Money Market Mutual Funds and Hank Paulson (2).docx - Money...

This preview shows page 1 - 2 out of 5 pages.

Money Market Mutual Funds – The Rescue Extract from “on the Brink” by Hank Paulson. Hank Paulson was the Secretary of the Treasury during the Global Financial Crisis. He had previously worked at Goldman Sachs. During the Global Financial Crisis, he was responsible for dealing with the crisis on behalf of President George W. Bush. Monday September 15, 2008 – Lehman Brothers files for bankruptcy (page 227-229) ….If I had any dounts that we were about to enter a new ugly phase of the crisis, they were erased when General Electric (GE) CEO Jeff Immelt stopped by the see me a little before 6pm. We spoke privately in my office. I’d know Jeff for years and admired the cool unflappable demeanor he constantly displayed as CEO of the biggest, most prestigious company in America. Jeff was following up on a phone call from the week before, when he had mentioned that GE was having problems in the commercial paper market. His report had alarmed me then. That market had been in distress since the onset of the credit crisis in August 2007. The worst of that had involved the asset-backed commercial paper market, which supported all those off-balance-sheet special investment vehicles filled up with toxic collateralised debt obligations that banks had cooked up. I’d never expected to hear those troubles spreading to the corporate world, and certainly not to GE. Commercial paper is essentially an IOU that is priced on the credit rating of the borrower and generally back-stopped by a bank line of credit. It’s usually for a short period of time – 90 days or less. And it is often bought by MMMFs looking for a safe place to get a higher return that they would earn from short-term government bills. Companies use these borrowings to conduct their day-to-day business operations, financing their inventories and meeting their payrolls, among other things. If companies can’t use the commercial paper market, they have to turn to banks (and in September 2008, banks were reluctant to lend). When their access to short-term financing is in question, companies have to curtail their normal business operations. Now here was Jeff telling me that GE was finding it very difficult to sell its commercial paper for any term longer than overnight. The fact that the biggest issuer in this $1.8 trillion market was having trouble with its funding was startling. If might E was having trouble rolling over its commercial paper, so were hundreds of other industrial companies, from Coca-Cola to Procter & Gamble to Starbucks. If they all had to slash their inventories and cut back operations, we would see massive job cuts spreading throughout an already suffering economy. “Jeff”, I remember saying, ”We have got to put out this fire.” Tuesday September 16, 2008 – the next day – Insurance giant AIG needs a bailout(page 234-236) By noon, European stocks had tumbled, the US markets were starting to dip, and the news was about to get worse. Lehman’s failure and AIG’s escalating difficulties had begun to roil money market funds.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture