Preliminary and Incomplete The Flight from Maturity*

Abstract

Why did the failure of Lehman Brothers make the financial crisis dramatically worse? Our answer is that following the initial runs on repo and asset-backed commercial paper, the financial crisis was a process of a build-up of risk during the crisis. We produce a chronology of the crisis which formalizes the dynamics of the crisis. We test for common breakpoints in panels, showing the date of the subprime shock and the dates of runs in the secured and unsecured money markets. During the crisis market participants tried to preserve the “moneyness ” of money market instruments by shortening their maturities – the flight from maturity. The failure of Lehman Brothers was the tipping point of this build-up of systemic fragility