Staring into the abyss

February 9, 2009 5:24 PM

$550 Billion Disappeared in "Electronic Run On the Banks" (SLYT)

At 2:20, Rep. Paul Kanjorski of Pennsylvania, chair of the Capital Markets Subcommittee, discusses a "tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars" that occurred in the matter of an hour or two in September 2008.

"The Treasury opened its window to help. They pumped a hundred and five billion dollars into 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 and there. And that's what actually happened. If they had not done that their estimation was that by two o'clock that afternoon, five-and-a-half trillion dollars would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed."

"It would have been the end of our political system and our economic systems as we know it."

Via Boing Boing

posted by up in the old hotel (49 comments total)

It didn't disappear. People were withdrawing money. That's what a run on the bank is. I don't see what the story is here. Things were tenuous in September. News at 11.
posted by allen.spaulding at 5:30 PM on February 9

Are they saying the economy would have collapsed because the money we all have, collectively, secured in banks, is far less than the actual amount of hard money banks actually have? Plus, 5.5 trillion out of money market systems - can someone explain that? He's talking about $250,000 per individual savings accounts but he's also talking about money markets. Either I'm confused or he is.
posted by billysumday at 5:36 PM on February 9

Er, rather, far more than the actual amount of hard money...
posted by billysumday at 5:41 PM on February 9

Wait... where does it all go? Is there, like, a singularity that the world economy will get sucked into? Where is this singularity? Can I invest in it? Enquiring minds want to know.

Really! I'm dense when it comes to things economic.
posted by not_on_display at 5:43 PM on February 9

This is the biggest Three Card Monty game ever. What a fucking load. The house of cards is falling, and hard.
posted by dbiedny at 5:51 PM on February 9 [2 favorites]

And he is wholly correct.

This inherent belief that some of the commentators had below, IE that he's simply in the pockets of the banks, are inane. His observation that our economic system would have collapsed in that 24 hour window are more or less accurate. It's not simply "people drawing out there money," but people effectively removing their money from institutions of America. The money markets are not simply some playpen for the 1% to get rich on (though they do and also corrupt it), but instead act as the wellspring for industry and growth. That's the way it's been since London. That's our system.

Now, I wholeheartedly agree that the last 28 years has seen a dreadful progression of shortsightedness in corps. handling of the money markets, but the mass withdrawal we were on pace for would be far more crippling. The unfortunately reality is that the shortsightedness (housing and money markets) is what got us into this mess in the first place, but once again. Blowing up the system is irrevocably dangerous for the average American. It is not to difficult to predict that every American corporations would fold. Sadly, this is not hyperbole, but the grim reality of a "zero equity" US money market.

While corporations don't dominate the total % of job market as people say, 1 out of 3 new businesses are designed to sell to corporations. The other 1.5 out of 2 rely on direct corporate suppliers. That leaves .5 out of 3 "small business/mid business" Americans employed.

If anything, corporate influence, 401ks, urban movement, and lack of agricultural build up leave us 100 times worse off in the face of a depression than we are now.

And yes... Everybody's arguments against the bailout are often logical and accurate, but a complete failure of systemic thinking.
posted by Lacking Subtlety at 5:51 PM on February 9 [4 favorites]

"We did not give the $700 billion for the purpose of lending money. That was never in the program. It was misconstrued initially and put together with the suggestion by the Secretary of the Treasury that we would be buying dirty assets..."

"Also part of the bill, we gave jurisdiction and authority to the Secretary of the Treasury to make investments in banks."

TARP will go down as one of the most misunderstood pieces of legislation in our modern history. Kanjorski gets it right here. Tomorrow a bunch of heads of Wall Street and the commercial banks will testify to their usage of TARP funds to lend to Main Street. The joke here is that these funds were NEVER meant to be lent out. They represent a down payment on an undercapitalized banking industry.

