Here's the important bit, buried on page 9:

From Felix Salmon:

"The Kanjorski Meme, Mark II

Tyler Cowen is now talking about the Kanjorski Meme Mark I (I thought I'd dealt with that one already) -- but that's not the end of the story, as Sam Jones demonstrates today.

Sam has what you might call the Kanjorski Meme Mark II: it's much less alarmist, but also more plausible, and it's based largely on a September report from the House Economic Committee. Here's the important bit, buried on page 9:

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.

I phoned the author of this report, House staffer Robert O'Quinn, on Friday, to ask him what his sources were for this assertion; I'm still waiting to hear back from him, but of course that's not going to happen today, which is a federal holiday.

In any case, this is the only place this assertion has been made: I haven't seen it reported anywhere else. That's not to say it didn't happen: September was a crazy month in the capital markets, and reporters were so busy chasing the latest news that they could easily have inadvertently let something like this drop. But Ben Smith, of Politico.com, has talked to Kanjorski's spokeswoman, Abbie McDonough, and she is still citing the New York Post article rather than anything else as Kanjorski's source.

So we have to ask whether it's credible that money-market funds got half a trillion dollars of redemption requests on the morning of the 18th, and that after a few phone calls from Hank Paulson, they changed their mind. Sam thinks it is:

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.

But there's a big difference here: in 2007, Treasury was trying to stop the money-market funds from withdrawing money from ailing conduits: it was worried that a certain sequence of events would happen, and intervened to stop it from happening. The 2008 version, by contrast, has the redemption requests already being made, and Treasury stepping in one morning to have them rescinded.

I'm not saying this is impossible, but it's certainly much more difficult. In 2007, it was clear which arms needed to be twisted: the ratings agencies would be asked to hold off on any SIV downgrades for a couple of weeks, while the big money-market funds would be asked not to try to exit the SIVs all at once. The money-market funds would be inclined to agree, since nobody wants a rush for the exits which is likely to crush everybody.

In 2008, by contrast, here's what we're asked to believe happened:

1. A number of big money-market funds all got massive redemption requests -- totalling $500 billion or so -- at the same time (specifically, about 11am on Thursday September 18).
2. The money-market funds communicated this information to the people at Treasury whose job it is to monitor such things.
3. Those people got scared, and rapidly escalated the information to Paulson.
4. Paulson, extremely concerned, called the money-market funds and asked for the names and phone numbers associated with all the biggest redemption requests. He then phoned up each of those big clients and persuaded them to rescind those requests, after they had been made, but before the market closed.
5. The big investors said yes to Paulson, and rescinded their requests.

The most improbable part of this story is not the incredible efficiency of the nexus connecting money markets, their clients, and Treasury -- although it would be pretty much the only case in living memory of the government acting on its toes in such a decisive manner, in the middle of the working day. Rather, the most improbable part is the first bit, where a bunch of big institutional money-market investors all decide to sell simultaneously on the Thursday morning. Why should that be the case?

And of course the other big unknown is who these investors are. They clearly need to be very big, and they equally clearly need to be open to arm-twisting from Treasury. Maybe it's a sovereign wealth fund or two?

It's also worth noting that this story is entirely distinct from the big-picture story which Sam shows in a chart from Bank of America, showing a move out of prime money-money funds and into government and Treasury funds over the course of a few weeks. That did happen, and the world managed to survive. The big question is whether there was a tsunami of redemption requests on the morning of the 18th, which would have dwarfed the flows that we ultimately saw.

As I say, I have a call in to O'Quinn, so I'll let you know if I get any more detail on where this story came from, or who knows the truth of the matter. But if any journalist has an interview with Hank Paulson lined up in the near future, it would be great if they could ask him directly about this."

Me:

I applaud that you're following this story up. However, I don't think that it's implausible that Money Markets were threatened by investors trying to gauge the strength of the government's guarantees to intervene after Lehman. Along with AIG and B of A and Merrill, it seems to me that the entire week was devoted to that enterprise. Investors were panicked that the government's implicit guarantees weren't solid. The actions taken on that Friday by the Treasury and Fed seem to indicate that.

