The Great Depression - 2008
The market was 500 trades away from Armageddon on Thursday, September 18. 2008.
Had the Treasury and Fed not quickly stepped in with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level – a 22 percent decline!
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. The total money-market capitalization was roughly $4 trillion that morning.
The panicked selling was directly linked to the seizing up of the credit markets – including a $52 billion constriction in commercial paper – and the rumors of additional money market funds “breaking the buck,” or dropping below $1 net asset value.
The Fed’s dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have major sectors of the US economy to a halt.
Without commercial paper, “factories would have to shut down, people would lose their jobs and there would be an effect on the real economy,” Paul Schott Stevens, of the Investment Company Institute, told the Wall Street Journal.
Cracks started to show in money market accounts late Tuesday when shares in one fund, the Reserve Primary Fund – which touted itself as super safe – fell below the golden $1 a share level. It had purchased what it thought was safe Lehman bonds, never dreaming they could default – which they did 24 hours earlier when the 158-year-old investment bank filed Chapter 11.
How could the overpaid managemment of the Reserve Primary Fund been so incompetent.
The Reserve Primary Fund is managed by the Reserve Management Co, Inc. whose president is Bruce R. Bent, (212) 401-5555. Bent’s estimated net worth is $7.6 billion, according to Forbes.