Too Big to Fail

In 2008, news channels flood with reports about the mortgage crisis and Bear Stearns' forced sale to JPMorgan Chase. With Bear Stearns out of the picture, markets begin to fear the fate of other investment banks. Short sellers zero in on Lehman Brothers as the next vulnerable firm.

Lehman Brothers sees a potential buyer in Korea, but the deal hinges on excluding Lehman's toxic real estate assets. The auction stalls when CEO Dick Fuld insists the Koreans accept the real estate baggage. The lack of a clean asset package kills the deal.

Bank of America appears as the strongest US-based bidder, but buyers are wary without federal backing. Investors and banks want explicit government guarantees before underwriting a rescue. Paulson signals the government won't subsidize acquisitions.

Paulson and Geithner convene the leaders of the largest US banks for a weekend session, urging them to back Lehman. The session looks like it could produce an agreement, but the outcome is uncertain. The sheer pressure reflects how close the system is to collapsing.

Paulson tries to broker a deal with Barclays as a backstop, but British banking regulators block their involvement. With no approval from abroad and no domestic buyers, Lehman loses its last option.

With no buyers remaining, Lehman is forced into bankruptcy. The filing sends tremors through global markets and signals the depth of the crisis. The firm’s collapse triggers a broader financial panic.

Paulson attempts to reassure the media that the decision to let Lehman fail was sound. Nonetheless, stock markets plunge as investors fear further disintegration of the financial system. The Lehman failure reverberates across every corner of the economy.

As Lehman falls, insurance giant AIG teeters and begins to fail. Christine Lagarde warns Paulson against letting AIG fail, underscoring the crisis's reach into Europe. The US Treasury steps in with an $85 billion loan to rescue AIG.

Ben Bernanke argues that Congress must authorize continued Fed and Treasury intervention. With credit drying up, the plan shifts toward buying toxic assets to free up cash for banks. The urgency grows as the financial system threatens to seize up.

Bernanke and Paulson lobby Congress while politics stall on the campaign trail. Senator McCain temporarily suspends his campaign to work on the bailout, prompting threats from Paulson to keep him from interfering. The political drama underscores the bailout's fragile path forward.

After political turmoil, the Troubled Asset Relief Program is created on a second attempt. The plan shifts to mandatory capital injections to banks, with the FDIC chair Sheila Bair involved. Banks agree to the loans, though the legislation stops short of forcing them to use funds to restore consumer credit.

The stock market stabilizes by 2009, signaling the end of the crisis phase. The epilogue notes banks made limited use of the loan money to ease credit conditions, while Wall Street compensation climbs to $135 billion by 2010. The economy begins a slow recovery, but the damages linger.