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Friday, March 29, 2024

Too Big to Fail: Fed Intervention and the Market

Courtesy of Doug Short.

Today is the third anniversary of the day Lehman Brothers filed for Chapter 11 bankruptcy protection. It remains the largest bankruptcy filing in U.S. history with Lehman holding over $600 billion in assets.

The Federal Reserve had begun intervention in our failing economy several months before the Lehman collapse. We have an veritable alphabet soup of tactical strategies intended to stave off economic disaster: PDCF, TALF, TARP, etc. But shortly after the bankruptcy filing, the Fed really swung into high gear. The Fed Funds Rate (FFR) fell off a cliff and soon bounced in the lower half of the 0 to 0.25% ZIRP (Zero Interest Rate Policy). The thud to the FFR bottom coincided with the first of two rounds (so far) of quantitative easing.

If a picture is worth a thousand words, this chart needs little additional explanation — except perhaps for those who are puzzled by the Jackson Hole callout. The reference is to Chairman Bernanke’s speech at the Fed’s 2010 annual symposium in Jackson Hole, Wyoming. Last year Bernanke strongly hinted about the forthcoming Federal Reserve intervention that was subsequently initiated in November of 2011, namely, the second round of quantitative easing, aka QE2. The 2011 August Jackson Hole event gave us less concrete expectations. But time will tell.

 

 

Let’s conclude this commemoration of the demise of Lehman Brothers with a couple of third anniversary facts:

  • The S&P 500 closed at 1228.90 on the day of the bankruptcy filing. Today’s close of 1209.11 is a mere 6.9% below the September 15, 2008 close. Of course, the market has been a spooky roller-coaster ride in between.
  • The yield on the 10-year note was 3.84% on the day of the bankruptcy. Today the 10-year yield surged to 2.09%, up from the all-time closing low of 1.93% set last Friday.
  • The past three years have been an exciting time for professional traders and their seasoned amateur counterparts. And it’s been a dream-come-true for institutional HFT (high frequency trading) with computerized algorithms.

    On the other hand, savers — those benighted souls looking for income from CDs, Treasury yields, and FDIC insured money markets — have had a rude introduction to the new reality, one that will apparently be with us for a very long time.

     

     

     

     

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