Lehman Crisis Contagion

About Lehman Crisis Contagion

The Lehman bankruptcy triggered global contagion. Money market funds broke the buck as the Reserve Primary Fund lost money on Lehman commercial paper. This caused a run on money market funds. The Federal Reserve guaranteed money market funds. Commercial paper markets froze. Companies could not roll over short term debt. The TED spread, a measure of bank lending stress, reached record levels. LIBOR spiked. Central banks coordinated interest rate cuts. The Federal Reserve opened swap lines with foreign central banks to provide dollar liquidity. Congress passed TARP, originally requesting 700 billion to buy toxic assets, which was later used for capital injections into banks. The contagion demonstrated how interconnected the global financial system had become.