Four Years Ago Today

It’s the single moment I remember most vividly from the 2008 financial crisis.

It was a warm September day, and I was waiting outside a tiny post office in a northern Connecticut town.  The top was down, and Bloomberg Radio was playing that Thursday afternoon.  The sun was gentle, and there was a slight breeze.

Everything was perfect, except for the fact that Lehman had declared bankruptcy on Monday, and on Tuesday AIG had nearly failed and the President had ordered the government to step in and pay 100 cents on the Dollar on its margin calls.

Rumor had it that all the other big brokerage firms were going down, too, and the hedge funds had put on Credit Default Swap (CDS) bets several times the size of the debt of Merrill, Goldman and Morgan, effectively sopping up every bit of liquidity those firms might turn to as the emergency widened.

But that Thursday afternoon I heard the news that could lead to the starvation of half the planet’s population in the next six months.


The Reserve Fund had “broken the buck.”  You probably never heard of it, since it was the Money Market Fund that institutions used to hold their ready cash.  It was also the oldest and biggest Money Market Fund.

Suddenly there was no “big” place to hold cash.  My employer had already decided that no more than $100 million in cash would be deposited at any bank, and even then there were only a handful of banks big enough and (hopefully) strong enough to trust, even overnight.

T-bill yields went negative.  Think about that….  Some investors (like my employer) were willing to lose money over one, two or three months, as long as they would get most of it back.

When the money markets were being liquidated, their bread-and-butter products, short bank CDs and company-issued commercial paper, had no way to “roll over”…. That, in turn, meant that longer credit obligations, like four to six month Letters of Credit issued by banks, weren’t about to be accepted.

So why would half the world’s population be in imminent danger of starving?

Because well over half the world’s population depends on food that passes through an international commodities market that has a lag in time between the farm and the dinner table.  That lag in time was financed, either with Asset-Backed Securities (already nearly dead, and declining from well over a trillion dollars outstanding to less than $400 billion in the prior year), or with shipping arrangements backstopped by bank-issued letters of credit.  Even the giants like Cargill issued commercial paper to fund their shipments.  Suddenly there were no customers for that paper, so the shipments just stopped.

It’s one thing when Australian ports have to deal with giant piles of iron ore, but another entirely when bread and pasta makers aren’t receiving their flour or Asian importers aren’t getting rice.  That’s Mad Max stuff.

While it took months or even years before the investing public realized how much the Fed did in the way of providing taxpayer backstop to the financial world (I’ve seen reasonable estimates that put the total above $50 trillion), the two most important guarantees were the bank credit backstop (for those CDs and LOCs), and the Commercial Paper credit backstop (which is how even mighty General Electric covers such mundane cash needs as paying salaries on months with five Fridays).

Without those short term credit facilities, virtually all goods that tie to basic commodities would stop flowing.  That’s right — no gas at the gas station, no coal to the power plants, no bread on the grocery store shelves.

And the Fed wasn’t alone.  Every central bank, regardless of the laws of their countries or the politics of their governments, basically did the same thing.

When you worship at the altar of free markets, at least stop and think about what the “free market” solution might have been that warm September day four years ago.



4 Responses to Four Years Ago Today

  1. Henry says:

    Howard, as usual – good post!

  2. Marc says:

    I remember that for the next 40 + days I lost more money than I thought I even had.

  3. William Kinsolving says:

    History is a painful perspective, but I thank you anyway. Great post.

  4. gold price says:

    Rates on commercial paper can be higher than other short-term cash instruments, reflecting the default risk and the needs of corporations to quickly raise financing. Mutual funds had a long history of using investments in commercial paper to boost the yields on their funds until the Lehman Brothers bankruptcy in 2008 severely rattled the commercial paper market. Mutual fund managers are now more careful about the commercial paper investments that they make for their money market funds .

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