Banks are required to have a certain capital cushion (extra cash/liquid assets) to make sure that if a few loans go bad, those loans won't take the bank with them. Paulson and Bernanke understood that the private capital markets were no longer willing to put billions into the US banking system (foreign and domestic investors saw how shitty that investment was). So they crafted TARP to give them options.

Now people are complaining that it was a "bailout" and that "we'll never see this money again". Which is horseshit. You know what a bailout is? It's the sweetheart deals that JP Morgan, BofA, and Citi received. The bullshit deals that allow US taxpayers to pay for losses that exceed a certain amount. That's a fricking bailout. Another bailout is the $30+ billion tax writeoff Wells Fargo received for purchasing Wachovia. There's another bailout.

TARP was never a bailout. The US taxpayer will make a profit off of TARP because one of the caveats was that the institutions receiving funds were healthy enough to eventually pay back the money. (There were of course exceptions; I pointed to one in a previous FPP I crafted.)
posted by SeizeTheDay at 5:54 PM on February 9 [3 favorites]

Economists: Our only solution is to destroy the system and nationalise the banks.
CNBC-General Electric: Okay Professor Frowny Face, but which stocks should our viewers be investing in now the market has bottomed?
Economists: Investing in anything is a bad idea.
CNBC-General Electric: Oh, you guys! We'll be back after this Shamwow commercial.
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 5:54 PM on February 9 [37 favorites]

Are they saying the economy would have collapsed because the money we all have, collectively, secured in banks, is far less than the actual amount of hard money banks actually have?

Exactly. The banks have worked that way for a long time now.

Plus, 5.5 trillion out of money market systems - can someone explain that? He's talking about $250,000 per individual savings accounts but he's also talking about money markets. Either I'm confused or he is.

He's talking about money markets. Savings accounts are now guaranteed to $250,000, true. But for a while (few weeks? months? still on going?), money markets were (are?) guaranteed to as well - I'm not sure on the limits.
posted by Bort at 5:54 PM on February 9

If they had not done that their estimation was that by two o'clock that afternoon, five-and-a-half trillion dollars would have been drawn out of the money market system of the United States

This is incorrectly extrapolating total withdrawal from rate of withdrawal.

Plus the Federal Flow of Funds report sez there was only $1.5T in MMs this year anyway:

1Q08: $1.56T
2Q08: $1.51T
3Q08: $1.55T
4Q08: ? (figure due out in next month)

where does it all go?

Treasuries, or an FDIC-insured savings account.

I'm no expert but this looks to be something circulating among the dumbasphere.
posted by troy at 5:55 PM on February 9

"commentators " = not mefi, but on that youtube channel
posted by Lacking Subtlety at 5:55 PM on February 9

btw, i'm a total macro guy, instead of micro... which makes me unpopular in business circles cause i keep bring up "systemic realities" and all
posted by Lacking Subtlety at 6:00 PM on February 9

I came here to link to the same video that East Manitoba did. Everyone should watch it. It's amazing. The talking heads are so clueless that it's breathtaking. They just can't wrap their heads around what Roubini and Taleb are saying.
posted by diogenes at 6:03 PM on February 9 [3 favorites]

Actually my numbers above are household holdings. Corporate america holds another $2T or so, bringing the numbers up to:


1Q08: $3.40T
2Q08: $3.34T
3Q08: $3.37T
posted by troy at 6:04 PM on February 9

DOOM DOOM DOOOOOOM.
(mashup of the original video and the 1981 movie Rollover)
posted by amuseDetachment at 6:16 PM on February 9 [3 favorites]

I can't stop thinking about that video. Who is the target audience of CNBC? I can't imagine an intelligent person could watch that exchange and not realize that the CNBC personalities are charlatans.
posted by diogenes at 6:40 PM on February 9

More on the money market funds insurance here:

On September 29, 2008, the U.S. Department of the Treasury opened its Temporary Guarantee Program for Money Market Funds (Program), a plan to protect certain shareholders of money market mutual funds from losses if their funds are unable to maintain a $1.00 net asset value ("break the buck"). The plan was first announced on September 19, 2008, with a termination date of December 19, 2008. The Program was extended by Treasury with a new termination date of April 30, 2009. Treasury has posted investor and technical FAQs on the Program. The following questions and answers address the Program's major features

posted by Bort at 6:43 PM on February 9

TARP will go down as one of the most misunderstood pieces of legislation in our modern history. Kanjorski gets it right here. Tomorrow a bunch of heads of Wall Street and the commercial banks will testify to their usage of TARP funds to lend to Main Street. The joke here is that these funds were NEVER meant to be lent out. They represent a down payment on an undercapitalized banking industry.

The original idea was buy crappy assets, but then everyone in the world said that was a bad idea and they didn't do it, instead they bought equity. I know the fed has also been lending money out at the same time, and lots of it. I remember seeing a figure like $600 billion somewhere, but unlike TARP they don't have a fixed amount to spend. Does anyone know?
posted by delmoi at 7:03 PM on February 9

It's a cool link and an interesting story, but I find some of the numbers being quoted pretty suspicious.

Look, if I have a tank with 100 gallons of water in it, and I open a spigot and water starts draining out at 20 gal/min, if I come back in an hour there is not going to be 1200 gal of water on the floor. That seems to be about what they're doing to get the $5.5T number.
posted by Kadin2048 at 7:14 PM on February 9

No, but if you have a barrel that says $1000 on it and open a spigot at $10/min and after only ten minutes it runs dry, you, me and your brother's dog "Mike" are all totally fucked.
posted by seanmpuckett at 7:19 PM on February 9 [1 favorite]

Does anyone know?

Here's the latest tally. Though we've (MetaFilter, not you and me) had this conversation before, and it's bad journalism because it mixes spending, guarantees, injections, and actual losses taken. The total amount lost to the US taxpayer will be nowhere even close to that amount.
posted by SeizeTheDay at 7:21 PM on February 9

East Manitoba's link is fucking frightening. How can that not be sketch comedy?

"You don't understand. The dead are rising from their graves and devouring the flesh of the living."

"Ha, okay mister black swan, so when is it time to go back to Applebees? I mean, surely you still eat at restaurants. Fast food? You like the drive thru?"
posted by fleetmouse at 7:22 PM on February 9 [1 favorite]

wow, just wow.

Mutant?
posted by leotrotsky at 7:28 PM on February 9

Nthing how terrifying that link is. First of all, who thought it would be a good idea to have five people interview two experts at the same time? Too many MCs, not enough mikes. Also, all of the MCs are, apparently, trivial and small-minded people.
posted by taliaferro at 7:31 PM on February 9 [1 favorite]

This is hardly surprising. And note the fix wasn't done by the government, it was performed by the banks. Freezing accounts is the logical safety measure employed in these situations to prevent insolvency.

Something similar happened here in Australia. The government guaranteed deposits in the major banks, but not mortgage trust funds. Everybody therefore saw the banks as safer, and tried to get their money out of the investment funds, and into the banks. Thus, these funds had to freeze redemptions to prevent collapse (a very wise move).

If you convince enough people that a bank is unstable it soon will be.
posted by kisch mokusch at 7:43 PM on February 9

Yeah, CNBC is chock full of idiots, this is really par for the course.

It seems as though the pick random people to be there at a time to give their airhead comments, but this bunch of hosts were especially bad. If they had Rick Santelli or Maria Bartoromo there it would've been a little better. But that was a terrible group, so Taleb and Roubini got a group of clowns. If it makes you feel any better, no one listens to Dennis Kneale anyways, everyone I know hates him so hard.
posted by amuseDetachment at 7:45 PM on February 9

I think the point of what he was saying was that money markets would have been dry by the end of the day. I don't think it really matters if the number was 1.5 trillion or 5 trillion.