Also, the flight to safety, from agencies to treasuries, began in August. The same is true I believe of the Libor-OIS. It began going up prior to Lehman. On the Sunday before Lehman, there was a special trading session at which many investors believed that if Lehman fell, Merrill would as well. The only point I'm making is that what I call a Calling Run ( Debt-Deflation ) was already understood to be a potential problem. By my reading of Fisher, a Calling Run is not localized to the particular investment. In other words, the flight to safety, if money markets funds were threatened, would extend to even tangentially effected investments. Once this general move begins in earnest, it is very hard to stop. Given that context, I don't think that there's any doubt that even a hint of money market problems would have caused a problem. In my view, by Tuesday morning, Bernanke, who understands Fisher, could have seen a serious problem facing the economy. The real question for me is his going along with the Lehman decision in the first place. If people weren't afraid of Debt-Deflation then, by now they should know better. But I'm not an economist, just a concerned citizen.

By DonthelibertarianDemocrat Posted: Feb 16 2009 12:40pm ET

In short, it would have been very bad but not the end of the world economy or democratic capitalism.

From Marginal Revolution:

"Did the world almost come to an end Sept. 18th?

I've had so many of you write me and ask me what I think of this blog post. The main claim is taken from Paul Kanjorski:

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. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.

If they had not done that, their estimation is that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.

The second paragraph is very much overstated (and I wonder about the exact numbers in the first paragraph). My personal guess -- and guess is the right word -- is that if nothing had been done on this day, a disaster would have resulted, though not on the scale postulated here. In my view there would have been an immediate bank holiday, partly improvised, plus complete insolvency for some very large financial institutions, followed by rapid nationalization. There would have been a much tougher whack to the commercial paper market than what we saw. Many businesses would have had problems meeting short-term payroll requirements. The downturn in the real sector would have been much steeper than it has been. In short, it would have been very bad but not the end of the world economy or democratic capitalism.

Posted by Tyler Cowen on February 16, 2009 at 07:21 AM in History | Permalink

Me:

I think that the Aleph Blog has a good point about what occurred:

http://alephblog.com/2009/02/15/the-story-not-told/

I'll simply repeat me view that I posted there: There was definitely a threat to pull out of money market funds. The threat was to test the strength of the government's guarantees in this crisis. When the government essentially guaranteed money market funds, the threat ended.

Posted by: Don the libertarian Democrat at Feb 16, 2009 11:35:30 AM

I think I'm finally able to squash it with some hard figures

From Felix Salmon:

"Kanjorski and the Money Market Funds: The Facts

With the Kanjorski Meme still spreading (see Ben Smith, Andrew Leonard, Moldbug, and more), I think I'm finally able to squash it with some hard figures: 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.

This is not the first time that Kanjorski has made these allegations. But first, it's worth going through the timeline.

On September 15, Lehman Brothers failed. The Reserve fund -- which was $64 billion that morning, and which had a substantial investment in Lehman debt -- saw $10 billion of withdrawals that day. The following day, September 16, it saw another $10 billion of withdrawals; on September 17, when withdrawals had reached a total of about $40 billion, it announced that redemptions would take "as long as seven days"; as we all know, that was massively overoptimistic.

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.

On September 19, worried about outflows from money-market funds, the Treasury announced that, for a fee, it would guarantee -- not freeze -- eligible money-market mutual funds. But the details of the plan still weren't clear as of September 21, when Treasury said it was "continuing to develop the specific details surrounding the temporary guaranty program".

Substantially all of the outflows came from institutional accounts: retail investors never panicked. If you look at the weekly data for bank savings deposits, including money market deposit accounts, they stood at $3,167.4 billion on the 15th, and rose to $3,191.4 billion on the 22nd.

So where does the $500 billion outflow number come from? Would you believe: the Sunday New York Post, which on September 21 published a story headlined "Almost Armageddon" featuring this paragraph:

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.

