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16th September 2008 Financial Crisis This day in history

Rather than a specific day in history this weeks “day in history” blog will focus on the impact of the infamous financial crisis of 2008, or more specifically the beginning of the crisis. On September the 16th it was announced that the insurer AIG, who was a big player in the CDS markets suffered a liquidity crisis on the back of its credit rating being downgraded.  Following on from this, as many will know AIG was essentially bailed out, the biggest bailout of its kind in history. Specifically the FED created a credit facility of up to $85 billion in exchange for 79.9% stake in AIG equity. The FED was also given the right to suspend dividends to previously issued common and preferred stock.

 

It is also the case that on September the 16th that the Reserve Primary Fund (large money market fund) lowered its share price to less that $1 due to its large exposure to Lehman debt securities. In the end had it not been for the Fed’s intervention into the money market then a market collapse would have been a highly likely outcome. This is an often overlooked factor of the financial crisis as Central banks across the world stepped in and stabilised markets at a time when there seemed like there was no end in sight. Many are also quick to point the finger at China recently for banning short selling but it is the case that short selling of financial stocks was in fact banned by the FSA in the UK and by the SEC in the US during this heightened period of market volatility.

 

Looking at the technical aspects of the market we will primarily be focusing on the USD and specifically on EURUSD however this global meltdown impacted all asset classes. For example the TED Spread which is a key indicator of credit risk, increased on a massive scale in 2008. For those that are unaware the TED spread is the difference between the (“risk free”) three month US T-bill rate and the three month LIBOR (this is a rate which bank will typically lend between each other). Coming back to EURUSD (specifically the weekly chart) we can see that the market was already trending lower from the topping formation in early-mid 2008 and although there was a slight rally following the week of mayhem, the market continued its push down. Clearly once the panic died down investors sought the relative safety of Dollars. 

 

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