De-Leveraging the Credit Markets
Financial institutions across the United States are scrambling for cash as the bankruptcy of Lehman Brothers, the acquisition of Merrill Lynch by Bank of America, and AIG's troubled balance sheet spread fears of systemic risk. The overnight lending rate controlled by the Federal Reserve jumped to nearly 7% from the target rate of 2%, the largest spread in nearly 20 years. The Fed injected $70bn into the market but the Dow Jones Industrial Average ignored the emergency measures and lost 500 points, the largest decline since September 11, 2001.
Snapshot asks, was yesterday's capitulation a new phase of deleveraging in credit markets?