"The Kanjorski meme and the end of the world, redux
It looked on Wednesday last week like Felix Salmon had had the last word on what he earlier dubbed the Kanjorski meme - a little piece of web flotsam alighted upon by a number of blogs, among them FT Alphaville - the gist of which went something like this:
Within 24 hours the world economy would have collapsed.
More specifically, the Kanjorski meme referred to this C-Span clip - dug up by Zero Hedge - of Dem representative Paul Kanjorski in which the congressman recounted a fateful day in September:
On Thursday (Sept 18), at 11am the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide.Felix, sceptical from the off, appeared to have put things to bed:
…there never was a $500 billion outflow from any asset class in the space of a couple of hours or even weeks, and the Fed never shut down or froze any money-market accounts.
In fact, writes Salmon, notwithstanding the dramatic withdrawal requests from the Reserve Primary fund (which broke the buck on September 15, when Lehman failed), money market funds, though roiled, were not completely collapsing.
The news from The Reserve was gruesome, and total withdrawals from money-market funds reached $104 billion that day, according to Crane Data. Another data provider, ICI, says that as of the close of business on the 17th, money-market funds had a total of $3,549.3 billion, which was a fall of just $30.3 billion from their level a week previously.
The following day, September 18, was bad but not quite as bad, with withdrawals of $57 billion, according to Crane Data. By the 24th, according to ICI, the total was $3,456.2 billion — a drop of another $93.1 billion from the 17th.
Now firstly, there’s a problem with looking at the MM fund market as a whole. There are three types of MM fund - those that invest in corporate commercial paper, those that invest in US Treasuries and those that invest in other government bonds. The really dramatic problem in the money markets - the one which, as Kanjorski intones was tantamount to “an electronic run on the banks” - was the shift within the money market fund universe, specifically, the massive redemptions from bank commercial paper-investing funds (called “prime funds) and an almost consummate increase in deposits at Treasury and Government funds. It’s nicely illustrated by this Bank of America graph, which like Felix, uses Crane data:
Looking at the fall in size of the money market fund universe in aggregate is something of a canard. It certainly doesn’t show the crisis quite for what it was - a total collapse in prime funds - and with that, an acute liquidity crisis for any corporate institution with a sizeable CP facility.
Secondly, there’s the figure at the heart of the Kanjorski meme: the $550bn of withdrawals from money market funds on Thursday September 18th. Salmon suggests that the number originated in no less reputable a place than the New York Post, which on September 21 wrote:
According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening [on Thursday]. The total money-market capitalization was roughly $4 trillion that morning.
But David Merkel at the Aleph blog may, in fact, have something which corroborates the provenance of the Kanjorski meme; and most notably, that some of the numbers in it came from Hank Paulson. The below is an extract from a research report (authored by Congressman Jim Saxton) to the Joint Economic Committee of Congress (emphasis ours):
Irrational runs on money market mutual funds began. For the week ending on Wednesday September 17, 2008, investors redeemed $145 billion from their money market mutual funds. On Thursday September 18, 2008, institutional money managers sought to redeem another $500 billion, but Secretary Paulson intervened directly with these managers to dissuade them from demanding redemptions. Nevertheless, investors still redeemed another $105 billion. If the federal government were not to act decisively to check this incipient panic, the results for the entire U.S. economy would be disastrous.
In other words, institutional clients tried to pull around $500bn, but were dissuaded by the Treasury Secretary - who must then have also been hectically working on the money market fund insurance programme, announced only the following day.
Such a subtle correction to the Kanjorski meme answers a lot of questions.There were requests for $500bn of redemptions, but not actually $500bn of redemptions. And it feels right too. FT Alphaville is aware of very similar circumstances back in September 2007 when secretary Paulson rang around various money market funds to dissuade them themselves from pulling money from a number of ailing bank SIVs (which were dependent on CP for daily financing). Rating agencies got similar calls.
And, anyway, zooming out slightly, is $500bn really such a big number in context? Reserve Primary breaking the buck was a phase transition - it completely altered the market and the psychology of it. Put yourself in the position of a huge institution with billions stashed in a money market fund - the equivalent of a personal bank account, as far as such institutions are concerned - you have no insurance and there’s a very very significant risk you’ll lose money if you keep it where it is while everyone else is redeeming. It’s a bit of a no-brainer. Considering prime funds had around $1.9 trillion in them before Lehman’s collapse, $500bn isn’t that much.
Now whether you follow through with Kanjorski on the conclusion that “within 24 hours the world economy would have collapsed,” and that “it would have been the end of our economic system and our political system as we know it,” is another matter.
Related links:
A systemic risk counterfactual - FT Alphaville
Revenge of the dull plodding nerds - FT Alphaville
1) "Tthe suggestion that the Fed was able to monitor redemptions AND make calls to forestall such redemptions is just operationally and technologically incorrect."
This is about the specifics of the story. I took this to be the focus at first as well, and, finding that Blodget/Tom Brown clip and looking at contemporary sources which focused on the main point as far as I was concerned, namely, the government actions and guarantees, the story seemed overblown. But, there's also this:
2)"Those two plans/programs saved the MMF industry from collapse - that is without argument. Had the plans not been announced on Friday 9/19 before the open, the outflows would have continued and there would not have been sufficient liquidity to meet redemptions. This could have had multiple funds breaking the buck. Keep in mind a certain investment bank acknowledged that the parent had to commit $26Bn to its MMFs to fund redeptions from the funds (this was before the ABCPFF was implemented)."
In other words, reading comments on blogs, I found that many people didn't seem to be aware of 2. Hence, i started taking 2 as the story readers were focusing on. If you were aware of 2, 1 didn't seem to add much except a kind of dramatic portrayal of what occurred.
This is not unusual. If you remember the tax provisions in TARP that allowed Wells Fargo to horn in on the Wachovia deal, many people weren't aware of them until November, when it became a big story.
Just my take.
Posts
February 15th, 200911:43 am at
I agree with Kurt, in the sense that the Money Market redemption threat was a way of finding out how far the government would go in financially intervening. From the prior Sunday, and the special trading session, many investors knew that, if Lehman went down, Merrill could follow quickly. In other words, a Calling Run ( Debt-Deflation ) was possible. When Lehman hit, the government aided AIG, the B of A bought Merrill, and the government essentially guaranteed Money Market Funds. All of these actions suggest to me that the government understood that we might be in a Calling Run. The mystery is why they have chosen such odd methods to stop it, other than generally admitting that the government is on the hook.
For me, a Calling Run is different than just redemptions in one area. Since no one knew who or how much anyone was committed to mortgages or mortgage related securities, and they could see a huge fall in prices and a tsunami of defaults coming, people started calling in cash in all sorts of investments, some only tangentially connected to mortgages. This also showed in the flight from agencies to treasuries, from implicit to explicit guarantees.
Once a Calling Run begins ( Fisher’s Debt-Deflation ) only the government can stop it, because only the government has the assets available to be believable in easing wipe-out concerns. The government has been trying to do this ever since, but poorly. The whole point of the total guarantee is to stop the run, and allow an orderly exchange of assets and losses, not keep it going, only in slow motion.
I like your plan, and would be inclined to support it, but not here. Again, for me, since many smart people saw this as a possibility, including Bernanke, I simply can’t explain their poor choices.
You know more than me, but that’s how I see it. By the way, paradoxically, even though I believe that we needed to honor these guarantees in this instance, I believe that these implicit guarantees are the main cause of this crisis. In this, I seem to be alone. For me, nothing else explains the risk taken by major banks and investment firms.