David Wessel - In Fed we trust: Ben Bernankes war on the great panic

A t the beginning of October 2008, after some of the toughest weeks of the Great Panic, the lines in Ben Bernankes face and the circles under his eyes offered evidence of more than a year of seven-day weeks and conference calls that stretched past midnight. Sometimes all that seemed to keep Bernanke going was the constantly restocked bowl of trail mix that sat on his secretarys desk and the cans of diet Dr Pepper from the refrigerator in his office. But the balding, bearded chairman of the Federal Reserve managed a smile as he confided that he had a title for the book he would write someday about his watch as helmsman of the world economy: Before Asia Opens

The phrase was a reference to the series of precedent-shattering decisions that Bernanke and others at the Fed and Treasury had been forced to make with insufficient sleep and inadequate preparation on Sundays so they could be announced before financial markets opened Monday morning in Asia, half a day ahead of Washington and New York.

Before Asia Opens was not a laugh line. The subprime mortgage mess was made in America, and that meant the U.S. government was forced to lead the cleanup. Ben Bernanke had more immediate power to do that than any other individual. The president of the United States can respond instantly to a missile attack with real bullets; he cannot respond instantly to financial panic with real money without the prior approval of Congress. But Bernanke could and did.

Yet the United States had become so dependent on the flow of money from abroad and the business of American financial institutions was so intertwined with those overseas that Bernanke didnt have the luxury of waiting until the sun rose over Washington to make decisions and pronouncements. Hence the subject line Goldman Sachs economists put on one of their weekly e-mails: Sunday is the new Monday.

There was the Sunday in March 2008 when the Federal Reserve shattered seventy years of tradition and lent $30 billion to induce JPMorgan Chase to buy Bear Stearns, a flailing investment bank the Fed neither regulated nor officially protected.

And the Sunday in August 2008 when Bernanke and Treasury Secretary Henry Paulson, the nations self-appointed investment banker in chief, decided to seize Fannie Mae and Freddie Mac, the government-sponsored, shareholder-owned mortgage giants that had borrowed heavily from abroad.

And the Sunday in late September 2008 when Bernanke and his Wall Street field marshal, Timothy Geithner, then president of the Federal Reserve Bank of New York, pressured the Federal Deposit Insurance Corporation to invoke an emergency law to subsidize Citigroups attempt to strengthen itself by acquiring Wachovia.

Yet no Sunday of the Great Panic would prove as consequential and controversial as September 14, 2008, the day Bernanke, Geithner, and Paulson allowed Lehman Brothers to fail after a desperate search for someone to buy it.

The government-sanctioned bankruptcy of a Wall Street firm founded before the Civil War marked a new phase in the Great Panic, a moment when financial markets went from bad to awful. The Wall Street Journal dubbed it the Weekend That Wall Street Died. Lehmans bankruptcy was the largest in U.S. history. The financial market reaction was ugly. At the end of trading on Monday, the Dow had plummeted over 500 points, its biggest one-day drop since September 17, 2001, when trading resumed following the 9/11 attacks. While financial giants led the way down Goldman Sachs stock lost 19 percent, Citigroup 15 percent every major sector on the S&P 500 index posted a loss. Other economic indicators were also negative: in anticipation of a global slowdown, oil prices plunged, while spooked investors sent the price of supersafe Treasury bills soaring. In a sign of what was coming, dozens of traders crowded around the specialists who trade American International Group, Americas largest insurance company, on the New York Stock Exchange floor as Mondays trading began. AIG shares, which had closed on Friday at $12.14, opened Monday at $7.12 and ended the day at $4.76.