Run on Banks Thwarted on 9/18??

[Marshall Kane]

Has anyone heard anything more about this? Sorry if this has already been mentioned here, but a friend just alerted me to these comments from Rep. Kanjorski about a massive electronic run on the banks that was barely thwarted back in September:

http://www.liveleak.com/view?i=ca2_1234032281

"...$5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it."

Pretty scary. Note the last part of the clip, where he invites the CSPAN caller, a hysterical elderly woman, to call him with her suggestions to prevent the collapse of the world economy, since, he concedes, the people in charge have no idea what to do. Very reassuring.

At 2 minutes, 20 seconds into this C-Span video clip, Rep. Paul Kanjorski of Pennsylvania explains how the Federal Reserve told Congress members about a "tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars." According to Kanjorski, this electronic transfer occured over the period of an hour or two.

On Thursday (Sept 18), at 11am the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $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.

If they had not done that, their estimation is that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.

We are no better off today than we were 3 months ago because we have a decrease in the equity positions of banks because other assets are going sour by the moment.

Kanjorski does not provide further details.

[Higgenbotham]

Has anyone heard anything more about this?

We are no better off today than we were 3 months ago because we have a decrease in the equity positions of banks because other assets are going sour by the moment.

I've posted on this numerous times since September. So far as I know, the money market funds where the panic occurred were not in the banks; the debt was securitized and moved outside the banks into these money markets through SIVs and SPVs. I gave specific examples of this in the Financial Topics thread around the beginning of January.

You would think that the politicians would know what they are talking about and maybe this guy does. However, I have been shocked over and over again in that regard. In a sense, though, it really doesn't matter whether all the money market funds in question have been moved outside or some are still in the banks. The potential is still for a $3 trillion lockup and partial evaporation of funds (so many cents on the dollar once it is sorted out).

But, yes, the problem still exists and we are no better off as far as I can see. The run from money markets to t-bills is the equivalent of the old fashioned banking panic.

[Higgenbotham]

One more comment.

The scenario of economic collapse he has described is exaggerated. Looks to me like he heard this from somebody who was looking for a bailout and needed a few votes to get it passed. We can all guess who that somebody was.

Yes, it would be a bad scenario, especially for the stock market, but not the end of the world.

[JLak]

On Thursday (Sept 18), at 11am

Right about when I walked out of the bank with my entire savings account in cash.

It would have been the end of our economic system and our political system as we know it.

What does he mean by the latter?