This is astonishing. I had done some basic research into this. I read that the money market sector had been purged of some 400 billion dollars in a matter of hours. To the point where the market was frozen to cool it off. I read earlier in 2008 that European Central Bank, after pumping 200 billion euro into the money market accounts had drained it at well. That irrational exuberance of American financial analysts apparently hinged on the liquidity of the market.
Couple that with high risk, arcane bundles of mortgages, which are then sold off in tranches [sometimes spelled trawnch or tronch] which is French for “slice”. Various elements of the mortgage are chopped up and attributed a level of risk. Higher risk = higher reward if it manages to survive. Without responsibility, they were sold off to additional levels, and more distant becomes the moral hazard of the risk.
This program focuses on Bear Stearns, Goldman Sachs, and the mortgage economy that had brewed for [to my recollection] only the last 8-10 years. Research, when you look back shows a slightly darker policy shift first presenting itself some 35-40 years ago with deregulation of certain markets over time, primarily the release of the “Net Capital Rule” which led to over-leveraging.
So, couple a somewhat late night and massive purge of money market liquidity, with a freezing of mortgage related credit, you have a tightening of economic belts and massive leverage stops swinging. Payments can’t be made, and you get defaults. Since we have money insuring money, and everything is leveraged against more money. The whole thing implodes the moment a large enough “call” is made for payment on a default.
The Federal Reserve seemingly saved the day, but without the injection of moral hazard, you have massive risk attempting to recover losses using similar arcane financial management.
These are interesting times.
ps… shareholders received a fraction of their stock price, just $2 per Bear Stearns stock. Interestingly enough, traders received bonuses that were no beholden to future performance as would exist in a sales position. So, if you did great one year, you could fail the next year completely.