After Lehman Brothers declared bankruptcy on September 14, 2008, credit markets froze up. On Tuesday, the 16th, the nation's oldest money-market mutual fund, Reserve Primary Fund, announced that its exposure to Lehman's debt caused its share value to "break the buck," i.e., its share price dropped to 97 cents. This led to massive redemptions of money market funds. To stop the run on the money funds, on Friday the 19th the Treasury announced temporary guarantees of money market accounts similar to the guarantees that the F.D.I.C. provides on bank accounts.
After playing a clip of Congressman Paul Kanjorski (D-Penn.) describing the situation that faced the markets on that Thursday, Christian talk host Sandy Rios offered the following cogent analysis (it's at about the 32 min mark):
Why haven’t we heard about that?
To repeat what he just said: $550 billion were withdrawn electronically from our system, our American system, within one to two hours and if they had allowed it to continue it would have gone up to $5.5 trillion electronically withdrawn.
Who’s doing this? Who’s doing this on that day? And if you go back in time, what was happening? That was right after Sarah Palin, right after Guy (her cohost) and I were at the convention and Sarah Palin was being introduced. Everybody...the polls were showing that people just loved her and John McCain was gaining momentum because of her and suddenly the financial collapse.
You think that’s an accident?
I have to tell you again that George Soros, its documented, was attributed with wrecking the economies of two different countries. Now I don’t know if—I’m not saying that George Soros did this. How would I know? How would I know? But he’s a billionaire who is a leftist who’s been funding the worst kinds of things in this country for the last I don’t know how many years, ten that I know of. So somebody like George Soros . . . . Who’s doing this? Who orchestrated this? Who orchestrated something so dastardly that the entire economy would have been destroyed on that day? Why would they do that? Because its destruction that they seek and that’s at the heart of why we’re in this trouble.
Have you heard this story?So there you have it. It wasn't subprime mortgages. It wasn't the collapse of the housing bubble. It wasn't the collapse of Bear Stearns, Countrywide, Washington Mutual, or Indy Mac. It wasn't the need to rescue Fannie Mae, Freddie Mace and AIG. It wasn't the Lehman bankruptcy. It wasn't the fact that real people were feeling rational insecurity about the safety of money market funds.
It was George Soros or some other evil liberal billionaire who was more than willing to take down the economy of the whole world just to thwart Sarah Palin.
I tried to call Rios' show today to let her know that I was aware of this story. I had not heard the exact figures that Rep. Kanjorski quoted for money fund outflows, but I trade the stock market for a living and I knew what the scale of problem was. There was nothing scarier in what the Congressman said than in how things felt that Thursday. I believe that was the day that short-term treasury bills traded at negative interest rates. That means that people were so desperate for a safe place to put their money that they were willing to give up $101 just to be sure of getting $100 a month down the road.
Unfortunately, Rios isn't taking calls today because she is talking to a guest about Abraham Lincoln. What I think I find most amusing is that Rios frequently complains about liberals who automatically blamed Bush for everything that went wrong over the last eight years. I will admit that I blame Bush for many thing, but I am confident that I can present reasons for blaming him for each and every thing that I blame him for that are infinitely more rational than Rios' liberal billionaire conspiracy theory.
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Reminds me of former Malaysian PM Mahathir who blamed the Asian financial crisis on Soros and other evil Western currency speculators. He also has a thing with the supposed Jewish world order.
ReplyDeleteYes, but didn't Palin say whatever happened in the election was the will of her god? Even if the accusation was true, then that means that her god was willing to have an economic crisis occur rather than have her and McCain get elected.
ReplyDeleteHer god is omnipotent, so you know he knew things would have been far worse. Praise god! LOL!
Good point Chief! I hear Jesus was shorting the shit out of the S&P futures.
ReplyDeleteVinny:
ReplyDeleteYou said:
"This led to massive redemptions of money market funds. To stop the run on the money funds, on Friday the 19th the Treasury announced temporary guarantees of money market accounts similar to the guarantees that the F.D.I.C. provides on bank accounts."
