The Zero Hour

I have to admit that even I thought there was a great deal of hyperbole involved when Congress was last fall being prodded with scary talk of Armageddon into taking action to "rescue" the financial system.

Now, though, as the Zero Hedge blog reveals in a post entitled "How The World Almost Came To An End At 2PM On September 18," it appears that those giving the warnings were deadly serious.

LiveLeak has caught a scary moment of previously undisclosed insight by Paul Kanjorski where he reveals some facts that have not been captured by the media previously. At 2 minutes and 20 seconds in the video below, Democratic Representative Kanjorski 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 or two. And it gets worse. Kanjorski paraphrases the following disclosure by Bernanke and Paulson:

On Thursday (Sept 18), at 11am the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.

If they had not done that, their estimation is that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.

We are no better off today than we were 3 months ago because we have a decrease in the equity positions of banks because other assets are going sour by the moment.

Interestingly, Kanjorski, and likely more and more Democrats, are starting to shift to the camp that more time is needed to make a correct decision this time (which may explain Geithner's decision to postpone the "bank-rescue" announcement by one day to Tuesday), instead of rushing into another half-baked plan. Very scary stuff.

 

Comments

[Subhankar]

I'm afraid the one day delay isn't going to change any thing. The 'bank rescue' scheme is unlikely to work. In the epicenter of capitalism and free market, may be a dose of socialism, like 'bank nationalisation', may just do the trick.

[Rick]

You have far more knowledge in this than I do. Does this make sense to you? Because it sure doesn't sound plausible to me. 550 billion in 1-2 hours doesn't sound like a rate to hit 5.5 trillion 3 hours later. How did Bernanke freeze the accounts? He stopped any and all withdrawals from money market funds? What is his authority to do that? Can he therefore limit anyone's access to their money? Can he unilaterally stop anyone from withdrawing money from any account anywhere anytime? Are money market accounts even protected under FDIC? How did raising the FDIC limit 'restore confidence'? I seem to remember there only being about 2.4 trillion in accounts that was not insured under the 100 thousand limit. Every one of those depositors somehow got the memo to yank their funds at the same time and no one else got a copy? And the uninsured funds were doubling in number? Is it credible that 550 billion of FDIC insured accounts was withdrawn in 1-2 hours? Were records and proof of this 'run' presented to Congress or was it merely more of the WMD-style proof?

[Marion Shaw]

I think Rick has raised some very pertinent and
insightful questions. I hope the author of this
blog or one of his friends will answer them. In
years gone by, the leadership would move heaven and
earth before they would use language that could
or would set off a bank panic. The daily cry of
"Wolf, wolf" from the highest sectors of public
authority, is capable of producing the same results
of a real wolf or a virtual wolf. If this keeps
up much longer, mere perception could bring down
the system . Where is the great patrician FDR who
warned that our greatest enemy is fear itself?

[Optimist]

An electronic run on banks could be very, very, quick.

[dr doom]

http://finance.yahoo.com/q?s=skf The banks should be allowed to fail. The ceos fired and banned from banking forever.

[Peter of Lone Tree]

Michael, maybe you ought to have a look at Kevin's post at Cryptogon entitled "Legatus and Reinhardt" as well as the NYTimes article entitled "For Catholics, a Door to Absolution Is Reopened".

[Jesse]

Where was the 5.5 Trillion supposed to be going?

The 550 billion for that matter is a bit of a struggle.

People were transferring it out of money markets and sending it where? Treasury direct?

I'm struggling a bit with this one.

[Optimist]

I think the money was being yanked out of Money Market funds back when it 'broke the buck'.

You had better believe that if funds around the world, including pensions, etc had conditions
set in the case of something seemingly catastrophic like that it would cause something of that level.

[TomK]

While I don't question the fact of a massive withdraw I DO QUESTION everything else.

First, as Rick indicated above, the mechanism of how it was 'stopped' is highly questionable. Projecting the rate of drawdown to hit so many trillions, as if there was that much available, is nonsense.

But I smell A RAT!

Who did this coordinated drawdown and why? The motive is clear - to trigger a financial scare at the Treasury and the Fed. I don't see any foreign banks or governments doing it. Why would they, and they must know this could mean some kind of act of war. I smell whoever did it wanted to scare the banana out of those stupid Congressmen, so that they will approve whatever Paulson wanted. And it worked!!!

[C White]

I believe that the intimation here is that this was an orchestrated, manufactured bank run. There is no way that hundreds of thousands of people, completely unconnected with one another, suddenly decided to withdraw their money, all at the same moment. This was either a large, specific group of people, each holding deposits, or it was a smaller group or organization or country with very LARGE assets on deposits.
As for how the Fed stopped the withdrawals, that's easy---they simply closed down for the day. All electronic transfers of funds go through the Fed. If you wire money from one bank to the other, it goes through the Fed. Depending on where it came from and where it's headed, it may make several stops along the way to its destination. Once the Fed closed for the day, though, like musical chairs, it will stay wherever it was when the Fed closed.
I, too wonder, however, HOW simply increasing the FDIC cap would stop a run like that. This couldn't be a coincidental convergence of hundreds of thousands---or even millions---of individual, unconnected investors, all suddenly being hit by the same thought at the exact same moment. There just wasn't enough "scare" in the market at that time. Hell, there's more scare NOW and you don't see it happening.
No, this seems as if it had to be INTENTIONAL and orchestrated by someone or some group of "someones" with a specific purpose in mind.