Bank of America Corp (BAC), Citigroup Inc. (C): After Lehman, This Problem Has Only Gotten Worse

Although we don’t believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes — just in case they’re material to our investing thesis.

The broad market indexes were up again today, capping another great week for stocks. In fact, with a 2% gain, the S&P 500 (INDEXSP:.INX) recorded its best week in roughly two months, putting it up 3.4% for the month. The narrower, price-weighted Dow Jones Industrial Average (INDEXDJX:.DJI) did even better than that, rising 3%, its best weekly gain since January.

Consistent with stocks’ gains, the CBOE Volatility Index fell 0.9% today, to close at 14.16. The VIX, Wall Street’s “fear index,” is calculated from S&P 500 (INDEXSP:.INX) option prices, and reflects investor expectations for stock market volatility over the coming 30 days.

I have been confounded by the VIX before, but I find such a low level of volatility astonishing, given that there remains some uncertainty concerning the Fed’s “taper” of its bond-buying program (the FOMC meets next week), not to mention looming political battles over the federal budget/ debt — all of which falls squarely within the next 30 days.

After Lehman, this problem has only gotten worse
Five years ago today, on Saturday, Sep. 13, 2008, the board and senior management of Lehman Brothers were desperately hoping a white knight would step forward to rescue it, much as JPMorgan Chase had done for Bear Stearns earlier in the year. The previous day, the stock had fallen 14%, for a stunning 77% decline on the week. Investors were fleeing the bank’s real estate and mortgage exposure, and were dumbfounded by the mystifying lack of urgency with which CEO Dick Fuld was responding to the crisis.

No buyer would materialize, leaving the bank no option other than to file for bankruptcy the following Monday morning. The bankruptcy — the largest in U.S. corporate history — sent a debilitating shockwave through the financial markets and the global economy, and was one of (if not the) defining moments of the financial crisis.