UNDO: The Kanjorski Catastrophe

By mw | Related entries in Business, Congress, Economy, Internet, Money

In recent days some misinformation was widely circulated on the ‘tubes, (including this blog) regarding the circumstances of the banking system crisis last fall. The information in question is the video clip of Congressman Kanjorski claiming that there was a two hour $550 billion drawdown in money market funds last fall, and that the global economic system was within 24 hours of complete collapse. This meme has been used as justification for Congress abrogating their responsibility to carefully consider and debate how our money is raised, allocated and spent without adequate oversight. Oh… and also for some gratuitous bashing of free markets. Justin’s takeaway:

“For those of you who didn’t realize how dire the situation was (even though I implored you to take it seriously) I hope this video will make it crystal. If our banking system failed and it set off a chain reaction around the world, our credibility would have been TOAST… Letting the market work would have literally resulted in almost a complete unraveling of our way of life. Imagine if you had woken up the next day and discovered that your debit card, your credit cards… none of them worked. It would have been catastrophic.”

I thought the story was a bit fishy at the time. Why is it that the only source was one Congressman in an obscure video clip? Where was the substantiation from… well… anyplace else? How is that anything so big and dire could take place last September, and nothing leak out about it until now? My suspicion was correct.

Kanjorski and the Money Market Funds: The Facts
“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 24, Kanjorski held a hearing on Capitol Hill with Treasury secretary Hank Paulson… 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 here 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…

…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.”

So Kanjorski “misremembered” his sources as he retells the story over time, and bad reporting from the New York Post is given new life on the Intertubes.

That was a bad week for the financial sector. But there was no retail panic in money markets, no $550B drawdown in a couple of hours and the world wide financial system was not 24 hours from collapse. Good story though. Kanjorksi enjoys telling it.

There are still questions and lessons to be learned. My question: To what extent did the Treasury Secretary and the executive branch permit misinformation and fear to be used to panic the Congress into abrogating their responsibilities to the American taxpayer and pass a very bad bill with very little consideration?

I don’t think this story is done.


This entry was posted on Friday, February 13th, 2009 and is filed under Business, Congress, Economy, Internet, Money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

14 Responses to “UNDO: The Kanjorski Catastrophe”

  1. Doug Mataconis Says:

    Thanks for digging up the truth on this one.

    There are already some on the fringe claiming that this was evidence of a terrorist attack on the United States.

    I don’t think we’ve heard the last of this one, though.

  2. Ryan Says:

    I’m glad to know that Kanjorski was full of it. It is irritating that the Truthers of the recession will buy into the slightest bit of conspiracy theory BS.

    Doug – I haven’t seen the MSM coverage on this that one would think this would have prompted. While I agree, we won’t be hearing the last of this for awhile, it won’t get any nearer to the front bearer than it never was.

  3. Justin Gardner Says:

    First off, nobody I’ve heard is claiming anything about a terrorist attack and I think it’s REALLY dishonest to muddy the waters with that Doug. Seriously. That’s dirty pool.

    Second, this is one columnist’s opinion about Kanjorski’s sources. Paulson didn’t deny that this is what happened. You think he didn’t deny it because it could be true?

    However…let’s say it didn’t happen exactly this way. You don’t think that something extremely similar happened?

    Because I seem to remember the actual numbers saying exactly that.

    But no, a columnist from Portfolio is more believable than a Congressman who was briefed by Paulson and Bernanke. He’d put his credibility on the line to spread a false meme on C-SPAN.

    Sure.

    Oh, and by the way, you might want to read what Ben Bernanke said on September 26th…

    While perhaps manageable in itself, Lehman’s default was combined with the unexpectedly rapid collapse of AIG, which together contributed to the development last week of extraordinarily turbulent conditions in global financial markets. These conditions caused equity prices to fall sharply, the cost of short-term credit – where available – to spike upward,and liquidity to dry up in many markets. Losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds.

    So to be so quick to say Kanjorski is full of it is disingenuous. There’s a lot more to back up Kanjorski’s version than the columnist’s.

  4. Doug Mataconis Says:

    Justin,

    1. http://tinyurl.com/djs6y9

    Granted, Pam Geller is nuts, but I didn’t say in my comment that this was a mainstream theory.

