n-September 18, 2008 -> How a Valuation Rule Can Cause Global Financial Collapse in 16.67 minutes

1. Under Rule 2(a)7, the definition of a money market fund is simply the value of its amortised cost over 12 months. This means each day the MMF must re-adjust its trading books so that it can deliver exactly what it says it is going to be able to deliver in 12 months time. If it is out by 50 basis points then it must report this fact to the Securities Exchange Commission, which constitutes a self-admission of a violation of a securities law. If the MMF is out by 25 basis points, it (the trader) must report to the board.

2. I have been long informed by private sources that August 7th 2008 was the day that all MMF fund transactions stopped, (they unaimously withdrew from the Asset-Backed Commercial Paper (ABCP) market, which in turn, supported ALL the privately issued Real Estate Mortgage Backed Securities (RMBS) markets) and that they stopped for about a day and a half.   That was a $600 billion market screeching to a dead stop.

3. And the following reportage is consistent with the August 7th day of emptiness-- that on September 18th (3 days after Lehman declared bankruptcy) individuals (moms and pops) started to withdraw from the MMFs. Least we forget how the world's financial markets can crash suddenly (that is, in about 63 minutes) I reproduce in part Tyler Druden's blog of February 8, 2009:

"SUNDAY, FEBRUARY 8, 2009

How The World Almost Came To An End At 2PM On September 18
Posted by Tyler Durden at 12:56 PM
LiveLeak has caught a scary moment of previously undisclosed insight by Paul Kanjorski where he reveals some facts that have not been captured by the media previously. At 2 minutes and 20 seconds in the video below, Democratic Representative Kanjorski explains how the Federal Reserve told Congress members about a "tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars." According to Kanjorski, this electronic transfer occurred over the period of an hour or two. And it gets worse. Kanjorski paraphrases the following disclosure by Bernanke and Paulson:
On Thursday (Sept 18), at 11am the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.

If they had not done that, their estimation is that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it.

We are no better off today than we were 3 months ago because we have a decrease in the equity positions of banks because other assets are going sour by the moment.

Interestingly, Kanjorski, and likely more and more Democrats, are starting to shift to the camp that more time is needed to make a correct decision this time (which may explain Geithner's decision to postpone the "bank-rescue" announcement by one day to Tuesday), instead of rushing into another half-baked plan. Very scary stuff.

Update - for all who claim that Kanjorski is yapping with a few screws loose upstairs, take a look at this clip: http://financialserv.edgeboss.net/wmedia/financialserv/hearing092408.wvx
and fast forward to the 1 hour, 50 minute and 48 second mark.
....Regardless of when it ws announced, the increased guarantee to $250,000 did not go into effect until Oct 3rd...

http://www.fdic.gov/news/news/financial/2008/fil08102.html

http://www.nytimes.com/2008/09/20/washington/19cnd-cong.html?_r=1&hp&oref="

3.  Now, imagine how long will it take a couple High Frequency Trading Algos to disrupt the planetary financial markets.  At 10 to the minus 6 seconds per trade,  for 10 billion trades, the ENTIRETY of the World's Financial Structure would go down in about 16.67 minutes.  OK?  Suppose I'm off plus or minus by 150%?  a 1000%?  Ha, ha, ha.  Hilarious computation.