On the weekend of September 13, 2008, when then-New York Fed president Timothy Geithner called a special meeting to discuss the future of Lehman Brothers, nobody knew how the bank's failure would affect other market participants. It was impossible, during the course of a weekend, to figure out the complex web of bilateral bets the bank was involved in.
In the end, the effect of Lehman's bankruptcy on the credit derivatives market was much bigger than the losses on those contracts alone. Market participants started looking at each other with heightened scepticism and the market seized up, causing a cascade of losses through the banking system that is still not even close to being resolved....
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