Lately it is hard to avoid talk about the Lehman “Moment”. It almost makes you think that the world fell apart the weekend Lehman filed for bankruptcy protection. But that’s not the case at all. Stocks sold off that first day, bounced the second, had another sell off, but by the Thursday, they actually closed higher than the Friday before Lehman filed. From there they generally went down. Often painfully swiftly, though the rallies were just as sharp. It wasn’t until March of the following year that we hit the lows. A full 6 months after Lehman. IG9 was trading at the time. It was not as wide as it had been right ahead of Bear Stearns weekend as we came into the Lehman weekend. After an initial spike to new highs (the IG200 hats were finally worth something), IG9 rallied hard and got back to levels tighter than prior to Lehman’s failure.
Although it has become popular to blame the entire sell-off on Lehman, it took a long time for the contagion to play out. There were many fits and starts, and it is a little hard to believe that all of the bad economic data was directly a result of Lehman. It was the catalyst, but it was an overlevered system that caused the markets to fail. A more robust system wouldn’t have failed. For all of the talk about how Europe needs to TARP its banks, it took a long time for that to have any lasting impact on stock prices. It may have supported them, but the market continued to decline long after we had gotten TARP’d.
Greece clearly didn’t default today, but there is growing sentiment that it should and it will. Maybe it is October, maybe they kick the can further. In any case, until the fundamentals are solved, we will continue to rally on belief that all is good, and sell-off on fears of contagion. Just like we did after Lehman. It was a long battle after Lehman, and I think it will be the same when Greece defaults. There will be days it seems contained and will look like Europe was successful in ring fencing its banks, and days it feels like it’s heading for contagion again and the problem will get out of control.