Monday, September 22nd, 2008
Some factlets from the weekends’ papers.
The New York Post highlights the flood of money market fund redemptions last week.
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. The total money-market capitalization was roughly $4 trillion that morning.
The panicked selling was directly linked to the seizing up of the credit markets – including a $52 billion constriction in commercial paper – and the rumors of additional money market funds “breaking the buck,” or dropping below $1 net asset value.
The Fed’s dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt.
While many depositors treat money market accounts as fancy savings accounts, they are different. Banks buy a variety of short-term debt, including commercial paper, with the assets. It is an important distinction because banks use the $1.7 trillion commercial-paper market to fund their credit card operations and car finance companies use it to move autos.
Without commercial paper, “factories would have to shut down, people would lose their jobs and there would be an effect on the real economy,” Paul Schott Stevens, of the Investment Company Institute, told the Wall Street Journal.
Cracks started to show in money market accounts late Tuesday when shares in one fund, the Reserve Primary Fund – which touted itself as super safe – fell below the golden $1 a share level. It had purchased what it thought was safe Lehman bonds, never dreaming they could default – which they did 24 hours earlier when the 158-year-old investment bank filed Chapter 11.
By Wednesday, banks sensed a run on their accounts. They started stockpiling cash in anticipation of withdrawals.
And Joe Nocera noted Saturday that, thanks to the new government guarantee of money market funds, it is now safer to keep your money in money market funds than FDIC insured banks. The FDIC insurance limit is $100k and is restricted to individuals. Now businesses — anyone — is insured infinitely in money market funds. That creates monstrous moral hazard… since investors can now dump money into high-yield funds that invest in the riskiest paper, knowing that their money is insured. It is also difficult to know how this guarantee will ever be terminated, since the minute it is lifted, money will flood out of money market funds.
Tonight we learned that Morgan Stanley and Goldman Sachs have banking licenses. Bloomberg focused on the impact this has on their liquidity — since they can now tap the Fed directly rather than relying on banks as intermediaries. It’s possible there’s another back story: maybe the rumored takeover last week of Morgan Stanley by Wachovia got it backward. It seems probably that Wachovia, burdened by $122 billion in rotting “pick and pay” loans, is in the weeds and will be taken over — like Bear Stearns — by a more competent and credible Morgan Stanley. Although at Friday’s close WB’s market cap was $40 billion, it spent most of the week valued at roughly $20 billion… significantly smaller than MS’s $30 billion.
Finally, one great tragedy of this bailout is that all the rotten bankers are not going to lose their jobs. Relative to previous banking crises, we haven’t even begun to wash our dirty laundrey.
Between 1989 and 1991, for example, 1,187 banks and S.& L.’s went under, representing more than $454 billion in assets, according to the Federal Deposit Insurance Corporation.
So far this year, there have been 11 failures of these institutions, representing total assets of around $40 billion.
The bailout guarantees that the bozos who put us into the current black hole will live to lend another day.