Free The Great Deformation by David Stockman Page A

that about $750 million of its $60 billion in assets had been invested in Lehman commercial paper. Yet obscured in the hubbub was the fact that the resulting losses were tiny—just 3 percent of assets. In reality, breaking the buck was a money fund marketing pratfall, not the precursor to Armageddon; it amounted to a modest wake-up call disabusing investors of the industry’s phony claim that money market accounts were absolutely safe and immune to loss.
    So the unexpected shock from the Reserve Prime Fund’s breaking the buck triggered a “run” on the prime funds of significant magnitude during the week or two after September 15. Yet according to the Financial Crisis Inquiry report, most of this so-called flight money did not get very far; that is, 85 percent, or $370 billion, of this outflow simply migrated to what were perceived to be safer “government only” money market funds.
    In truth, the “run” was almost entirely within the money market mutual fund sector, with the debit going to the “prime” funds and the credit to the “government” funds. Indeed, this migration frequently involved nothing more than investors hitting the SEND button! They simply moved their deposits between these two types of accounts at the same fund management company.
    Bernanke, Paulson, and the other bailsters focused exclusively on the gross outflow from the prime funds and waved this $430 billion bloody shirt incessantly. Needless to say, they did not bother to tell Congress that only a net amount of $60 billion, or 2 percent of total assets, had actuallyleft the money market fund industry during the three weeks before the October 3 TARP vote.
    Nor did they mention that most of the $60 billion which did leave the money market sector had gone into CDs and other bank deposits, and that none had ended up in mattresses. Moreover, all of this data was published in real time by the Investment Company Institute, so it should have been evident to policy makers, even in the heat of the crisis, that the circular flow from “prime” funds into “government only” money funds and banks (which got the $60 billion) posed no threat whatsoever to financial system stability.

CHAPTER 3
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DAYS OF CRONY CAPITALIST PLUNDER
    T HE APPROXIMATE 25 PERCENT SHRINKAGE OF THE PRIME FUNDS did induce a painful corrective adjustment. In this case, the hit was to the commercial paper market, but the ensuing correction was all about losses on Wall Street, not harm to Main Street.
    On the eve of the crisis about $650 billion, or one-third of prime fund assets, were invested in commercial paper, making these funds the largest single investor class in the $2 trillion commercial paper market. Consequently, when the wave of money moved from prime funds to government-only funds which could not own commercial paper, open market rates on the A2/P2 grade of thirty-day commercial paper spiked sharply. Loan paper that had yielded only 1 percent prior to the spring of 2008 suddenly soared to over 6 percent during the September crisis.
    Any garden variety economist might have suggested that commercial paper had been seriously overvalued. The flight from prime funds was living proof that the market had been artificially buoyed by big chunks of demand from what were inherently risk-intolerant prime fund investors. Now, the commercial paper market was in a violent rebalancing mode, causing borrowers to experience the joys of “price discovery” as interest rates sought a higher, market-clearing level.
    THE REAL BAILOUT CATALYST: JEFF IMMELT’S THREATENED BONUS
    At that particular moment, however, General Electric CEO Jeff Immelt was apparently in no mood for a lesson in price discovery. In fact, he was then learning, along with the rest of Wall Street, an even more painful lesson about the folly of lending long and borrowing short. Notwithstanding that General Electric was one of just a handful of