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FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009

In the crisis, Lehman Brothers' failure in September 2008 intensified systemic stress mainly because it:

Lehman's failure created widespread counterparty uncertainty, freezing interbank and money markets. The Reserve Primary Fund, which held Lehman paper, broke the buck, triggering money market fund runs. Contagion through interconnected exposures and funding withdrawal turned a single failure into a systemic event.

  1. ACaused counterparty uncertainty and a freeze in interbank and money markets, including a run on a major money market fundCorrect
  2. BEliminated all credit default swap exposures in the market
  3. CWas bailed out by the Federal Reserve, which encouraged risk taking
  4. DHad no derivatives or repo counterparties

Explanation

Lehman's bankruptcy raised fears about counterparty exposures, froze interbank lending and led the Reserve Primary Fund to 'break the buck', triggering money market fund runs. It was not rescued, and it had large derivatives and repo exposure.

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