Working Paper: NBER ID: w20027
Authors: Gary B. Gorton; Andrew Metrick; Lei Xie
Abstract: Why did the failure of Lehman Brothers make the financial crisis dramatically worse? The financial crisis was a process of a build-up of risk during the crisis prior to the Lehman failure. Market participants tried to preserve an option or exit by shortening maturities - the "flight from maturity". With increasingly short maturities, lenders created the possibility of fast exit. The failure of Lehman Brothers was the tipping point of this build-up of systemic fragility. We produce a chronology of the crisis which formalizes the dynamics of the crisis. A crisis is a dynamic process in which "tail risk" is endogenous.
Keywords: financial crisis; Lehman Brothers; maturity; fragility; money markets
JEL Codes: E32; E42; E44; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Shortening maturities by lenders (G21) | Ability of banks to sustain operations (G21) |
| Ability of banks to sustain operations (G21) | Systemic fragility (F65) |
| Systemic fragility (F65) | Lehman Brothers' failure (F65) |
| Shortening maturities by lenders (G21) | Systemic fragility (F65) |
| Lehman Brothers' failure (F65) | Large-scale crisis (run on Lehman) (E44) |