Are money markets fractional reserve, too?
posted by empath at 8:14 PM on February 9

This may be the most idiotic thing ever. It didn't just vanish. People were nervous. That's when the Reserve Fund money market broke the buck. It was scary. People over-reacted. Everyone but investors in two funds got their money back.

Please take a deep breath and calm down.

Also: the infowars idiots posted the video and they want you to buy shiny metal and cans of seeds because the apocalypse is around the corner or something.
posted by Pants! at 8:24 PM on February 9

Are money markets fractional reserve, too?

Sort of. Money markets use most of the cash to buy short term debt like commercial paper, CDs, and the like. They also keep a relatively large percentage of their assets in cash to cover redemptions. Fractional reserve banking has longer term lending to some degree, depending on the bank.
posted by Pants! at 8:27 PM on February 9

Everyone but investors in two funds got their money back. Please take a deep breath and calm down.

Try telling that to the Chinese:

Oct. 13 (Bloomberg) -- China Investment Corp., the sovereign wealth fund that bought stakes in Morgan Stanley and Blackstone Group LP before their stocks plunged, may have as much as $5.4 billion frozen in a U.S. money-market account.

Stable Investment Corp., an affiliate of Beijing-based CIC, was the largest shareholder in Reserve Primary Fund on Sept. 1, according to regulatory filings. Reserve Primary suspended withdrawals last month after becoming the first U.S. money- market fund in 14 years to leave investors with losses. Stable Investment had about $6 billion in additional U.S. money-market funds earlier this year.

posted by up in the old hotel at 8:40 PM on February 9

I don't know if those CNBC guys were supposed to know what they were taking about, but it seemed like neither of the two experts were willing to answer the question asked. I assume that their answers would have been 'Nothing is safe' or 'keep it in cash' or most probably 'I don't know, nobody knows'. Why couldn't they have just said that, especially the fourth or fifth time the interviewer said 'but specifically, no, I mean RIGHT NOW, ME, what should I do with this money I'm holding?', instead of continuing with the high level 'this system has these problems and will not be fixed until x'?
posted by jacalata at 8:41 PM on February 9

so now we find out about this half-trillion run on the banks nearly 6 months after it happened

i'm left with two possible conclusions - a) he's exaggerating wildly in order to get the stimulus bill passed or b) we weren't told about the biggest bank run in history - what the hell else aren't we being told?

neither one is very comforting
posted by pyramid termite at 8:41 PM on February 9 [1 favorite]

4Q08: ? (figure due out in next month)

And I'll guess that it won't be much different from previous quarters. There was a brief run on money markets in the September panic, but as the market collapsed you saw just as much getting parked in money markets and cash funds. Remember, only one fund collapsed that week, and it was an institutional fund (a Putnam fund). The following day the Fed guaranteed all the money funds. After that, you saw the cash fly in and the run on short-term Treasuries.
posted by dw at 8:49 PM on February 9

Try telling that to the Chinese

The money was frozen for months. Most of it was returned. Some of the remaining assets were lost the day of the massive redemptions and others were spent on legal fees after the collapse.
posted by Pants! at 9:12 PM on February 9

CNBC is a soapbox cum security blanket for finance types. Their viewers want to know what percent each guest is allocated in bonds, emerging markets, treasuries, etc. They don't want to hear about how the fundamental worldview is on a downward spiral of doom. The talking heads are just trying to cater to the audience.
posted by jckll at 9:22 PM on February 9

Now people are complaining that it was a "bailout" and that "we'll never see this money again". Which is horseshit.

Whatever TARP's defenders will tell you, there's no real obligation for most of the banks to fix underlying problems. There was no obligation to get lending started again, and, unsurprisingly, it hasn't. The foreclosure rate keeps going up. We don't even know the full extent of the banks' bad investments, yet. Bankers will laugh and demand more, either way, and the government will give it to them — cheerily. It is and always was a bailout, pure and simple.

