Also, Lehman brothers was one of the biggest commercial paper hangers on Wall Street. They placed more CP daily than almost any other firm. Suddenly that conduit was closed. So when the outstanding CP came due Lehman wasn't there to roll it. A lot of stuff happened very quickly and can be called a perfect storm of defaults.
Yes, all true.
I got into disagreements with some other FR members who thought that MA/NY coming down on the various banks for the ARS scam was “anti-free market” - when my central point was that advertising ARS as “same as cash” was the central point of the fraud. What the market showed us in Sep/Oct of 2008 was this: There is nothing, NOTHING that is “same as cash.” When everyone wants cash “right now!”, there’s nothing like cash, and in fact, when everyone demands cash “right now!”, there’s going to be nowhere near enough cash to convert all these instruments to cash. That’s what happened in 1907, which was what led to the creation of the Fed in the first place, BTW.
If there’s anything I’d try to convince everyone on FR of after 2008’s melt-down, it is this: ANYONE who is telling you that XYZ fund/bond/security/etc is “the same safety/liquidity/whatever as cash” - RUN, do not walk in the other direction. An honest advisor/broker will spell out the liquidity risk in instruments, a dishonest one will use terms like “same as cash.” There’s no shortage of small businesses who lost their business because they could not get at their money to pay their bills because the ARS market just evaporated overnight, and so did the liquidity. Suddenly, instruments that were supposed to be “same as cash” ended up being illiquid for 30 to 90 days. When you’re on a tight budget, as most small businesses are, they simply cannot afford to have their cash inaccessible for that amount of time.
As you point out, Lehman was one of the biggest CP paper peddlers in the world (not just Wall Street). When they went belly-up, suddenly everyone got a hard lesson in what is cash and what isn’t.
Now, what we have is a market with fewer, bigger, even bigger than “too big to fail” outfits in the world, with no cessation of stupid risk-taking, ie, the Lehman-style risk has amplified, not diminished.