    And I think saying that Kanjorski is full of it is entirely appropriate. Were there withdrawls at Money Market funds ? Yes. Is there any evidence that it was on the scale that Kanjorksi claims ? No.

  5. kranky kritter Says:

    2 simple points, which if we all acknowledge them, could stop this food fight in its tracks.

    1)Regardless of the the actual numbers and speeds, there was a point where people were VERY worried about MM accts, and if there wasn’t an actual run like this. (I’m no nervous nellie, and I had white knuckle chat with a service rep about my mother’s retirement money. W/o that guarantee, I was daya away from going to cash. Period.] I think you can still presume that the best case was that a run was imminent. And it was stanched by federal action to make the guarantees. Does anyone really disagree with that? I’m curious.

    2) The fairly uncontroversial efficacy of this guarantee does not speak to the overall efficacy of ALL the hasty actions that congress took in the fall. The guarantee probably didn’t even cost us much if anything, because it covered most funds, thereby ending the worry and any need for folks to consider hasty withdrawals.

    Now, to re-start the argument: I think there’s an extraordinarily good possibility that as time passes more and more of us are going to wonder why we saved these banks. Unless they step up and participate willingly, quickly, and yes somewhat selflessly in stabilizing the RE market by renegotiating terms of loans to current viability, based on borrower income and current property value.

    That doesn’t mean saying “OK we’ll take 250k for the home you owe 450k on, even though you can’t afford the payments on that either because you only ever made $900 a week, and holy crap now you’re unemployed.

    But it does mean saying something OK we’ll give you a new 30 yr mortgage at 5.5% for 240k on that house that isn’t worth the 275 you paid, because you haven’t given us a dime of your payments at 7% in 3 months, and we don’t want to get stuck with another house.

    Banks should be using that bailout money to give breaks to customers who can be viable homeowners under current circumstances. That’s the only way the RE market stabilizes within a couple years. Otherwise we all suffer while even the normally creditworthy are stuck in bureaucratic red tape and the unfortunate circumstances of a burst bubble created, let’s face it, largely by feckless lenders.

  6. Donklephant » Blog Archive » REALITY: Ben Bernanke’s Testimony On September 26th, 2008 Says:

    [...] « UNDO: The Kanjorski Catastrophe [...]

  7. Justin Gardner Says:

    Doug,

    1) You muddied the waters. Not cool.

    2) Did you not read Bernanke’s testimony? He said that there was a run without using that language.

    kk, good points all around. It’s going to take mutual sacrifice and I don’t think anybody’s happy with how the bailout money was spent, but it did free up the commercial paper market, just not the persona and business lending market. But then again, only half of the TARP money has been spent so far. Perhaps those markets would have freed up had all of it been spent. We just won’t know until we start trying some things and seeing if they work.

  8. Doug Mataconis Says:

    Justin,

    From my original comment:

    There are already some on the fringe claiming that this was evidence of a terrorist attack on the United States.

    How did that muddy the waters ?

    As for Bernanke, I didn’t say there was a run on the MM’s, just that there’s no evidence to support what the Congressman said. And Bernanke’s testimony doesn’t get him there.

    On kk’s point and yours, maybe we all need to think about it this way — maybe it’s not such a bad thing that banks aren’t lending and credit markets are tight; we have lived too long on money we don’t have and things we can’t afford. It may be time to pay the piper.

  9. Victor Says:

    Justin,

    It’s more than just one journalist’s opinion: Crane’s Data is also reporting on the event, saying that “we believe that the major facts in this account are false and confused.”

    http://cranedata.wordpress.com/2009/02/11/doom-and-gloomers-seize-on-false-550-billion-number/

    Their news archives for that month (Sept. 2008) provide some insight as to what was happening in the markets at the time.

  10. mw Says:

    @Victor
    Crane is being kind by calling the Kanjorski account “confused”. Kanjorkski’s story is in the same category as Nancy Pelosi saying we are losing “500 million jobs a month”.

