Watching financial markets armageddon

My weekly credit update on September 19, 2008, the most infamous 7 days in the history of finance. We sat on the trading floor in amazement as everything seemed to implode. 

Some moments I'll remember during that week: seeing the bright red text flash up on my Bloomberg terminal 'LEHMAN BROTHERS FILES FOR CHAPTER 11 BANKRUPTCY' and pondering the chaos those words would unleash;and watching the HBOS stock price with the traders late one night, I ducked off to the toilet. In those two minutes, the bank lost half of its GBP12b market value, and got it all back when news of a bailout from Lloyds emerged - the world had gone mad ! 

I got really afraid when the trading floor received an email telling us, in essence, to hold off on doing any business with Macquarie Bank. Could the bank down the road really be on the brink of collapse ? What the hell was going on!! The embargo was brief, if at all, and Macquarie is battling on but in that environment of sheer panic, no one knew who to trust. 

Weekly credit update from the Syndicate desk as follows…in case you missed it!! 

Sheer terror gripped financial markets this week as some global financial heavyweights met their end.  The drama began after midnight on Monday when the Fed declined to step in and save Lehman Brothers, forcing the 158yr old firm into bankruptcy. As Lehman’s fate was sealed, Bank of America snapped up a nervous Merrill Lynch. 

Insurance giant AIG, with its global web of interests was deemed too big to fail. It was saved from collapse at the last minute by a US$85b Fed package. In the UK regulators hastily arranged a £12b tie-up between HBOS and Lloyds, following the collapse of HBOS’s stock.

Markets went mad with massive movements in anything tradeable. Swap spreads and short term lending rates spiked as banks hoarded cash, forcing Central banksto inject funds. CDS spreads gapped as traders frantically reacted to headlines. Globally, investors shunned risk seeking refuge in Govt Bonds and gold.  Australian markets felt the pain, with banking stocks heavily sold off. Macquarie Bank’s senior CDS traded at unpresedented wides (+1000) as its stock price plummeted.

With financial markets in chaos, shortsellers were relentless; targeting ailing names such as WaMu and the brokers Morgan Stanley and Goldman Sachs.   Despite their apparent liquidity, firms such as Morgan Stanley realised that their fate is not in their hands, but in those of their counterparties.

Once the dust settles, attention will turn to the disposal of assets, and dealing with the headaches created as the intricate web of structured credit exposures are unwound. All eyes will be on policymakers, who will be instrumental in coordinating short term fixes and setting long term guidelines as global banking enters a highly regulated future.