Speaking of politics, those who track polls say that McCain’s fate was sealed on Friday, October 10. That is the day the Dow Jones opened 750 points down and McCain said that the U.S. economy was fundamentally sound. Almost immediately, his poll numbers which had been consistently close to Obama’s, sank and never recovered.
If so, blame the Lehman bankruptcy for at least contributing to McCain’s loss, with all the implications that follow. October 10, you recall, was the settlement date for the credit default swaps on Lehman. The dreadful opening of the markets in the U.S. was in anticipation of multi-billion dollar losses by Lehman CDS writers that was estimated to be in the order of $400 billion. It turned out that, thanks to netting, the ultimate payable amount was less than $6 billion. On that news, the Dow Jones recovered, but not McCain’s poll ratings.
The Lehman bankruptcy established a high water mark for the dislocated rates and prices and, in that regard, has become a de facto reference point for the crisis. All market rates and indices have a pre-Lehman and post-Lehman level, with the latter being drastically, at times almost unbelievably, different from the former. The Baltic Dry Index, for example, that measure the cost of shipping goods (as opposed to liquids such as oil and gas) dropped 76% in one month, from about 5,000 to 1150 post-Lehman.
I was away on the week of September 15, with little access to markets. Still, I wrote that Lehman bankruptcy would be an event to remember. I focused on the inability of the Fed to take action because it had reached the limit of its authority, something that Treasury secretary Paulson confirmed and emphasized in a recent interview. But there is more twist to the story. There always is
Why was Lehman allowed to fail? And under what general heading should we classify/archive the event?
I have a few thoughts on the subject. In coming weeks, I will share them with you.