Carney: What made things more challenging was the Reserve Fund breaking the buck and the number of banks and hedge funds that discovered their collateral at Lehman in Europe was frozen. … What induces panic is thinking you are protected and finding out you are not. That causes institutions to pull in their horns across the board and the system to begin to collapse. … When I was most concerned was as September progressed and there started to be evidence in Europe, Ireland, of bank runs.
The reality begins to sink in that the crisis is far bigger than just the failure of Lehman Bros. While the damage to the Canadian financial sector is still limited, in government and corporate circles, Lehman creates a new urgency. Senior executives and their boards begin preparing for the worst.
de Bever: There was an article on Citigroup in the paper one day … and I said ‘Well, what exposure do we have to Citigroup anyway?’ [My team] said, ‘Give [us] eight hours and we’ll figure it out.’ That shows you – I was sort of flying blind in the sense that we didn’t have the information readily at hand to calculate answers to specific immediate questions.
Leech: The biggest thing you’ve got to concern yourself about in an institution like ours is liquidity. If you get caught where you have to raise cash by selling assets when the world is coming down on you, you are toast. … So although we had, by all of our formulas, lots of liquidity, I remember the fatal discussions of why don’t we just double the liquidity requirement for the sake of it.
By late September – in the heat of a presidential election campaign between Democratic candidate Barack Obama and Republican John McCain – the U.S. government realizes it needs to do something to contain what is quickly becoming a global crisis of confidence. Treasury Secretary Henry Paulson drafts what becomes known as the Troubled Asset Relief Program (TARP), asking Congress for $700-billion to buy toxic assets from financial institutions, giving them badly needed capital. Despite a push from the White House and House Majority Leader Nancy Pelosi, the House of Representatives votes down the plan on Sept. 29. The market’s reaction is violent: The Dow falls 7 per cent that day.
Lindsay: I watched it on TV and I thought, ‘Oh my god, what have they done.’ Because in financial markets the world generally had a perception that if things got really bad, the U.S. could step in and put a floor under it. And what we saw with Nancy Pelosi’s speech [which blamed the problems on “failed Bush economic policies”] was that not only was the U.S. not going to put a floor under it, they didn’t even get it.
Just four days later, Congress votes again, and this time TARP is passed. But investors are already badly shaken. During one extraordinary week, Oct. 6 to 10, the Dow Jones industrial average plummets 18 per cent.
Lindsay: Shit hit the fan – that’s an understatement! You can quote me on that. …The reality is that the month of October, during which we were supposed to refinance, was the single worst month in all of capital markets history.
Nixon: This was totally untested. Nobody knew if any of these things were going to work – if TARP was going to work, if the markets were going to recover, if people were going to start buying bonds again and provide liquidity.
Greg Mills, RBC Dominion Securities:
Getting up and going to work every day was like going into the ring with Mike Tyson. You knew you were going to get the crap kicked out of you.