When people in the finance industry warn you against protecting your life savings, be wary.
posted by Blazecock Pileon at 10:40 PM on February 9 [1 favorite]

Of all the running over of comments in the CNBC-a-go-go link the one that really struck me was the mention of Sweden and how they dealt with a very similar problem: That is brushed aside so completely. And it's this that makes me pretty confident they won't do anything actually smart to solve this problem, they'll just do what they can and it'll be a great big fucking Japan-esque stagflation mess.
posted by From Bklyn at 1:06 AM on February 10

it seemed like neither of the two experts were willing to answer the question asked

That's because the questions were fantastically stupid.

Here's what they should have said:

Question: What single metric can I watch to know when we've hit bottom?
Answer: It will be an excellent sign when the likes of you aren't on TV anymore.

Question: Where can I put all my money that will guarantee me a fat return?
Answer: Going ultra-short on intelligent discourse on financial news networks is a safe bet.
posted by diogenes at 6:06 AM on February 10 [5 favorites]

or b) we weren't told about the biggest bank run in history - what the hell else aren't we being told?

Well, you *can't* tell people about a huge run on the bank -- it'll make them nervous and they'll start another run on the bank.
posted by clarahamster at 6:10 AM on February 10

Well, I'm definitely pulling my money out of my money market account now. :P

I suspect mergers among banks represent much of the underlying difficulty here. If you have lot & lots of banks, fewer engage in speculative behavior.

If they want to inject more capital, I'd still suggest sending the military in to run the mines, meaning : invest heavily in stable smaller banks while assigning CIA & NSA analysts to help manage their new larger & more numerous investments, as well as keeping an eye on public money.
posted by jeffburdges at 6:40 AM on February 10

Oh man! I'm too chicken to short, but I'd short all over intelligent discourse!
posted by jeffburdges at 6:42 AM on February 10

Well, I'm definitely pulling my money out of my money market account now.

This seems like a good opportunity to point out the difference between money market accounts which are deposit accounts and FDIC insured, and money market funds, which are mutual funds invested in short-term debt instruments, and not FDIC insured.
posted by malocchio at 7:08 AM on February 10 [1 favorite]

Why this video is important:

Why was there a run? Commercial paper issued by Lehman Brothers had just been discovered to be almost worthless. In theory money market funds should like other mutual funds and be able to pass through losses straight to their investors. In practice the investors believe they are cash and expect never to make a loss. They withdraw their cash if the fund ever breaks the buck.

The problem: Money market funds do some of the work of banks. They perform maturity transformation of typically up to 90 days and maybe more. This shows how dangerous this part of the shadow banking system is and how urgently it needs to be fixed. Money market funds need to and must be properly capitalized.
posted by up in the old hotel at 7:55 AM on February 10

Money market funds generally are properly capitalized. They keep a large chunk of their assets in cash to cover normal liquidity redemptions. If they tried to defend against all of their investors pulling out at once, they would have no investors because they would have a minuscule return on investment due to their large cash holdings.

Investors know there are risks. If they don't, they shouldn't be investing.
posted by Pants! at 9:22 AM on February 10 [1 favorite]

Sorry for withdrawing all those billions from the money market accounts last Septemeber. I had this old phone with four extra buttons lying around, and just wanted to see what happened when I hit "D" over and over again. How was I supposed to know that "D" was for "Depression?"
posted by ericbop at 9:36 AM on February 10 [5 favorites]

ericbishop: Hah!
posted by bz at 10:31 AM on February 10

er, ericbop, I meant.
posted by bz at 10:31 AM on February 10

That Reserve fund that broke the buck back in September still has $5.5 billion in assets that don't mature until after June. Relatively safe things, like CDs and bank notes, but not very easy to cash in early without losing money.
posted by smackfu at 2:39 PM on February 10

Update: Finance blogger Felix Salmon reports this never happened.
posted by up in the old hotel at 4:21 PM on February 14