs. Credit markets had seized up, to the point that even routine daily settlements had stopped until banks had the actual securities or cash in hand.”

“Investors were rushing out of these [Treasury and Federal Reserve] funds -- $105 billion out of $1.8 trillion on Thursday alone -- which in turn caused the funds to redeem their commercial paper investments.”

“Issuers of that paper then had to find new funders, which in a pinch are banks. But jittery banks were refusing to accept paper from even worthy companies amid the panic, creating a larger credit breakdown. In response, Treasury will now insure nonbank money-market fund deposits for the next year, to slow money-fund redemptions.”

For such a large and coordinated exodus of funds to occur in U.S. markets, something more than individual “investors” at their PCs had to be in play. Large and well-managed hedge and mutual funds were undoubtedly behind much of the move.

A few months later on a C-Span interview, Rep. Paul Kanjorski, House Capital Markets Subcommittee Chair, described that day: More: http://worthreading.ning.com/profiles/blogs/2008-market-crash-should-be