In 1999 a CEO's job was to make the stock go up. In 2008 it was to stop it going to zero. A bank lives on other people's willingness to lend to it overnight, so its share price was not a scoreboard, it was a confidence signal, and a falling one could cut off the funding by itself. Here is how firms fought that spiral, why most of it failed, and where it ended.
Confidence was the product
The investment bank Bear Stearns traded at about $170 a share in early 2007. In the week of 10 March 2008, rumours spread that it was running short of cash. On Wednesday its chief executive went on television to say "our liquidity position has not changed at all." On Thursday night the bank told the Federal Reserve it would have to file for bankruptcy in the morning. By Friday the stock was near $30, and that weekend JPMorgan agreed to buy it for $2 a share, raised to $10 about a week later [1].
The lesson the rest of the market took: a statement that everything is fine is only worth the cash behind it.
Blame the shorts
When financial stocks kept falling, the target became the people betting on the fall. On 19 September 2008 the SEC took emergency action and banned short selling in 799 financial companies, saying manipulation "threatens investors and capital markets" [2]. The ban ran for three weeks and expired on 8 October [3].
It did not do what it was meant to. A later study found no sign that the ban propped up prices; shorting in the large banned stocks fell by about 77%, while spreads, price impact and intraday volatility got worse for most of them [4].
The rating was the trigger
Much of the trouble had been stamped triple-A. Of the mortgage-backed securities Moody's rated triple-A in 2006, 73% had been downgraded to junk by April 2010 [5].
Ratings also decided who lived. On 15 September 2008 a credit-rating cut forced the insurer AIG to post another $14.5 billion in collateral it did not have. The next day the Federal Reserve pledged $85 billion to keep it alive, and the government took a 79.9% stake [6]. For a company with a downgrade hanging over it, the most valuable thing a CEO could say was whatever kept the rating where it was.
Dressed for quarter-end
Lehman Brothers reported a $2.8 billion quarterly loss in June 2008 and raised $6 billion in new shares to show it was sound [7]. It filed for bankruptcy on 15 September 2008 with more than $600 billion in assets, still the largest bankruptcy filing in U.S. history [7].
The court-appointed examiner later found that the firm had moved about $50 billion off its balance sheet in temporary transactions around the end of reporting periods, when investors and regulators were looking, and brought it back soon after, without telling them [8].
Marking to the model
Banks held securities that had stopped trading, so there was no market price to report. In April 2009 the accounting standard-setter changed its fair-value guidance to let companies apply "significant" judgment when markets were inactive, which could shrink the writedowns on assets like mortgage bonds. Analysts expected it to lift some banks' first-quarter profits substantially [9]. The assets were the same; the number next to them changed.
How it ended
On the day Lehman filed, the Dow fell more than 500 points [7]. The S&P 500, which had peaked at 1,565 on 9 October 2007, closed at 676.53 on 9 March 2009: a fall of about 57% [10]. Bear Stearns and Lehman were gone; AIG was owned by the government.
The game on top
Synthetic Demand is a satire of moments like this. You are the CEO of an invented company and you have one job: make the stock go up before you sell. A market like 2008 is one of the ones you can be dealt, though nobody tells you the year until it is over, and in that market most of the usual tricks get sold into.
Every call you make, and every one you don't, is graded A to F. The good grades go to CEOs who read the room. In 2008 the room was on fire.