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« Ron Paul Supporters Speak Out In Tampa | Main | IMF Declares Iceland Did Bank Bailouts The Right Way, By Punishing Bondholders »
Tuesday
Aug282012

BAILOUT SECRETS - How Hank Paulson Guaranteed $2.4 TRILLION In Money Market Assets With A $50 Billion Bluff

Paulson's Money Market Bailout Had No Clothes...

On Thursday September 18, 2008, with global stock and money markets descending in panic, Hold 'Em Hank Paulson announced an emergency program (bluff) to stabilize markets that would utilize a $50 billion fund, that was actually designated for another purpose, to guarantee $2.4 trillion in money-market mutual fund assets, or 99% of the U.S. total.

Until yesterday, details of this $2.4 trillion bailout program were a closely-held secret, only made public through a FOIA request by finance professor Dr. Linus Wilson.  Wilson's reveal illustrates a point we have made repeatedly regarding bailouts and various federal banking guarantees:

At their core, most are rubbish.  Little more than words and secret prayer sessions by central bankers.  In this case, the last we checked, $50 billion is exactly 2.08% of $2.4 trillion.

Put another way, Paulson was using X to guarantee 48X in assets.

Luckily for Paulson, the bluff worked and order was restored.

---

John Carney - CNBC

Excerpt:

Details about a secretive government program to bail out money-market mutual funds are finally coming to light.

Acting without any explicit Congressional authority, the U.S. Treasury guaranteed in excess of $2.4 trillion of money market funds after the giant Reserve Primary Fund "broke the buck" following the bankruptcy of Lehman Brothers. The program, which ended on Sept. 18, 2009, seems to have successfully prevented a panicked run by money-market fund investors.

But until now, the Treasury has kept the identities of the funds that received government backing and the amounts guaranteed secret. It was not clear how many funds obtained backing or for how much taxpayers were on the hook during the program's duration.

Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette, recently obtained data about the program from the Treasury, through a Freedom of Information Act request. The data from the Treasury show that taxpayers were backing in excess of $2.4 trillion through the mutual fund program.  Hundreds of funds participated in the program, amounting to almost 99 percent of the total money-market mutual fund assets.

Mutual fund companies such as BlackRock, BNY Mellon, T. Rowe Price, Dreyfus, and Legg Mason took advantage of federal assistance, plus large banks that provide money market funds to customers, including JPMorgan, Goldman Sachs, Morgan Stanley and Wells Fargo.

Despite the enormous size of the guarantees, the Treasury collected only $1.2 billion in fees from the participating funds. By Wilson’s calculation, most participating funds paid just 0.04 percent, or 4 basis points, for a year’s worth of insurance.

Treasury used $50 billion from an account set aside for exchange rate stabilization to fund the program. Those funds can be spent at the Treasury Secretary’s discretion—even when it takes a pretty creative logical leap to connect the expenditures to exchange rates.

Clearly, the tie between exchange rates and money-market mutual funds is very weak,” Wilson points out.  “Moreover, it is not clear that $50 billion was enough to guarantee over $2 trillion in assets.”

Guaranteeing the money-market funds was not without risk.  Although money-market funds have rarely seen their values drop below a dollar, guaranteeing the funds, it could be argued, encouraged moral hazard as investors lost the incentive to police the quality of fund management.

Continue reading...

---

Listen as Kanjorski describes Paulson's threats:

Transcript of Rep. Paul Kanjorski statement on C-SPAN:

"It was about September 18th [sic]. … On Thursday at about 11 o’clock in the morning the Federal Reserve noticed a tremendous drawdown of, uh, money market accounts in the U.S. to the tune of $550-billion was being drawn out in in a matter of an hour or two.