Since you trade stocks for a living can you explain a little more what what going on with this for me. I read about it the other day and saw the video of Paul Kanjorski talking about it but people are talking about it lately like it's some big conspiracy (like the one you mentioned with Palin) or like a few rich powerful people (or some hackers) have the ability to topple our whole economy by just withdrawing their money.
Bryan L
Bryan,
ReplyDeleteI will try to do my best to explain. I hope that it does not sound like I am being condescending, but I would rather explain something that seems obvious rather than leave out an important detail because I flatter myself to think that others who do not have your basic financial knowledge might read this comment as well.
Money market funds invest in the safest of short-term government and corporate securities. In the pantheon of risk, the safest investment is short-term government T-Bills. The next would probably be deposit accounts at federally insured banks. The next would be money market funds. Because the FDIC guarantee on bank deposits is limited, the first choice after T-Bills for individuals and businesses with substantial short term cash to park is money market funds.
Money market funds are similar to stock mutual funds, however, unlike other mutual funds whose share price fluctuates, money market funds make it their primary goal to always keep their share price at $1.00 by investing in the safest short term securities. The interest rate money market funds pay may go down to 0%, but the one unforgivable sin is for the share price to go below $1.00. This is known as “breaking the buck.”
In mid-2007, the market for mortgage backed securities dried up. These are pretty sophisticated investments and most average people did not notice although if you are a fan of CNBC's Jim Kramer, you may recall his head exploding. The Treasury and the Fed said that this problem was confined to a limited part of the credit market.
In February of 2008, the market for auction rate securities froze up. I will confess that I knew very little about these securities prior to this event. Nevertheless, the government assured us that the problem was contained to a small part of the market. Early 2008 also saw the failure of Indy Mac, Washington Mutual, and Bear Stearns. The summer of 2008 saw Fannie Mae, Freddie Mac, and AIG in need of federal bailouts. In every case the Treasury and the Federal Reserve tried to assure the public that things were under control.
In my opinion, the money market panic of September 18, 2008 was an understandable response to the events of the prior year. I might even call it a rational response to the extent that panic can ever be considered rational. Each time a risky asset class had gone sour in the preceding year, the government had tried to assure the markets that the damage was contained. However, each time the assurance was followed by a somewhat less risky asset class going sour and new assurances that the problem was contained. As a result, when the oldest money fund “broke the buck” due to its exposure to Lehman Brothers securities, people perceived that the second least risky investment (at least for investors whose deposits exceeded the limit of FDIC insurance) was starting to go sour and they rushed to get out and switch their funds to T-Bills.
As investors rushed to redeem their money market funds, the fund managers were forced to liquidate the short-term securities in which the funds were invested at a time when demand for all non-government securities had disappeared. If this had continued, many more money funds would have broken the buck thereby triggering further redemptions. That is why the treasury stepped in to provide the guarantees that would stem the tide of redemptions.
It is almost unthinkable to me that a single individual could trigger the scale of money market redemptions that occurred on September 18. I won’t say completely unthinkable because the market has surprised me enough times in my twenty years of trading that I am reluctant to declare anything completely out of the question. I would say that it is completely unthinkable in the absence of the kind of market turmoil that resulted from the Lehman bankruptcy and pretty damned unlikely even with it.
Although I may not be able to disprove extraordinary manipulation, I haven’t the slightest reason to resort to such an explanation because the money market outflows can be more than satisfactorily explained by the various failures that occurred in the credit markets during the preceding days, weeks, and months.
Moreover, having listened to Sandy Rios in the past, I am absolutely certain that she does not have the slightest understanding of what went on in the markets that Thursday. I am convinced she is motivated by an irrational paranoia about liberal boogeymen that is on a par with the irrational paranoia about conservative boogeymen that inspires the 911 conspiracy theorists.
Thanks Vinny. That was very helpful and I learned quite a bit. Any idea what can fix all this mess?
ReplyDeleteBryan L
I had it all figured out and I was ready to go to Washington to fix it, but then someone found out that I had been declaring my cats as dependents on my tax return.
ReplyDelete