MONEY MARKETS & FUNDS

AmEx paying card holders to close their accounts 

“American Express, often seen as catering to relatively wealthy customers and companies, has been expanding its credit card business in recent years by reaching out to a wider range of clients.  But that strategy has backfired. The company’s earnings tumbled in the fourth quarter as credit losses jumped and debt-burdened consumers slashed spending.” Reuters 2/23/09

 

2 minutes and 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 occurred over the period of an hour and threatened a further $5 trillion to be drawn out triggering a total collapse of the Worlds Financial System, which then prompted Hank Paulson’s emergency $700 billion TARP bailout action. 

 

Bond market calls Fed’s bluff as global economy falls apart   “The yield on 10-year US Treasury bonds – the world’s benchmark cost of capital – has jumped from 2pc to 3pc since Christmas despite efforts to talk the rate down.   This level will asphyxiate the US economy if allowed to persist, as Fed chair Ben Bernanke must know. The US is already in deflation. Core prices – stripping out energy – fell at an annual rate of 2pc in the fourth quarter. Wages are following. IBM, Chrysler, General Motors, and YRC, have all begun to cut pay. ”  Telegraph UK   2/08/09

Opinion: Hedge Funds’ Business Model Upended  “‘I was shocked myself at the scale—the leverage ratio of the banking system at 35 and some of them have 60,’ said Michael Hart, head of European FX strategy at Citigroup in London. ‘If that comes back to the norm for commercial banks of 10 times leverage that means an awful lot of adjustment, an awful lot of balance sheet adjustment in the banking system but also a huge adjustment economy-wide’… It is not a coincidence that while this was happening the household savings rate in Britain declined from just under six percent to just over nothing.”   Reuters  11/05/08

Death march of the hedge funds  “Hedge fund withdrawals have been widely cited as a contributing factor to recent stock market declines. When investors demand their money back, hedge funds are forced to sell assets into a down market, which inevitably forces prices even lower. The hedge fund industry manages about two trillion dollars worth of assets, so a 50 percent decline would have far-reaching consequences.”  Salon.com 10/16/08

Blocked Pipes: when banks find it hard to borrow, so do the rest of us.  “Why do these markets matter? First, the rates on loans paid by many consumers (adjustable-rate mortgages, for example) and companies are set with reference to the money markets. Higher rates for banks mean higher rates for everyone. Second, if the markets are blocked for more than a week some companies may find it hard to get any finance at any price. That could mean more bankruptcies and job losses. Third, more banks could go bust if the blockage continues, making investors even more risk-averse. The downward spiral would take another turn.”  The Economist  10/2/08

Money market funds devoured bankers' deposits

Money Market funds “Chutzpa Banking”“The money market funds siphoned massive amounts of our deposits—and have even gotten the government to provide a guarantee.”  Seeking Alpha  9/23/08

Almost Armageddon: markets were 500 trades away from a meltdown – “Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level – a 22 percent decline! – while the clang of the opening bell was still echoing around the cavernous exchange floor.  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. ” – NY Post  9/22/08

U.S. Scales Back Money-Fund Plan as Withdrawals Slow (Update1) “The U.S. government backed away from insuring all domestic money-market funds as a run on the $3.29 trillion industry slowed and banks complained that they would be hurt by the Treasury’s plan.”  Bloomberg   9/22/08

Money Market Funds Appear  “An even darker cloud, at least for the banks, appeared on the horizon.  Henry B.R. Brown and Bruce R. Bent invented the money market fund in 1971 in order to avoid th restrictions in Regulation Q that limited intertest rates on bank deposits…The Merrill Lynch Ready Assets Trust…was started in 1975 and required a minimum investment of $5,000.  This fund grew in one year by $40 billion…Further, there were no penalties for early withdrawals from money market accounts, unlike deposits invested in certificates of deposits (CDs)…The Colorado State Banking Board even brought an action against Merrill Lynch’s programs, charging that Merrill was illegally acting as a bank.  That effort failed, and the growth of the money market funds continued.”  A Financial History of the United States



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