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Tuesday, February 10, 2009

 

near miss


a friend emailed me this video yesterday, and today i see the financial times picked it up through mike panzner and zero hedge.

my response to him:

you can bet it happened. FDIC insurance does not apply to foreign accounts; i think such accounts constitute something like a third of all deposits in american banks, concentrated of course in the biggest ones. those folks in foreign countries responded to the failure of lehman brothers by starting a general run on american banking, which didn't stop until it became apparent later that week that the fed and treasury would not allow that to happen to merrill, morgan stanley or goldman sachs.

part of the reason all the big banks (MS, GS, C, BAC, JPM) are being so ardently defended today by tim geithner and larry summers -- even though they are all insolvent by a long shot -- is because they mortally fear a repeat run if it becomes apparent that these banks are headed to the FDIC for resolution.

most people think the FDIC protects banks and the system against bank runs. it does for most banks, but not for those that have a large proportion of foreign deposits.


i obviously misunderstood kanjorski to mean bank accounts, not money market account -- but the of course the run on the money markets was also in response to the default of lehman's short-term obligations, such as eventually did in the reserve fund and others.

subsequently, the fed stepped in to insure money market accounts and further purchase commercial paper.

nevertheless, the bright memory of this scarring experience is clearly driving the leadership's "no more lehmans" stance and the rapacious bailouts of the system that we've seen since. uninsured institutional funds, be they in money market funds or bank accounts, remain a potential source of trouble for the american financial system and will have to be dealt with carefully.

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