Kanjorski and the Money Market Funds: The Facts 15 comments
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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 numbers are false.
After that, we didn't hear 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.
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Glad someone is holding people accountable and doing some fact checking.
The link I put for my "website" links to the women who uncovered this. What Kanjorsky says is kinda confusing.
www.nytimes.com/2008/0...
I would bet you cannot find any evidence for your belief that the "run" occurred the previous Thursday.
www.imf.org/external/p...
See Box 1.1 on page 6 in Chapter One.
On Feb 13 05:54 PM Micajah wrote:
> Go back and listen to Rep. Kanjorski again. He said, "it was about
> September 15" when the Secretary of the Treasury (Paulson) and Chairman
> of the Federal Reserve (Bernanke) came to brief members of Congress.
> He then said the run occurred on Thursday. Thursday was the 18th.
> The briefings by Paulson and Bernanke occurred on Thursday evening,
> the 18th:
> www.nytimes.com/2008/0...
>
> I would bet you cannot find any evidence for your belief that the
> "run" occurred the previous Thursday.
On Feb 13 08:50 PM Robert Timsah wrote:
> How would Paulson come talk to them on Monday the 15th about a run
> that was going to happen on Thursday the 18th?
On Feb 13 11:03 PM Micajah wrote:
> When Kanjorski said "about September 15," he was guessing at the
> date. He remembered it was a Thursday. Thursday was the 18th.
> Kanjorski's reference to the 15th was simply his error.
>
>
> On Feb 13 08:50 PM Robert Timsah wrote:
seekingalpha.com/user/...
The $500 billion in redemption orders from large institutional investors on Thursday, September 18, 2008, didn't result in withdrawing that amount from the money market, because Secretary Paulson personally intervened and persuaded those investors not to follow through.
That is apparently part of the facts behind what Rep. Kanjorski recalls, although his recollection seems to be a mixture of what is reported in the New York Post, what he heard from others, and what he was told on the evening of Thursday, September 18, 2008, by Paulson and Bernanke.
In other words, there was a crisis that day, the 18th, but it wasn't exactly as Kanjorski recalled it and recounted it in that C-Span segment.
On Feb 14 01:03 AM Robert Timsah wrote:
> There was no run on the 18th I mean, either. I am under the impression,
> that when Kanjorski says "we never talk about this" he was talking
> about those in his committee. So this might have been something hush
> hush.
I asked "Where did the money go?" on Tyler Durden's recent SA post (2/10). With the exception of institutional funds, all the rest of us wanting to deposit funds in a money market have our funds transmitted over the Fed Funds wire system from our local bank or credit union. The system tells where the money went and when. And yes, I realize you can still put a check in the mail.
As far as I can tell this may have been "a run on the confidence of one more part of the system" but to call it a "run on the bank" seems to me to be a bit of a stretch.