The Treasury opened up its window to help, and pumped in $105-billion into the system, and quickly realized it could not stem the tide. We were having an electronic run on the banks. They decided to close down the operation, to close down the money accounts. … If they had not done that, in their estimation, by 2 PM that afternoon $5.5-trillion would have been withdrawn and would have collapsed the U.S. economy and within 24 hours the world economy would have collapsed.  We talked at that time about what would have happened. It would have been the end of our economic and our political system as we know it."

For more detail on this clip:

Kanjorski Reveals Paulson's Closed-Door TARP Threats

 

 

Background:

The U.S. Treasury's $2.4 Trillion Secret

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Reader Comments (6)

Shortly after this the Kanjosky clan came under investigation for some shady business dealings. Don't think anyone got in trouble for it though.
Aug 10, 2012 at 4:56 PM | Unregistered CommenterSKINFLINT
The contemporaneous account of the guarantee would appear to have originated with the New York Times on 9/19/08:

http://www.nytimes.com/2008/09/20/business/20moneys.html

This account confirms that (1) Treasury "would guarantee money market funds against losses up to $50 billion" and (2) money market "funds held more than $3.4 trillion in investor funds, as of the most recent industry tally released Thursday, down almost $170 billion from the previous week."

(Note that the guarantee is for $3.4 trillion, not $2.4 trillion, which is backed up by Neil Barofsky in "Bailout" at page 161 (which cites to http://www.sigtarp.gov/Quarterly%20Reports/July2009_Quarterly_Report_to_Congress.pdf, which in turn cites to a dead Treasury link): "I knew that the government had made a pledge of support of up to $3.36 trillion to guarantee the money market industry.")

Both the timing (9/18) and the subject matter (money market accounts) are consistent with the Kanjorski clip above, which draws into sharp question his representation concerning the amount of the drawdown, namely, $5.5 trillion drawdown in under 2 hours.

However, one week later, Kanjorski questioned Paulson about it, alleging that the massive figure (which had morphed to $4 trillion in just a week) came from Paulson himself, which the Hammer doesn't deny in the least (2:45 mark):

http://www.youtube.com/watch?v=IUZd-idfah4

Some day this war's gonna end...
Aug 10, 2012 at 8:38 PM | Unregistered CommenterCheyenne
Watch your portfolio's value rise and sink deeper with every bailout. Your boat made it to shore but the bottom of your boat is the sand. Every wave's backwash pulls your lowly investments into the deep and history. Who stole it?

CNBC. Can't Notice Banksters' Crimes.
Aug 11, 2012 at 3:16 AM | Unregistered CommenterHoward T. Lewis III
Romney's selection of Paul Ryan as his running mate ensures that the slate of executive office candidates is filled with nothing but Bankster Party candidates--a total rehash of 2008. All four candidates are TARP apolgists despite the massive fraud that characterize that legislation and its implementation, and despite the ensuing economic hardshipt it's visited on Main Street (15,000,000 new mouths on the food stamps program, anyone?).

Paul Ryan voted for TARP not once, but twice:

http://clerk.house.gov/evs/2008/roll681.xml

http://clerk.house.gov/evs/2008/roll674.xml

But Ryan's support pales in comparison to Mitt's enthusiasm for TARP, which he hysterically claims was necessary “to make sure we didn't all lose our jobs.”

http://www.realclearpolitics.com/video/2011/10/11/mitt_romney_defends_tarp_at_debate.html

You got that? Without statutorily rewarding the financial failures who produce nothing, hemmorhage other people's money by gambling degenerately, and collect vast fees for their "service," the unemployment rate would have been 100%, according to Mitt.
Aug 11, 2012 at 9:36 AM | Unregistered CommenterCheyenne
Thanks for the research Cheyenne. The plate of shit we have to swallow in November seems to be laced with cyanide. At least MAINE Governor Paul LePage will not go to the RNC convention IF they do not seat the Maine Ron Paul delegates. The man has backbone and my respect, especially regarding a very complicated 'legal matter' relating to energy and energy policy.
Aug 11, 2012 at 9:52 AM | Unregistered Commenterjohn

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