The Week Wall Street Died. On Monday, September 15th, Lehman Brothers filed for the largest bankruptcy in U.S. history ($600B+ assets). The government let them fail, hoping to reduce moral hazard. The result was global panic.
By Tuesday, AIG—the insurer of the world's financial system via CDS—was on the brink. The Fed stepped in with an $85B revolving credit facility, effectively nationalizing the company.
The Real Panic: The Reserve Primary Fund, a money market fund considered 'as good as cash', broke the buck (NAV fell to $0.97) due to Lehman exposure. This triggered a $140B run on money market funds, freezing the commercial paper market. The gears of capitalism have ground to a halt.