02/11/09 Baltimore, Maryland When Bob Woodward slaps together his next instant-history book about the Panic of ’08 (c’mon, you just know he’s going to), I imagine the book will open with the events of September 18-19, 2008.
Just using public sources, it’s now easy to glean that on those two days, a run on money-market funds brought the financial system to the edge of collapse, and Hank Paulson was threatening members of Congress with martial law if they didn’t pass a bailout.
The collapse revelation came a few days ago from Rep. Paul Kanjorski (D-Pennsylvania) when he was interviewed on C-Span.
On Thursday [the 18th], at about 11 o’clock in the morning, the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States to a tune of $550 billion being drawn out in a matter of an hour or two.
The Treasury opened up its window to help. They pumped $105 billion 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, $5.5 trillion 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.
Now we talked at that time about what would have happened if that happened. It would have been the end of our economic system and our political system as we know it.
Couple this with the remarks of Rep. Brad Sherman (D-California) on the House floor just days after the first bailout bill went down in flames. “Many of us were told in private conversations that if we voted against this bill… that the sky would fall, the market would drop 2000-3000 points the first day, another couple thousand the second day, and a few members were even told that there would be martial law in America if we voted no.”
Careless bloggers have jumped to the conclusion this threat was delivered the same day there was a run on the money-market funds. But by the recollection of Sen. James Inhofe — who confirmed to a Tulsa radio station it was Hank Paulson himself who delivered that threat — the discussion took place on Friday the 19th.
It’s possible Paulson resorted to such dire language because the Dow popped 400-plus points in the final hours of trading the day before on rumors that Treasury and the Fed were hatching one of their many rescue plans — a rally that continued into the first hours of trading Friday. Ordinary scare language wouldn’t do under those circumstances. Or it’s possible Inhofe’s memory is fuzzy and the threat came the same day that everything nearly melted down.
Well, I’m sure Bob Woodward can make a few phone calls and clear up any discrepancies on the time frame. In the meantime, I’m more concerned about the potential for another Black Swan to show up before the month is out.
Dave Gonigam
Treading a fine line between contrarian thinking and conspiracy theory, Dave Gonigam explores the nexus of finance, politics, and the media for Agora Financial's 5 Minute Forecast. He joined kindred spirits at Agora Financial in 2007 after a 20-year career as an Emmy award-winning writer, producer, and manager in local TV newsrooms nationwide.
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That’s an awful lot of money on the move. In fact the only thing that could cause a drawdown so big, so fast seems like someone unwinding a colossal yen carry trade. Given that the yen strengthened 20% or so in the month following, I think that’s probably what happened. But who would have done it with such shocking suddenness, knowing the problems it could cause? Did some of the banks that were rendered insolvent by the subprime crisis also have huge carry trade positions that they would have been forced to liquidate?
HOORAY FOR FRACTIONAL-RESERVE BANKING!!
OR MAY BE PLUNGE PROTECTION TEAM IS AT WORK (PPT)?
It would be very interesting to know who or what pulled out big chunks of money market cash? Maybe a more serious game is underway.
Time for a Coxey’s Army or perhaps a neo-French Revolution and “the Farmer Death and the Woodman Fate.”