in june 2008, hedge fund manager david einhorn called out lehman on CNBC and publicly stated he was shorting the stock, which at the time, seemed crazy. he looked at the numbers, and concluded that they were illegally cooking their books and defrauding their shareholders (#55). he called bullpucky:

http://www.cnbc.com/id/24984941


most on the street villified him, the NYTimes called him nuts, and a deranged short seller trying to cause a run on the bank.

a couple months later, LEH stock fell 45% in one day, was unable to raise capital, and was under a massive bank run. they tried to sell off lehman to another bank, similar to bear stearns, but the two potential buyers (barclays & bofa) backed out.

after BSC, FNM, & FRE, the gov't got sick of dealing with rescuing banks, and to everyone's surprise, let lehman fail. this was hugely important b/c lehman was a major lynch pin in the daisy chain of the money markets, interbank lending, UST, & credit derivatives.

when they failed, it caused a tsunami of bank runs to occur all throughout the shadow banking system, and simultaneously triggered CDSs on lehman's bonds (lehman was too big to fail, so a lot of people made bets that the gov't would rescue them).


that's *exactly* when this happened: http://board.okayplayer.com/okp.php?az=show_topic&forum=10&topic_id=21388&mesg_id=21388




AIG

a few days later, AIG's unregulated credit default swap hedge fund, which was losing tons to begin with, was suffering due to the bank runs and lack of liquidity caused by the lehman failure. AIG was a big issuer of CDS insurance, and had to make big counterparty payouts on non-performing CDOs & the derivative bets made on lehman's bonds. (this didn't happen with bear, b/c the gov't saved bear stearns' bond holders. fannie and freddie didn't trigger the CDS market either b/c the gov't saved their bondholders too)

the small fund was so heavily levered that it would wipe out a significant portion of the capital AIG is required to have by its regulator, and would trash its credit rating. (see posts #12 & the black swan, #51).

bear and lehman were major shadow bank counterparties, but AIG was much, much, much bigger. the reason many bonds were considered AAA was because the borrowers bought credit insurance from AIG. (bonds were rated not on their intrinsic safety based on cash flow (#5 & #11), but on the credit rating of the counterparty insuring the derivative or bond).

AIG needed to raise billions of dollars in cash by selling assets, but the level of losses and selling throughout the frozen capital markets would have been like an economic 9/11 (#36 & #52-dynamic hedging). it would have made the lehman failure and subsequent bank runs look like a cake walk. (Cramer on the issue: http://www.youtube.com/watch?v=lUnIyH1jVhw)

on top of that, the $400 trillion derivatives market would have gone nuclear.


so the gov't had no choice: they nationalized AIG, and started the TARP to keep the securitized debt market, & the banks, from imploding further.


but the system was too far gone: goldman and morgan stanley gave up on the shadow banking model, LIBOR and the TED spread went into the stratosphere, Iceland went bankrupt, the markets crashed, a few stock markets across the globe were shut down, unemployment began to take off, the balance of power in the future 2008 US presidential election shifted dramatically, and all kinds of other nonsense that everyone would like to forget happened.


and we've been in a global depression ever since.


the process we are going through now is the slow deleveraging and purging of the innovations (and sins) of securitization and the shadow banking system, which will take years.