    Opinion has nothing to do it. The core facts that Kanjorski relates about a $500B drawdown in Money Markets is false. It is in direct contradiction to the reports released by the Fed for that week as linked by the reporter I quoted. If you want to believe Kanjorski’s story, you have to believe that the Fed is generating false reports. They can’t both be true.

  11. L.H. Says:

    BERNANKE & PAULSON ANSWER KANJORSKI RE: “THE FATEFUL DAYS IN SEPTEMBER:”

    Here are two videos that hold some answers. For example:

    In the first video, while talking to Bernanke and Paulson, Kanjorski states there was a “money market run” in the amount of $500 Billion in $4 Trillion of accounts. Kanjorski states that he understood it was essential for the Fed to pump $105 Billion into the system and to suspend operations, or else the money markets in this country would have failed. Paulson said he agreed with Kanjorski’s comments, and then he described what actions were taken.

    9/25/2008: Paulson’s answers to Kanjorski’s questions about a run on the banks:

    http://video.msn.com/video.aspx?mkt=en-us&vid=64d4a5e0-049a-43d3-8f25-7798683068fb

    (6:18 min. long) Rep. Paul Kanjorski, D-Pa., questions Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke on the proposed plan to bail out the financial sector. Sanjorski asks Paulson to admit to the American public that there was a run on the bank in Sept. 2008 and to describe the actions taken. Please listen to Paulson’s response, including using “emergency powers” (exchange stabilization funded Treasury) through 9/19/2008.

    (Per Wikipedia: “The Exchange Stabilization Fund (ESF) is an emergency reserve fund of the United States Treasury Department, normally used for foreign exchange intervention. This arrangement (as opposed to having the central bank intervene directly) allows the US government to influence currency exchange rates without affecting domestic money supply.”)

    Please note that this video was two days before the 9/27/2008 CSPAN video of Kanjorski that started this blog.

    ——————

    http://www.c-span.org/Watch/watch.aspx?MediaId=HP-R-15785

    2/25/2009: Ben Bernanke testified before the House Financial Services Committee.
    (Beginning at 19:20 min.:) During Bernanke’s opening remarks, he said investors “began to withdraw large amounts” from money market funds.
    (Beginning at 21:50 min.:) “Resulting outflows threatened the stability of short-term funding markets…”

    (Beginning at 46:26 min.:) Rep. Paul Kanjorski asked Bernanke to describe the September 15-24, 2008 “meltdown.” Bernanke said it was almost “a collapse of the global financial system” and we came “very, very close to a global financial meltdown.”

    ===========

    For reference, this event is what helped spark the large withdrawals from MM accounts on or about 9/18/2008:

    http://latimesblogs.latimes.com/money_co/2008/09/the-credit-cris.html

    Money market fund ‘breaks the buck’ on Lehman IOUs
    4:37 PM, September 16, 2008

    The credit crisis has taken a new and dangerous turn: Shares of a large money market mutual fund have “broken the buck” – fallen below the standard $1 a share – because of losses on IOUs from brokerage Lehman Bros. Holdings Inc.

  12. L.H. Says:

    This posting adds more details to my previous post.

    This BIS document includes mind-blowing details. Please read it before you post opinions about Kanjorski or others that discuss this topic.

    If anybody out there doubts there was a run on the ~$3.4 Trillion money market funds in the U.S. in Sept. 2008, you can point them to the BIS (Bank for International Settlements) document below. Also, this document helps explain why the Paulson/Geithner decision to not save Lehman on 9/15/2008 kicked off a global panic and why governments raced to announce new policies to protect money market accounts, etc.

    (For an explanation of “The fall of Lehman Bros,” including Paulson’s and Geithner’s roles, see the 2nd link below.)

    The run on the money market funds is also part of why our government saved AIG on 9/16/2008 and why certain financial institutions were “persuaded” to take government money.

    This is the global financial “meltdown“ that Bernanke, Paulson, and Geithner often mention, without the details. Also, this is a key reason why firms such as GS and MS became bank holding companies. (Banks get access to “last resort lending” from the Fed.)

    I appears to me that many people (including some members of Congress and the media) have no idea how close we came to (quoting Bernanke) “a collapse of the global financial system” and “very, very close to a global financial meltdown.”

