What really precipitated the financial crisis in Sept.?

[Zoocat]

Finally someone talks about what really happened in the room when Paulson and Bernanke came to call on Congress on sept. 18. This is very enlightening and pretty scary too. Everything rolled out from this moment.
Daily Kos: State of the Nation

 

[ziggy29]

I heard that the other day. I wonder if this "run" may have been sparked by the Lehman failure.

 

[Dawg52]

Lovely.

 

[FIREd]

I unfortunately probably participated in the "run". The deciding factor for me was hearing good old Richard Shelby and his possies suggest that the government should not intervene and just let the chips fall where they may after the failure of Lehman. In other words, if the economy's gotta collapse, just let it collapse. That guy scared the heck out of me and I knew he wasn't joking, so I immediately went to the bank and cashed in my emergency fund held in a money market fund. Oops!

 

[Zoocat]

I never understood exactly what people meant by the Lehman failure precipitating this financial crisis until I saw this video. Obviously, letting Lehman fail didn't cause it, but now that we know what happened at the "show down" in the closed room, it's pretty clear that a LOT of people panicked on Sept 18,as well as corporations, hedge funds, etc, etc. Not a pretty picture of our financial system.

 

[FinanceDude]

Finally someone talks about what really happened in the room when Paulson and Bernanke came to call on Congress on sept. 18. This is very enlightening and pretty scary too. Everything rolled out from this moment.
Daily Kos: State of the Nation

I think they over-reacted.........

 

[ls99]

From the Ko's:" In a span of 2 hours, $550 billion was drawn out of money market accounts in an electronic run on the banks." Kanjorski alludes to 3 trillion total draw out possibility if...........

No discussions that I can find on the Who, and Why part. Absent that explanation the rest of the interview might as well be smoke and mirrors.
Guess I just don't understand economics, or high finance.

 

[ziggy29]

From the Ko's:" In a span of 2 hours, $550 billion was drawn out of money market accounts in an electronic run on the banks." Kanjorski alludes to 3 trillion total draw out possibility if...........

No discussions that I can find on the Who, and Why part. Absent that explanation the rest of the interview might as well be smoke and mirrors.
Guess I just don't understand economics, or high finance.

I've heard some "who" and "why" speculation, but it's political in nature and possibly foilhattery.

 

[Trek]

Iceland!

 

[ls99]

I think i got it:

There was this massive electronic withdrawal of funds....

The computers went berserk, started to move money out of money markets into the bit bucket (where everything disappears into nothingness).
Then when the fed announced that the guaranteed limit is $250000. Them computers obeying the master instruction, ground to a halt.

It is as good of an explanation as any other out there.

 

[hogtied]

Revisions to the Community Reinvestment Act in the 90's by the Clinton Admin.

Economist Stan Liebowitz wrote in the New York Post that a strengthening of the CRA in the 1990s encouraged a loosening of lending standards throughout the banking industry. He also charges the Federal Reserve with ignoring the negative impact of the CRA.[52] In a commentary for CNN, Congressman Ron Paul, who serves on the United States House Committee on Financial Services, charged the CRA with "forcing banks to lend to people who normally would be rejected as bad credit risks."[58] In a Wall Street Journal opinion piece, Austrian school economist Russell Roberts wrote that the CRA subsidized low-income housing by pressuring banks to serve poor borrowers and poor regions of the country.[59] Jeffrey A. Miron, a senior lecturer in economics at Harvard University, in an opinion piece for CNN, calls for “getting rid” of Fannie Mae and Freddie Mac, as well as policies like the Community Reinvestment Act that “pressure banks into subprime lending

 

[Zoocat]

From the Ko's:" In a span of 2 hours, $550 billion was drawn out of money market accounts in an electronic run on the banks." Kanjorski alludes to 3 trillion total draw out possibility if...........

No discussions that I can find on the Who, and Why part. Absent that explanation the rest of the interview might as well be smoke and mirrors.
Guess I just don't understand economics, or high finance.

I find it very interesting that there has been no outcry to learn what was said by Paulson and Bernanke behind the closed doors on Sept 18 and only now 5 months later are some little hints trickling out, much less information on "who" and "why." Smoke and mirrors, yes. But what is being obscured?

 

[Bikerdude]

When I heard that a MM had "broke the buck" I withdrew all my MM funds or transferred them to a bank account. I believe this was on the 18th. Letting Lehman go under was a mistake, wiping out the investors in FNMA was a mistake. I think we could have brought this down in a controlled fashion had politics not intervened setting off panic.

 

[ziggy29]

I think we could have brought this down in a controlled fashion had politics not intervened setting off panic.

Unfortunately, happening seven weeks before a presidential election, that option wasn't on the table.

 

[Gone4Good]

When I heard that a MM had "broke the buck" I withdrew all my MM funds or transferred them to a bank account.

This is exactly the "who" and the "why" of it.

