Crises and Runs

On Tuesday 16 September 2008, the day after Lehman Brothers filed for bankruptcy, the Reserve Primary Fund, a large money-market fund, announced that its shares were worth less than the $1 at which money funds are meant to be redeemed. It held Lehman commercial paper, and that paper was now worth little. "Breaking the buck" was supposed not to happen; money-market funds were sold as a safe place for cash that paid more than a bank. Investors in other prime funds, which held the commercial paper of banks and companies, began to withdraw, and the funds stopped buying commercial paper to meet the withdrawals. Companies that relied on that paper to pay wages and suppliers found the market closing. The same day the Federal Reserve lent AIG $85 billion. On Friday 19 September the Treasury guaranteed money-market funds.

None of these institutions was a bank in the ordinary sense, and none had deposit insurance. Yet each was doing what a bank does, funding long-term or illiquid assets with money that could be withdrawn on demand, and each was run like a bank. Chapter 1 told the story of one bank's run in 2023. This chapter looks at the system: how runs spread from one firm to many, how 2008 became a run on the shadow banking system, how 2023 repeated old patterns at digital speed, and what governments do when they stop one.