    ———————-

    Click on the “Full Text” PDF on the right side of this web page:

    http://www.bis.org/publ/qtrpdf/r_qt0903g.htm

    Bank for International Settlements
    BIS Quarterly Review, December 2008
    US dollar money market funds and non-US banks
    2 March 2009

    EXCERPTS:

    The Lehman Brothers failure stressed global interbank and foreign exchange markets because it led to a run on money market funds, the largest suppliers of dollar funding to non-US banks. Policy stopped the run and replaced private with public funding.

    “The run on money market funds.” (Page 72)

    On 16 September, the day after Lehman’s failure, the fastest growing fund family over the previous several years, Reserve, announced that shares in its flagship fund were worth 97 cents and those in its Caribbean fund 91 cents. (i.e., It broke the buck.) The flagship Primary Fund, the industry’s oldest and still independently managed by its founder, had gained market share by buying higher-yielding paper, including Lehman notes

    …On the Wednesday (9/17) and Thursday (9/18) following Tuesday’s (9/16) breaking of the buck, institutional investors liquidated $142 billion in 102 prime institutional funds, 16% of their holdings. On the same days, they purchased $54 billion in government funds, a similar percentage increase. Individuals sold a more modest $27 billion from prime funds (3%), and bought a net $34 billion in government funds.

    Two-day redemptions at the largest institutional prime fund managed by the three largest securities firms were 20%, 36% and 38% of assets…

    On 21 September, Goldman Sachs and Morgan Stanley announced plans to become bank holding companies; Bank of America had announced its purchase of Merrill Lynch on 15 September. (The day of Lehman’s failure.)

    American Beacon, an independent money fund spun off by American Airlines, faced two-day redemptions of 46% of its assets and resorted to in-kind redemption.

    In sum, the run on money market funds threatened a run first on the CP market and then on the CD market and thereby on non-US banks. A run on the money market funds destabilised already strained global bank funding markets…

    The run on money market funds made it almost inevitable that they cut back on their funding of non-US banks…In response to these and other pressures on non-US banks’ dollar
    funding, central banks ramped up their transatlantic dollar funding of non-US banks. On 18 September, the Federal Reserve agreed to increase its existing swap lines with the ECB and the Swiss National Bank (SNB) to $110 billion and $27 billion, respectively. It also agreed new swap lines with the Bank of Japan ($60 billion), Bank of England ($40 billion) and Bank of Canada ($10 billion). On 29 September, the above swap lines were at least doubled. On 13 October came an unprecedented announcement: “sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of US dollar funding is demanded [at fixed rates]”.

    The future of the money market fund industry is not clear…

    …Such proposals and developments leave open the future allocation of the current $3.4 trillion portfolio of US taxable money market mutual funds. In particular, their ultimate importance as providers of dollars to non-US banks remains to be seen. For now, flows from low-yielding Treasury funds to prime funds could provide a near-term boost to non-US banks’ funding in US dollars.

    ===========

    http://www.nzherald.co.nz/management/news/article.cfm?c_id=59&objectid=10550178&pnum=0

    The fall of Lehman Bros – Part 5
    Thursday Jan 01, 2009

  13. L.H. Says:

    $550 Billion Disappeared in “Electronic Run On the Banks:”

    This video is from C-SPAN’s Washington Journal on January 27, 2009:
    http://www.youtube.com/watch?v=HOhc2e6UfMM

    Summary: In the C-SPAN interview, Rep. Paul Kanjorski of Pennsylvania explains what former Treasury Secretary Paulson and Fed Chairman Bernanke told some members of Congress (probably during the critical September 2008 closed-door meeting that they all keep referring to, but haven’t explained.) During the first 2 minutes of the video, an enraged caller rants to Rep. Kanjorski about how wasteful the first $700 billion bailout was. Then, about 2 minutes 15 seconds into it, Rep. Kanjorski reveals what Paulson and Bernanke said that shocked Congress (at least the Congressional leaders that were in that meeting) into supporting the $700 billion TARP bailout.