In September the equity & bond markets were already rife with panic and uncertainty. But then Lehman's bankruptcy caused the Primary Reserve money market fund to break the bunk which in turn caused a mass exodus from money market funds (see Bikerdude). Money market funds started puking commercial paper to meet redemptions causing the commercial paper market to shut down. Without access to the CP markets, short-term corporate liquidity for things like payroll and inventories was drying up. Corporations started drawing down on their revolving bank lines defensively, putting futher pressure on bank liquidity, which was already under assault . . . .

This was a classic run on the bank scenario. But in this instance it was cascading through the entire economy. Things were dangerously close to falling apart in ways that are absolutely terrifying. Paulson & Bernanke improvised a bunch of programs that prevented a bad situation from spiraling into an absolute catastrophe . . . about that I have zero question.

 

[Khan]

I never understood exactly what people meant by the Lehman failure precipitating this financial crisis until I saw this video. Obviously, letting Lehman fail didn't cause it, but now that we know what happened at the "show down" in the closed room, it's pretty clear that a LOT of people panicked on Sept 18,as well as corporations, hedge funds, etc, etc. Not a pretty picture of our financial system.

What's funny about this (to me anyway) was I was without electricity from Sept 14 - 20, and had no idea what was going on.

 

[audreyh1]

What precipitated the crisis? (yes, the MM fund run was caused by the Lehman failure)

The short version - letting Lehman go bankrupt.
The long version - SEC in 2004 loosening the rules and letting investment banks lever themselves as much as 40X

If it hadn't been for the excessive leverage, there would have been a lot of financial pain in 2007 due to the housing bubble,MBSs etc., but no "systematic failure".

Audrey

What precipitated the crisis? (yes, the MM fund run was caused by the Lehman failure)

The short version - letting Lehman go bankrupt.
The long version - SEC in 2004 loosening the rules and letting investment banks lever themselves as much as 40X

If it hadn't been for the excessive leverage, there would have been a lot of financial pain in 2007 due to the housing bubble,MBSs etc., but no "systematic failure".

Audrey

P.S. The Lehman failure DID precipitate the run on MM funds. Two MM funds immediately broke the buck because of holding Lehman securities, and once this became known, the run started. Also, the Lehman failure put several Hedge funds in the position of not being able to get to their cash.

 

[dessert]

As I read this I relate it back to the 20's where a "run on the bank" could be seen by long lines in front of the brick and mortar institution. It was easy to simply close the doors to prevent further damage.

In this computer society where everyone has instant information and a high speed internet connection to their funds, only certain people would ever know about a run on the banks and this looks like what went on.
It is kind of disturbing.

Of course this might be against my policy of "not believing everything I read on the internet".

 

[racy]

What precipitated the crisis?
(1) Government meddling in mortgage markets: homes for everyone! It doesn't matter if you can't afford one.
(2) Government/SEC not providing oversight & not keeping up with 21st century financial instruments, ie credit default swaps (sold as insurance but not regulated as such).
(3) Government/Fed/Greenspan's easy money policies leading to housing bubble.

But, don't worry. Government has a plan.........................

 

[Gpond]

I heard that the other day. I wonder if this "run" may have been sparked by the Lehman failure.

Rumor is Chavez (Venezuela) had $300B sitting at Lehman Brothers and that is why it was allowed to fail.

Venezuela Faces Loss on Lehman - WSJ.com

 

[yakers]

IMHO this is a pretty good description of the banking mess

FT.com / Markets - Insight: How Wall Street scammed the Chinese banks

 

[ls99]

IMHO this is a pretty good description of the banking mess

FT.com / Markets - Insight: How Wall Street scammed the Chinese banks

Most interesting article. So if wall street really scammed the Chinese banks, without "wink wink" the regulators knowledge, who is the Yakuza going to pay a visit to?

 

[Zoocat]

I'd guess that the Chinese are not pleased with us these days. Maybe that's why they have explicitly said they need a guarantee that the dollar will not devalue and ruin their treasury holdings.

“In talks with Clinton, China will ask for a guarantee that the U.S. will support the dollar’s exchange rate and make sure China’s dollar-denominated assets are safe,” said He in Beijing. “That would be one of the prerequisites for more purchases.”
Bloomberg.com: Worldwide

“These comments are some sort of a threat but of course China can never get such a guarantee,” said Thomas Harr, a currency strategist at Standard Chartered Plc in Singapore. The U.S. may assure China that it will clean up the financial system and that it “won’t push for a weaker dollar but they can’t promise not to increase the fiscal deficit,” he said.

We'll never be able to pay back those trillions unless we devalue the dollar. Maybe this demand is a play for us to raise interest rates on the treasuries? If we do that, the US government will self destruct from humongous interest payments on the debt. Seems like we've got a Catch-22 game going on.

 

[clifp]

It is all about Karma.

As I have said several times, there is a certain justice to the Chinese selling us toxic toothpaste, toys, and dog food, and us paying for these junk with toxic financial instruments.