CapitoliaSeptember fifteenth, two thousand eight. A bank founded in eighteen fifty vanishes in a weekend.
A hundred and fifty-eight years of history. One weekend to collapse.
Six hundred and thirty-nine billion dollars on its books. The biggest bankruptcy in American history.
To understand how we got there, we have to go back a few years.
A family wants to buy a house. It doesn't quite earn enough.
A bank lends to them anyway, knowing it's risky.
Why? Because house prices have been rising for ten years.
If the family stops paying, the bank takes the house, which will be worth more. Everybody wins.
Except the bank doesn't keep that loan.
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It resells it, along with thousands of others, bundled together.
And then something extraordinary happens.
The bundle gets the best possible rating: the safest in the world.
The reasoning: a thousand shaky loans can't all fail at the same time.
It's the diversification from chapter four, applied exactly backwards.
Because those thousand loans all depended on the same thing: house prices.
In two thousand six, prices stop rising.
Then they fall by twenty-seven percent, from peak to bottom.
Families can't pay anymore, and the house no longer covers the loan.
The bundles rated safest in the world lose most of their value.
And they were everywhere: in banks, insurers, pension funds.
This is what really stopped everything, and it isn't the loss.
It's that nobody knew who held what.
One bank stops lending to another, because it doesn't know what's in its books.
The system didn't stop for lack of money, but out of ignorance.
The stock index loses thirty-seven percent over the year. Houses, twenty-seven.
Eight million seven hundred thousand jobs destroyed in the United States.
And then, slowly, it comes back.
Let's go back to the two people from chapter three.
The one who didn't sell recovered everything in about five years. The other, never.
This story doesn't teach you to distrust banks.
It shows that nobody saw it coming, including the people paid to see it.
So you don't prepare for the next one by predicting it.
You prepare by never needing to sell at the worst moment.