The day Lehman died

September has proved to be one of the most gripping months in stock market history. Lehman Brothers filed for bankruptcy protection, Merrill Lynch sold itself to Bank of America for US$50bn and Fannie Mae and Freddie Mac followed by AIG were bailed out by the American government.

The drama began when Lehman Brothers was left in the cold by the US government. After refusing to rescue the 158 year old investment bank, the government ordered Wall Street to solve its own problems.

Ten major banks agreed to create an emergency fund of US$70bn to US$100bn to protect them from the chain reaction that was sure to follow from the Lehman failure.

Although the government’s initial message to Wall Street was to clean-up its own mess, the Federal Reserve was forced to step-in and resolve the banking crisis. The Bush administration put forward a US$700bn rescue package to Congress for the troubled financial sector.

The Fed also announced that the last men standing, Morgan Stanley and Goldman Sachs will become traditional bank holding companies. The final two investment banks will be under supervision of bank regulators.

This year has already seen the Treasury and Federal Reserve step-in to bring Bear Stearns and JP Morgan Chase together. The Fed’s response to the Lehman fallout is to broaden the terms of the emergency load programme, a move which many are saying will put tax payer’s money at risk.