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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
risk and business from the guys on Wall Street that were at the epicenter of the prob-
lem. And that is a good measure, classic measure of incipient panic.” In an interview
in December , Geithner said that “none of [the biggest banks] would have sur-
vived a situation in which we had let that fire try to burn itself out.”
Fed Chairman Ben Bernanke told the FCIC, “As a scholar of the Great Depres-
sion, I honestly believe that September and October of was the worst financial
crisis in global history, including the Great Depression. If you look at the firms that
came under pressure in that period . . . only one . . . was not at serious risk of fail-
ure. . . . So out of maybe the , of the most important financial institutions in the
United States, were at risk of failure within a period of a week or two.”
As it had on the weekend of Bear’s demise, the Federal Reserve announced new
measures on Sunday, September , to make more cash available to investment banks
and other firms. Yet again, it lowered its standards regarding the quality of the collateral
that investment banks and other primary dealers could use while borrowing under the
two programs to support repo lending, the Primary Dealer Credit Facility (PDCF) and
the Term Securities Lending Facility (TSLF). And, providing a temporary exception to
its rules, it allowed the investment banks and other financial companies to borrow cash
from their insured depository affiliates. The investment banks drew liberally on the
Fed’s lending programs. By the end of September, Morgan Stanley was getting by on
. billion of Fed-provided life support; Goldman was receiving . billion.
But the new measures did not quell the market panic. Among the first to be di-
rectly affected were the money market funds and other institutions that held
Lehman’s billion in unsecured commercial paper and made loans to the company
through the tri-party repo market. Investors pulled out of funds with known expo-
sure to that jeopardy, including the Reserve Management Company’s Reserve Pri-
mary Fund and Wachovia’s Evergreen Investments.
Other parties with direct connections to Lehman included the hedge funds, in-
vestment banks, and investors who were on the other side of Lehman’s more than
, over-the-counter derivatives contracts. For example, Deutsche Bank, JP
Morgan, and UBS together had more than , outstanding trades with Lehman
as of May . The Lehman bankruptcy caused immediate problems for these OTC
derivatives counterparties. They had the right under U.S. bankruptcy law to termi-
nate their derivatives contracts with Lehman upon its bankruptcy, and to the extent
that Lehman owed them money on the contracts they could seize any Lehman collat-
eral that they held. However, any additional amount owed to them had to be claimed
in the bankruptcy proceeding. If they had posted collateral with Lehman, they would
have to make a claim for the return of that collateral, and disputes over valuation of
the contracts would still have to be resolved. These proceedings would delay payment
and most likely result in losses. Moreover, any hedges that rested on these contracts
were now gone, increasing risk.
Investors also pulled out of funds that did not have direct Lehman exposure. The
managers of these funds, in turn, pulled billion out of the commercial paper
market in September and shifted billions of dollars of repo loans to safer collateral,
putting further pressure on investment banks and other finance companies that de-
