WTF Just Happened?

I am still trying to figure out what exactly Paulson is proposing, but a few things seem clear.  First, people had been misled on a massive scale about the safety of money market funds.  Even today the New York Times writes in one of their cover story “ultra-conservative money market funds” – as if.  Earlier this year we advised all of our portfolio companies to make sure that the money market funds they were holding did not invest in anything that could turn toxic.  Turns out almost all of them were to some degree in money market funds that had exposure to the credit market.  For an explanation, see my post from March on “Cash is King – Except When It Isn’t Cash."  Second, with a few money market funds beginning to "break the buck” and being forced to temporarily stop withdrawals to allow for an orderly liquidation of their positions we were at the brink of a trillion dollar bank run.  This forced the hand of the government to say something about backing money market funds and announce some overall larger plan.  Third, once the plan was announced people seemed to conclude that this would at least temporarily stop the downward spiral.  Combined with a ban on short selling of financials it produced a huge squeeze on the shorts.  In fact, a short examination of yesterday’s rally suggest that many shorts had to trade out of safe stocks to cover their short positions.  So on a day with some financials up 20% and more, Clorox was down.  Some of the lift for equities may also have come from folks exiting the bond market and heading over to equities fearing that the government action will do to interest rates.  It is the potential implications of the latter that are truly scary.  More on that tomorrow.

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