Monday, September 15, 2008
DJIA Reaction to Lehman Bankruptcy
Today the Dow Jones fell 504 points, and this time it has a clear precipitant—the bankruptcy of Lehman Brothers, the 4th largest investment broker, one that heavily bought in to mortgage securities, and has become the largest bankruptcy in history. The issue is broader than that. For the first time credit default swaps are being triggered, and soon the whole patency of the default swap market (in other words, bond insurance) will be tested. Also, for the first time, some magic wand hasn't been waved to get the bond holders in a financial corporation out of hot water, so swap counterparties are finally on the hook. Apparently Lehman wasn't quite well-connected enough, and a giant has been allowed to die.