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Money Tighter than we Thought?

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By TMFSlydo
September 23, 2008

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Maybe the feds fear foreign banks will pick up too many of the pieces?

I think the feds may fear foreigners won't pick up any. If confidence in the U.S. evaporates, we could end up paying far higher interest rates to get foreigners to buy any U.S. financial instruments, including federal securities.

Last week, banks stopped lending to each other because no one trusts what anyone's assets are worth. The systems were grinding to a halt. I think everyone here understands the importance of liquidity in efficiently pricing and effecting the sale of assets. That liquidity was disappearing.

Here is part of a post over on the Hidden Gems board from someone in the financial services industry that gives some insight into what was going on last week:

On Wednesday, the oldest money market in the world broke the buck...people who thought they were in a safe investment suddenly woke up learning they had lost 3%...that day, we had clients calling us to liquidate their money markets like crazy, going to treasuries...by midday, treasuries were at a negative yield after transaction costs. Banks had entirely stopped loaning to each other.

I can say with some measure of confidence that we were days from the start of a disastrous spiral...money markets no longer being "cash safe"...mortgages becoming impossible to get without a 40% down payment...which would have sent home prices everywhere tumbling even more. I do not say the words "another depression" lightly, but I really do believe that was where we were heading.


On a personal level, I've been trying to secure a very small business loan, personally guaranteed by my partner and me. We're not exactly lightweights - I've built and sold a multi-million dollar business, while my partner is CEO of a mid-sized manufacturing firm (he is meeting with folks from Berkshire Hathaway today who are interested in acquiring his company). We had to go to numerous banks and put down almost 50% to get just a little over $100K to buy a business that is making money. I have never seen money so tight - not even close. And that was before last week's debacle.

We saw the reactions on the stock market, but otherwise, life for most of us went on as usual. But it appears that behind the scenes, things were far more unsettled and precarious than we imagine. Sitting back and letting the chips fall where they may might not have been the simple exercise we envision.

Paul