The Kanjorski Meme, Mark II

Tyler Cowen is now talking about the Kanjorski Meme Mark I (I thought I’d dealt with that one already) — but that’s not the end of the story, as Sam Jones demonstrates today.

Sam has what you might call the Kanjorski Meme Mark II: it’s much less alarmist, but also more plausible, and it’s based largely on a September report from the House Economic Committee. Here’s the important bit, buried on page 9:

For the week ending on Wednesday September 17, 2008, investors redeemed $145 billion from their money market mutual funds. On Thursday September 18, 2008, institutional money managers sought to redeem another $500 billion, but Secretary Paulson intervened directly with these managers to dissuade them from demanding redemptions. Nevertheless, investors still redeemed another $105 billion. If the federal government were not to act decisively to check this incipient panic, the results for the entire U.S. economy would be disastrous.

I phoned the author of this report, House staffer Robert O’Quinn, on Friday, to ask him what his sources were for this assertion; I’m still waiting to hear back from him, but of course that’s not going to happen today, which is a federal holiday.

In any case, this is the only place this assertion has been made: I haven’t seen it reported anywhere else. That’s not to say it didn’t happen: September was a crazy month in the capital markets, and reporters were so busy chasing the latest news that they could easily have inadvertently let something like this drop. But Ben Smith, of Politico.com, has talked to Kanjorski’s spokeswoman, Abbie McDonough, and she is still citing the New York Post article rather than anything else as Kanjorski’s source.

So we have to ask whether it’s credible that money-market funds got half a trillion dollars of redemption requests on the morning of the 18th, and that after a few phone calls from Hank Paulson, they changed their mind. Sam thinks it is:

FT Alphaville is aware of very similar circumstances back in September 2007 when secretary Paulson rang around various money market funds to dissuade them themselves from pulling money from a number of ailing bank SIVs (which were dependent on CP for daily financing). Rating agencies got similar calls.

But there’s a big difference here: in 2007, Treasury was trying to stop the money-market funds from withdrawing money from ailing conduits: it was worried that a certain sequence of events would happen, and intervened to stop it from happening. The 2008 version, by contrast, has the redemption requests already being made, and Treasury stepping in one morning to have them rescinded.

I’m not saying this is impossible, but it’s certainly much more difficult. In 2007, it was clear which arms needed to be twisted: the ratings agencies would be asked to hold off on any SIV downgrades for a couple of weeks, while the big money-market funds would be asked not to try to exit the SIVs all at once. The money-market funds would be inclined to agree, since nobody wants a rush for the exits which is likely to crush everybody.

In 2008, by contrast, here’s what we’re asked to believe happened:

1. A number of big money-market funds all got massive redemption requests — totalling $500 billion or so — at the same time (specifically, about 11am on Thursday September 18).
2. The money-market funds communicated this information to the people at Treasury whose job it is to monitor such things.
3. Those people got scared, and rapidly escalated the information to Paulson.
4. Paulson, extremely concerned, called the money-market funds and asked for the names and phone numbers associated with all the biggest redemption requests. He then phoned up each of those big clients and persuaded them to rescind those requests, after they had been made, but before the market closed.
5. The big investors said yes to Paulson, and rescinded their requests.

The most improbable part of this story is not the incredible efficiency of the nexus connecting money markets, their clients, and Treasury — although it would be pretty much the only case in living memory of the government acting on its toes in such a decisive manner, in the middle of the working day. Rather, the most improbable part is the first bit, where a bunch of big institutional money-market investors all decide to sell simultaneously on the Thursday morning. Why should that be the case?

And of course the other big unknown is who these investors are. They clearly need to be very big, and they equally clearly need to be open to arm-twisting from Treasury. Maybe it’s a sovereign wealth fund or two?

It’s also worth noting that this story is entirely distinct from the big-picture story which Sam shows in a chart from Bank of America, showing a move out of prime money-money funds and into government and Treasury funds over the course of a few weeks. That did happen, and the world managed to survive. The big question is whether there was a tsunami of redemption requests on the morning of the 18th, which would have dwarfed the flows that we ultimately saw.

As I say, I have a call in to O’Quinn, so I’ll let you know if I get any more detail on where this story came from, or who knows the truth of the matter. But if any journalist has an interview with Hank Paulson lined up in the near future, it would be great if they could ask him directly about this.

Update: "Short-duration guy", in the Alphaville comments, has a very plausible take on all this. First, he says, it’s simply not technically feasible that Treasury would be able to monitor hour-to-hour redemption requests from money-market funds.

As for Treasury’s actions, the most important development was in fact the decision by the Fed to start accepting asset-backed commercial paper as collateral — thereby allowing money-market funds to meet redemption requests without selling their ABCP.

So color me skeptical on the Kanjorski Meme, in both its Mark I and Mark II forms. I think that Mark I we know for sure to be false, while Mark II is less certainly false but is still a long way from being credible.