Kanjorski Meme Update

The Investment Company Institute, the mutual-fund industry group, today released a massive 228-page report on what has happened to the money markets over the course of this crisis and how they should change in future. There are lots of recommendations, most of which make perfect sense to me. But I'm particularly interested in Section 6 of the report, which gives a very detailed 22-page history of what exactly happened to the money-market industry in September 2008.

If you recall, according to the Kanjorski meme (both Mark 1 and Mark 2), there was significant direct intervention by Hank Paulson in the week of September 15 to prevent hundreds of billions of dollars of redemptions from money-market funds. But there's no hint of any such intervention in the ICI report.

The report gives great credit to the government actions which did take place that month: bailing out AIG, implementing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility and the Commercial Paper Funding Facility, and announcing the Temporary Guarantee Program for money market funds. Concludes the report:

The U.S. government's programs were highly successful in shoring up confidence in the money market and money market funds. Immediately following the difficulties of Primary Fund, assets in institutional share classes of prime money market funds dropped sharply as institutional investors, seeking the safest, most liquid investments, moved into institutional share classes of Treasury and government-only money market funds and bank deposits. Within a few days of the announcements on September 19 of the Treasury Guarantee Program and the Federal Reserve's AMLF program, however, outflows from institutional share classes of prime money market funds slowed dramatically. Indeed, by mid-October, the assets of prime money market funds began to grow and continued to do so into 2009, indicating a return of confidence by institutional investors in these funds.

There's nothing here about personal intervention by Paulson -- and indeed everybody I've spoken to who knows about the workings of the money-market fund industry says that it's basically impossible that Paulson could have even gotten the information about the redemptions before they occurred, let alone phoned anybody up and persuaded them to change their mind.

The ICI report is at this point the definitive history of what happened to money-market funds in September 2008; if it says nothing about phone calls from Treasury to prevent a meltdown, I'm inclined to conclude that such phone calls never happened. It's pretty much impossible to prove a negative, and I'm still interested in learning where Robert O'Quinn, the author of the House Economic Committee report making the assertion, got his information. But for the time being I think we can lay the Kanjorski Meme to rest.