Remember where we're at here: the end of the longest week in financial-market history, when no one -- traders, reporters, Congressmen, you name it -- was getting much if any sleep. Simple errors can easily be made, numbers can get fuzzy, everything was moving very fast and confusingly.

In any case, three days later, on September 24, Kanjorski held a hearing on Capitol Hill with Treasury secretary Hank Paulson. Here's what he said:

I was talking to someone, one of my friends on Wall Street today, asking him to verify the money market run. It was anonymously reported in some of the New York papers, and I think I have evidence of it in some of our conversations, whether it was with you or with other experts, that between 11:00 and 11:30 on Thursday last, the money markets in the United States were hit by a run that amounted to about $500 billion of $4 trillion in accounts and that as I understand it, it was essential for the Federal Reserve to pump $105 billion into the system and to suspend operations or the money market accounts of the country would have, in fact, failed.
One, you should tell us that.

Kanjorski is clearly fishing here: he's talking about anonymous newspaper reports and vague "conversations" and anonymous Wall Street "friends", and basically asking Paulson to confirm his suspicions. Which, naturally, Paulson doesn't do, because the suspicions weren't actually true. That said, however, Paulson's being-polite-to-the-Congressman answer doesn't explicitly say that Kanjorski's numberes are false.

After that, we didn't here much more about this meme until Kanjorski resuscitated it on C-Span, this time citing the Federal Reserve as his data source, and beefing up the numbers for good measure:

On Thursday at about 11 o'clock in the morning the Federal Reserve noticed a tremendous drawdown of, uh, money market accounts in the United States to the tune of $550-billion was being drawn out in in a matter of an hour or two...
We were having an electronic run on the banks. They decided to close down the operation, to close down the money accounts. ... If they had not done that, in their estimation, by 2 PM that afternoon $5.5-trillion would have been withdrawn and would have collapsed the U.S. economy and within 24 hours the world economy would have collapsed.

This is all, frankly, fiction, and it's not clear where most of it came from, although maybe Kanjorski's "friends" on Wall Street are the same people as Michael Gray's sources at the New York Post. Thinking back to that crazy week it's easy to get details wrong, especially when you're speaking off the cuff on a call-in show. But let's stop treating it as though there's any substance to it. Please."

Me:

I have to say, that your explanation sounds like Tom Brown's on that Blodget/Task tape I recommended. It was real time and made sense to me, which is why I didn't credit this story and never had. But thank you for adding context to my recollections of what occurred.

It also seems to me that a lot of panic was in the air about a number of issues, and people could be confusing the end of our way of life statement to other concurrent events that people focused on and pronounced such statements about at the time.

By DonthelibertarianDemocrat Posted: Feb 11 2009 5:47pm ET

this only seems semi-coherent to me, but undoubtedly this is a semblance of what was described

From Paul Kedrosky:

"Congress Spooked in September By Massive Financial System Run Underway?

Everyone remembers that Henry Paulson and Ben Bernanke went into a closed session in Congress in mid-September of 2008 and scared the crap out of the assembled politicians. According to a (very rough) transcript of a semi-coherent Rep. Paul Kanjorski (D-PA) on C-Span, here is what Paulson and Bernanke said:

It was about September 15th [sic]. … On Thursday at about 11 o’clock in the morning the Federal Reserve noticed a tremendous drawdown of, uh, money market accounts in the United States to the tune of $550-billion was being drawn out in in a matter of an hour or two.

The Treasury opened up its window to help, and pumped in $105-billion into the system, and quickly realized it could not stem the tide. We were having an electronic run on the banks. They decided to close down the operation, to close down the money accounts. … If they had not done that, in their estimation, by 2 PM that afternoon $5.5-trillion would have been withdrawn and would have collapsed the U.S. economy and within 24 hours the world economy would have collapsed.

We talked at that time about what would have happened. It would have been the end of our economic and our political system as we know it.

More here. As I said at the outset, this only seems semi-coherent to me, but undoubtedly this is a semblance of what was described."

Me:

Here was a good real time discussion of why a money market Calling Run would be a problem:

http://finance.yahoo.com/tech-ticker/article/6351...