Systems

Abstract

On September 16, 2008, President Bush sat down in the Roosevelt Room of the White House with Secretary of the Treasury Henry Paulson and Chairman of the Federal Reserve System Ben Bernanke. They discussed the events of the previous days. Lehman Brothers had filed for Chapter 11 bankruptcy protection the day before. In and of itself, the largest bankruptcy in US history was a dramatic event. But the unanticipated ripple effects were what really worried Paulson and Bernanke and led them to propose measures to the president that were previously unthinkable. The Lehman bankruptcy had led to the failure of a money-market fund that owned large sums of Lehman debt securities. This in turn had led to a general collapse of trust and a money-market run, which meant many large (non-financial) companies became anxious because they used this source of finance to fund their day-to-day operating expenses, such as paying their employees and their suppliers. The entire economy threatened to come to a standstill. After he had listened to the men, agreed to the proposed measures, and was concluding the meeting, President Bush put into words the precise perplexity which was puzzling many of us: ‘Someday you guys are going to need to tell me how we ended up with a system like this.’¹