    THIS IS A PARTIAL TRANSCRIPT:

    Rep. Paul Kanjorski (D) of Pennsylvania, speaking:

    “It was about September 15th. Here’s the facts, and we don’t even talk about these things. On Thursday (9/18) at about 11:00 in the morning, the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States to the tune of $550 billion was being drawn out in a matter of an hour or two. The Treasury opened up its window to help. They pumped $105 billion in 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 out there and that’s what actually happened. If they had not done that, their estimation was that by 2:00 that afternoon, $5 1/2 trillion would have been drown off 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 happen if that happened. It would have been the end of our economic system and our political system as we know it and that’s why when they made the point we’ve got to act and do things quickly, we did…(the rest of this video section explains what Paulson did with the $700 Billion: Paulson gave money to banks as equity investments because “they” determined it would have taken $3-4 trillion of taxpayer’s money to actually buy bad bank assets.)

    We are no better off now than we were three months ago.

    Will you listen to a lady that just got off the telephone. She is near panic, and she doesn’t think her government’s acting properly or acting in her behalf. I think it’s important that we start informing that lady as to what really were the facts, what happened, and get input from her. Maybe she has a better idea. You know, we’re not any geniuses in economics or finance. We’re representatives of the people. We ought to take our time but let the people know this is a very difficult struggle. Somebody who is…

    Somebody threw us in the middle of the Atlantic ocean without a life raft and we’re trying to determine what’s the closest shore and whether there’s any chance in the world to swim that far. We don’t know.”

  14. L.H. Says:

    Please listen to the whole 6 minutes. (A partial transcript is below the link.)

    Then, compare it with the info in my other posts, including the BIS linked document. The exact numbers may not line up, but the point is that the run on the $3.4 Trillion occurred and only extraordinary government measures stopped it.

    BLOGGERS: Instead of spending your time ridiculing Kanjorski, please ask Bernanke, Geithner, et al: are the American people protected from this type thing happening again?

    $550 Billion Disappeared in “Electronic Run On the Banks:”

    This video is from C-SPAN’s Washington Journal on January 27, 2009:
    http://www.youtube.com/watch?v=HOhc2e6UfMM

    Summary: In the C-SPAN interview, Rep. Paul Kanjorski of Pennsylvania explains what former Treasury Secretary Paulson and Fed Chairman Bernanke told some members of Congress (probably during the critical September 2008 closed-door meeting that they all keep referring to, but haven’t explained.) During the first 2 minutes of the video, an enraged caller rants to Rep. Kanjorski about how wasteful the first $700 billion bailout was. Then, about 2 minutes 15 seconds into it, Rep. Kanjorski reveals what Paulson and Bernanke said that shocked Congress (at least the Congressional leaders that were in that meeting) into supporting the $700 billion TARP bailout.

    THIS IS A PARTIAL TRANSCRIPT:

    Rep. Paul Kanjorski (D) of Pennsylvania, speaking:

    “It was about September 15th. Here’s the facts, and we don’t even talk about these things. On Thursday (9/18) at about 11:00 in the morning, the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States to the tune of $550 billion was being drawn out in a matter of an hour or two. The Treasury opened up its window to help. They pumped $105 billion in 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 out there and that’s what actually happened. If they had not done that, their estimation was that by 2:00 that afternoon, $5 1/2 trillion would have been drown off 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 happen if that happened. It would have been the end of our economic system and our political system as we know it and that’s why when they made the point we’ve got to act and do things quickly, we did…(the rest of this video section explains what Paulson did with the $700 Billion: Paulson gave money to banks as equity investments because “they” determined it would have taken $3-4 trillion of taxpayer’s money to actually buy bad bank assets.)

    We are no better off now than we were three months ago.

    Will you listen to a lady that just got off the telephone. She is near panic, and she doesn’t think her government’s acting properly or acting in her behalf. I think it’s important that we start informing that lady as to what really were the facts, what happened, and get input from her. Maybe she has a better idea. You know, we’re not any geniuses in economics or finance. We’re representatives of the people. We ought to take our time but let the people know this is a very difficult struggle. Somebody who is…

    Somebody threw us in the middle of the Atlantic ocean without a life raft and we’re trying to determine what’s the closest shore and whether there’s any chance in the world to swim that far. We don’t know.”

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