The Crunch, one year on: How the money markets broke the back of Wall Street
In the first of a series to mark the anniversary of the collapse of Lehman Brothers, Stephen Foley reports on Bruce Bent, the money market fund manager who played a key role in the financial panic
Monday 14 September 2009
Forget Dick Fuld of Lehman Brothers, Hank Paulson at the US Treasury, or Ben Bernanke at the Federal Reserve. The man at the epicentre of the earthquake that shook financial markets a year ago this week is someone you probably haven't even heard of. Step forward Bruce Bent Snr, aged 72. If you really want to understand how the collapse of Lehman had turned, within a few days, into a maelstrom that threatened to bring the global economy to a halt, you have to go back to the 32nd floor office on Manhattan's Broadway, where this blunt-speaking businessman had run his fund management firm almost four decades.
With his shock-white hair and spectacles that were bigger than fashionable, Mr Bent was the big cheese of the money market mutual fund industry. It made him super-rich; a nine-figure fortune that he once dallied with using for a political career. He funded an anti-tax lobby group and made a disastrous run as Republican candidate for county executive, before realising he didn't have the politesse for politicking.
His Broadway office has a picture of him with a bust of Lenin, and he likes to thank the Russian dictator "for proving that socialism doesn't work". Mr Bent wasn't in the office the weekend Lehman went down. He was in Italy on holiday, without access to email, but my goodness was he on the phone. There was no doubting the size of the problem about to hit his fund, the Reserve Primary fund. It held $785m in Lehman debt, out of $62bn in assets. His son, another Bruce Bent – "Bruce Two", to colleagues – was there, pacing the office, fielding the calls with his father and other senior staff. Within hours of markets opening on Monday morning, investors were clamouring to get their money. None wanted to wait around to see how bad the losses on the Lehman debt would be; it pays to be first out the door, just in case. It was a full-on "run on the bank".
The chaotic atmosphere on the 32nd floor on the Monday and Tuesday of that week is set out in detail in legal filings by the Bents and the Securities and Exchange Commission, which alleges their response to the immediate crisis was to lie to their investors. Mr Bent was said to be barking down the phone that they might still get 100 per cent back on the Lehman debt. Bruce Two was apparently desperately hunting for private or government cash to prop up the fund. Board members supposedly threw up their hands and said trying to value their fund was like "throwing a dart at the wall". Their bankers had run out of ready cash to pay redemption requests by 10am on the Monday, yet the demands for money kept ticking higher. And higher. It would be 30 hours more before the Bents finally admitted there would be no escape. They say they never lied to anyone.
When the Reserve Primary fund capsized at 4pm on Tuesday, the shock triggered an even bigger run across what was supposed to be the safest corner of the investment world. These money market funds promised their investors they would never lose their money. Never. As well as interest, investors would always get a dollar back for a dollar put in. But when Mr Bent could no longer meet that promise, there was panic.
Some 17 per cent of the money invested in these types of institutional prime money market funds was withdrawn in the next 48 hours, shoved into the only thing that looked safer, US government bonds. At one point, investors were accepting a negative interest rate on US Treasuries, so sure were they that they would lose money on everything else. By Thursday night Mr Paulson was on his knees begging the Speaker of the House, Nancy Pelosi, to support a bailout. The headlines were dominated by the Wall Street banks, going down like dominoes, but Mr Paulson was on his knees because an entire system for funding American business and shielding Americans' savings was collapsing.
The story of the Great Panic of 2008 is laced with ironies, but this must be among the biggest: in 1971, Bruce Bent had invented the money market fund.
When he set off for Italy last September, he was more sure than ever that ultra-cautious money market funds would be the answer to – not the cause of – the crisis of confidence in finance. Just a few weeks earlier he had penned the Reserve Primary's annual report. "One year has passed since the sub-prime crisis shook the foundation of our markets, which has investors questioning the safety of their money funds," he said. "Good! We are pleased to report that you, and the markets in general, have embraced the very concept and foundation on which The Reserve was founded, an unwavering discipline focused on protecting your principal, providing daily liquidity and transparency, and all the while boring you into a sound sleep."
On public television in August he had said that only "a total fool situation" could discredit money market funds. "And frankly, I'm not aware of total fools that are money fund providers."
In four decades, the money market industry has grown to such proportions that it operates as a whole shadow banking system, with $3.8trn in assets. It is money market funds that buy the short-term IOUs that companies from General Electric to Goldman Sachs use to fund their day-to-day operations, to pay invoices and pay salaries. Money market funds are treated by institutional investors as if they are cash. Americans of relatively modest means use them like a bank account, because the money can be easily accessed. If the run continued, and more funds had to dump assets at lower and lower prices, still more would have broken the buck. When Mr Paulson went to Capitol Hill, he was careful to insist that lawmakers didn't talk too openly about the money market run in progress, for fear of triggering a public stampede.
"If a big retail name had hit the papers, it could have got real ugly, real quickly," says Peter Crane, president of Crane Data, which measures money market flows. "Had President Bush not stepped in on Friday morning and guaranteed assets in money market funds, it is pretty clear a run would have developed. It seems unbelievable now, when you consider that Reserve Primary investors look likely to get back 99 cents on the dollar. But that is why runs are dangerous. It is a moot point whether there was a fire in the theatre or not; if people get trampled, they get trampled."
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