A look at the problems exposed by the events that day and what investors, bankers have learned since then
By now it is widely understood that
- the global financial industry was overleveraged, that the U.S. mortgage market was rife with loans that wouldn’t be repaid, that investors and
- financial institutions everywhere were paying high prices for highly rated securities that were actually extremely risky.
.. But at the time that larger meaning wasn’t evident, even to financial industry executives and the central bankers charged with overseeing them. The economy was growing at a near-4% clip and stocks were hitting new highs. Many still believed the mortgage problems would blow over.In the minds of many at the time, what Wall Street began grappling with on Aug. 9 was a liquidity outage in the trading of risky securities, one that might be solved with repeated infusions of central-bank money... On Aug. 9, for instance, a spike in short-term interest rates such as Libor prompted central bankers to spring into action, pouring funds into the market and promising further support. Those efforts were successful—but they didn’t create incentives for capital raising and deleveraging, which is what the markets needed most desperately.