As Credit Crisis Spiraled, Alarm Led to Action - Morningbull

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Out of the blue, it seemed, there was a run on the $12.3 billion Putnam Prime Money Market Fund. That meant the money fund contagion was spreading. Because of huge withdrawals, Putnam decided it had to shut the fund, and distribute the cash to shareholders. If it did not, the first ones out the door would get a better deal than the laggards. Executives of the Investment Company Institute and fund officials scrambled to find a solution that would keep Putnam from having to take that step, but they failed. On Thursday, Putnam shuttered the fund. (After the government rescue plan was announced, it sold the fund, intact, to another company, and investors did not lose a penny.) The Fed Takes Action Ben Bernanke had spent his career studying financial crises. His first important work as an economist had been a study of the events that led to the Great Depression. Along with several economists, he came up with a phrase, “the financial accelerator,” which described how deteriorating market conditions could speed until they became unmanageable. To an alarming degree, the credit crisis had played out as his academic work predicted. But his research also led Mr. Bernanke to the view that “situations where crises have really spiraled out of control are where the central bank has been on the sideline,” according to Mark Gertler, a New York University economist who has collaborated with Mr. Bernanke on some papers. Mr. Bernanke had no intention of keeping the Fed on the sidelines. As the crisis deepened, it took more aggressive steps. It added liquidity to the system. It opened the discount window — the emergency lending facility that had been reserved for troubled banks — to investment banks. It also agreed to absorb up to $29 billion in Bear Stearns losses and made an $85 billion loan to keep A.I.G. afloat. Representative Barney Frank, the Massachusetts Democrat who leads the House Financial Services Committee, asked Mr. Bernanke if the Fed had $85 billion to spare. “We have $800 billion,” Mr. Bernanke replied, according to Mr. Frank.
Since the Bear Stearns bailout, Treasury and Fed officials had discussed what a broad government intervention might look like. Although there were suggestions for a “bank holiday” — a temporary, nationwide closing of banks, which had not been done since 1933, to stem panicky withdrawals — Mr. Bernanke and Mr. Paulson dismissed the idea, fearing it would do far more harm than good by scaring people needlessly. They had both assembled teams to map out drastic rescue plans — the “break the glass” plans. Almost from the start, they concluded the best systemic solution was to buy hard-to-sell mortgage-backed securities. On Wednesday morning, during a conference call with other top officials, including Jean-Claude Trichet, the president of the European Central Bank, Mr. Bernanke sounded them out on a big government bailout. The other officials sounded relieved; their main questions were about whether Congress could act quickly. That evening, Mr. Bernanke told Mr. Paulson during a conference call: “You have to go to Congress. This is pervasive.” Mr. Paulson agreed. A Sense of Urgency By Thursday morning, the need for dramatic action had grown even more urgent. In Asia, stocks had already closed lower. To quell fears before the opening of European markets, the Fed and other central banks announced they would make $180 billion available, in an effort to get banks to start lending to each other again. The Fed had agreed to open its discount window to make loans available to money market funds to prevent further runs. But it was to little avail. At 8:30 Thursday morning in the United States, when Mr. Paulson and Mr. Bernanke reviewed the state of affairs, markets remained roiled. The crisis was not easing up. One Bank’s Solution
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As Credit Crisis Spiraled, Alarm Led to Action - Morningbull

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