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SEPTEMBER : THE BANKRUPTCY OF LEHMAN                          


         ernment’s position had been made perfectly clear at the meeting at the Fed earlier in
         the day. 
            Following that call, McDade advised the board that Lehman would be unable to
         obtain funding without government assistance. The board voted to file for bank-
         ruptcy. The company filed at : A.M. on Monday morning. 

                                    “A CALAMITY”
         Fed Chairman Bernanke told the FCIC that government officials understood a
         Lehman bankruptcy would be catastrophic:

              We never had any doubt about that. It was going to have huge impacts
              on funding markets. It would create a huge loss of confidence in other
              financial firms. It would create pressure on Merrill and Morgan Stanley,
              if not Goldman, which it eventually did. It would probably bring the
              short-term money markets into crisis, which we didn’t fully anticipate;
              but, of course, in the end it did bring the commercial paper market and
              the money market mutual funds under pressure. So there was never any
              doubt in our minds that it would be a calamity, catastrophe, and that,
              you know, we should do everything we could to save it. 

            “What’s the connection between Lehman Brothers and General Motors?” he
         asked rhetorically. “Lehman Brothers’ failure meant that commercial paper that they
         used to finance went bad.” Bernanke noted that money market funds, in particular
         one named the Reserve Primary Fund, held Lehman’s paper and suffered losses. He
         explained that this “meant there was a run in the money market mutual funds, which
         meant the commercial paper market spiked, which [created] problems for General
         Motors.” 
            “As the financial industry came under stress,” Paulson told the FCIC, “investors
         pulled back from the market, and when Lehman collapsed, even major industrial cor-
         porations found it difficult to sell their paper. The resulting liquidity crunch showed
         that firms had overly relied on this short term funding and had failed to anticipate
         how restricted the commercial paper market could become in times of stress.” 
            Harvey Miller testified to the FCIC that “the bankruptcy of Lehman was a catalyst
         for systemic consequences throughout the world. It fostered a negative reaction that
         endangered the viability of the financial system. As a result of failed expectations of
         the financial markets and others, a major loss of confidence in the financial system
         occurred.” 
            On the day that Lehman filed for bankruptcy, the Dow plummeted more than 
         points;  billion in value from retirement plans, government pension funds, and
         other investment portfolios disappeared. 
            As for Lehman itself, the bankruptcy affected about , subsidiaries and affiliates
         with  billion in assets and liabilities, the firm’s more than , creditors, and
         about , employees. Its failure triggered default clauses in derivatives contracts,
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