James “Jes” Staley, head of JPMorgan Chase & Co.’s investment unit, speaking in Davos:
Money-market funds, not banks, were responsible for the collapse of Lehman and the near bankruptcy of Bear Stearns Cos. last year. The funds, which typically hold highly rated, short-term debt instruments, were forced to pull their money from the firms when they saw signs of trouble.
The people who brought down Lehman and almost Bear Stearns weren’t the banks, they were the money funds. You have this huge industry with $4 trillion of capital, immediate intraday liquidity to the client who wants it with no capital behind that statement and no insurance behind that statement.
So It was not JP Morgan’s fault as reported in WSJ?
http://liberodaconfini.blogspot.com/2008/10/gli-ulitimi-giorni-di-lehman-brothers.html
Re #3: To oversimply only a bit, under Investment Company Act Rule 2a-7 U.S. money market funds can buy long dated floaters only if they have a 7 day put exercisable by the money market fund and are issued or guaranteed by a highly rated entity.
Disingenuous cheap talk from Jes. Banks made out quite well charging fees and offering “playa” deals that crowd, now they’re the scapegoat. It sucks being a mark.
Store, thx, this is an experiment…
Lehman, I was surprised they had so much commercial paper outstanding, I don’t know the rules for u.s. money-market funds, I suspect they have some maturity restrictions, not sure.
In any case, if you finance very short and unsecured, you are asking for trouble.
I like your new store.
Regarding Bear and Lehman, they did not have to finance so much of their business off of short-dated paper. I know that financial businesses are normally more profitable when using a decent slug of short term finance, but it opens the company to runs. Long dated floaters would cost more, but they assure greater stability. And, many of them can be bought by money market funds. (If I’m wrong on that, please correct me.)
Agreed, they believed in the greenspan put, wrongly.
The idea that any investment bank failed to have a backup plan in case their wholesale funding was pulled is almost beyond belief. They should have had guaranteed lines of credit from commercial banks (that can turn to the Fed) just like any other corporate issuer of commercial paper.
Ditto for their reliance on repo funding.
Just a little more evidence that the investment banks were profiting from the fact that the government would have to bail them out, not if, but when they failed.