Our financial system is crumbling this week.

[slide_into_first]

That's more corporate propaganda imo.

[longhornbaseball]

I think the mistake was not letting other firms fail before Lehman. There was no clear policy on who would be bailed out and who would be allowed to fail. This caused chaos in the markets, because no one knew who was next.

Over the past 6 months, 25% of trading days have seen the S&P change by 2% or greater. Good time to be an options trader.

[slide_into_first]

Here is what should have been done

http://www.bloomberg.com/news/2011-11-0 ... risis.html

[vinsanity]

But letting Lehman fail is what sparked the sell off and lead to the credit crunch right? Banks literally couldn't lend money because they drop caused them to be over-leveraged and they essentially couldn't cash some checks was my understanding.

[Freed Roger]

Over the past 6 months, 25% of trading days have seen the S&P change by 2% or greater.

I wonder if it is this sort of teeter-tottering going on



US Econony, we will miss your bus as we knew it. But maybe it can be a better place as a result.

[longhornbaseball]

But letting Lehman fail is what sparked the sell off and lead to the credit crunch right? Banks literally couldn't lend money because they drop caused them to be over-leveraged and they essentially couldn't cash some checks was my understanding.

I didn't live it, so someone else like greenback44 or JoD might have a better explanation, but...

Banks were over-leveraged for a long time before Lehman. The amount of leverage on a bank's balance sheet is its ratio of assets to equity (also called capital), and it is a measure of how susceptible a company is to changes in its asset base. So if a bank is leveraged at 10:1 and its assets decline in value by greater than 10%, its capital is wiped out and it is bankrupt. Lehman was leveraged at over 30:1 so when its sub-prime assets turned toxic it was quickly rendered insolvent. No one knew how exposed other banks were to toxic assets on their balance sheets, due to accounting gimmicks and off balance sheet items such as credit derivatives and special purpose entities. This created an atmosphere of fear and uncertainty because banks couldn't reliably measure the risks of lending to other banks, even in short term markets. This cause Libor (the rate banks charge each other for Eurodollar deposits) and commercial paper (financing tool corporations use to meet short term obligations such as payroll) markets to seize up. This might be what you're thinking of when you say banks couldn't cash checks. Banks can always settle payments (cash checks) in the US interbank market because the Federal Reserve will always lend them bank reserves (also called "fed funds") if they can't obtain them from other banks.

The TED-Spread gives a good indication of how the Lehman bankruptcy (9/15) affected the interbank credit markets. This shows that the cost of borrowing sharply increased as a result of the uncertainty.

[SHOW]

[vinsanity]

Lehman was leveraged at over 30:1 so when its sub-prime assets turned toxic it was quickly rendered insolvent. No one knew how exposed other banks were to toxic assets on their balance sheets, due to accounting gimmicks and off balance sheet items such as credit derivatives and special purpose entities. This created an atmosphere of fear and uncertainty because banks couldn't reliably measure the risks of lending to other banks, even in short term markets.

Gotcha, ya this was my over-simplified idea of it.

This might be what you're thinking of when you say banks couldn't cash checks. Banks can always settle payments (cash checks) in the US interbank market because the Federal Reserve will always lend them bank reserves (also called "fed funds") if they can't obtain them from other banks.

I shoulda been more specific when I said checks. Money Markets. My understanding of most money market accounts is that the returns are slightly higher than regular interest gaining savings/checking accounts because it's almost like a mutual fund. But instead of having to wait for securities to sell or bonds to mature to get the cash, the bank 'credits' you the money and then waits for the sale to clear. But between the Lehman failure and bailouts the banks weren't really offering credits to anyone.

[longhornbaseball]

I shoulda been more specific when I said checks. Money Markets. My understanding of most money market accounts is that the returns are slightly higher than regular interest gaining savings/checking accounts because it's almost like a mutual fund. But instead of having to wait for securities to sell or bonds to mature to get the cash, the bank 'credits' you the money and then waits for the sale to clear. But between the Lehman failure and bailouts the banks weren't really offering credits to anyone.

Yeah, this is right. There was a run on money market funds which forced them to liquidate assets at a loss to meet payouts. This caused the net asset value of the funds to drop below a dollar. It's really hard to lose money when the typical maturity of your investments is only a few months, but the increase in credit standards caused the value of even short duration securities to plummet.

[longhornbaseball]

This is the best. Ron Paul in the lower middle is my favorite.

[heyzeus]

Unemployment finally drops below 9% for first time in 3 years