US stocks were only 20% below peak before Lehman's collapse
Markets had assumed Lehman would be rescued like Bear Stearns
Multiple crises occurred simultaneously (Lehman, Merrill Lynch, AIG)
Credit crisis had been ongoing for over a year
Market participants believed damage would be limited due to preparation time
Many compared crisis to 2000 dotcom bust, underestimating severity
Opinion
The market's complacency before Lehman's collapse reveals deeply troubling misjudgments. The assumption that all major financial institutions would be rescued shows dangerous moral hazard, while the comparison to the dotcom bust demonstrates a fundamental misunderstanding of systemic risk. Most concerning is how even after months of warning signs, the market remained unprepared for the interconnected nature of financial institution failures.
Core Sell Point
The widespread underestimation of Lehman's collapse and its systemic implications, despite clear warning signs, suggests a dangerous level of market complacency that could lead to similar misjudgments in future crises.
This is how we reported the day that Lehman went bust. The importance of the moment was obvious at the time. The credit crisis had been grinding on for more than a year, but by September 2008 US stocks were scarcely 20 per cent below their peak. That yardstick misled many into believing the crisis was nothing compared to the dotcom bust of 2000. Lehman was a huge deal, of course. But we also had to cram in the fire sale of Merrill Lynch, and the desperate straits for AIG, which was seeking a bailout after unwisely guaranteeing much of the credit that had gone bad. That is why the word “Lehman” does not hit you. It may seem obvious now that the market would fall on this news; but investors had assumed that there would be a rescue for Lehman, as there had been for Bear Stearns earlier in the year. Even if not, Lehman and its creditors and investors had had months to prepare for what had just happened. Some people we talked to that day were panicking; but many assumed that precautions had been taken, and damage would be limited. They were wrong.
