Ice-Nine or Why You Read EPJ?

Bloomberg writers Bob Ivry, Mark Pittman and Christine Harper are getting major props for their Ice-Nine story . Andrew Leonard at Salon highlights the story. Credit Writedowns says of the piece:

Bloomberg News is writing a very worthy series of retrospective articles on the financial panic of September 2008. I profiled the first one on Monday. The next in the series came out yesterday and it makes for riveting and enlightening reading.

Bloomberg News reporters Bob Ivry, Mark Pittman and Christine Harper talked to a large number of market participants to get a sense of what happened in the financial system to bring the global economy to its knees, not just at Lehman but throughout the system. Their analysis hits on the money markets as a catalyst for the market meltdown.

Mohammed El-Erian has the money quote with a nice reference to Kurt Vonnegut and Cat’s Cradle by the Bloomberg team.

The ice-nine wasn’t noticed by most market participants at first, said Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pacific Investment Management Co., the world’s largest fixed-income fund manager.

“Monday and Tuesday, people didn’t quite see what was happening,” El-Erian said in a July interview. “You had to be on the desk in the payments and settlements system, cash and collateral, to start seeing cascading market failures and a complete erosion of trust.”

So what's my take on all this?

Ah, well, ice-nine is a fictitious material in Kurt Vonnegut's novel "Cat's Cradle" that freezes the entire world's oceans. The metaphor the writers are referring to is the freezing up of the commercial paper markets last year. In my view, the metaphor should be extended to the brains of most journalists and economists who were on brain freeze back then and continue to be so now, about most everything that goes on in the world of economics. (Witness their current coverage of ObamaCare. How often have you heard it mentioned about how it will destroy incentives for new innovations in medical treatment?)

Kudos to to Ivry, Pittman and Harper for digging this important story out, but I had them beat on this story by months. How many months? For a good chunk, I had it nailed, last year, in real time.

The reporters point to panic that circled around the mid-September period when the money market fund, Reserve Primary Fund, broke a buck:

Treasury Secretary Henry M. Paulson Jr. left his suite at Manhattan’s Waldorf-Astoria Hotel last Sept. 15 after a sleepless night, feeling he’d done all he could to minimize the damage from that morning’s collapse of Lehman Brothers Holdings Inc., aides said....Nobody accounted for Bruce R. Bent. The 72-year-old graduate of St. John’s University in Queens, New York, created the first money market fund in 1971, the Reserve Primary Fund. He touted it as an investment so safe it would lull clients to sleep -- so safe that, even with $785 million in loans to tottering Lehman, Bent and his wife had jetted to Rome that Sunday evening to celebrate their 50th wedding anniversary....On Sept. 15, while his flagship fund was sinking under the surge of redemption requests, Bent was speed-dialing from Rome.

That the money market breakdown was a key to Treasury and Fed panic was a story I had back in February. In a post, The Government Panic of September 2008 I wrote:

I now believe that the United States government went into full panic mode in September, 2008 and continues in panic mode to this day. This has serious implications for the future direction of the economy. Those in government who truly understand the current situation must have serious doubts as to whether the United States financial structure will survive in any form close to what it is today....
there were serious runs on money market funds back in September 2008, and...the government, early on, took an active hand in trying to kill this news...

They also write this:

The ice-nine wasn’t noticed by most market participants at first, said Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pacific Investment Management Co., the world’s largest fixed-income fund manager.

“Monday and Tuesday, people didn’t quite see what was happening,” El-Erian said in a July interview. “You had to be on the desk in the payments and settlements system, cash and collateral, to start seeing cascading market failures and a complete erosion of trust.”

Get that? Head PIMCO trader Mohamed El-Erian saying people didn't quite see what was happening on Monday and Tuesday, back in September '08. You had to be on the payments and settlements desk. Ah, no you didn't. The headline on my post on the Tuesday El-Erian is referring to was:

Holy Sh*t: Money Market Breaks Buck; Freezes Resumptions

To me this was big news. Given the spooked financial markets, all we needed was to spook money market holders. Spooked money market holders meant redemptions which would lead to escalating liquidations of commercial paper, which would spook commercial paper markets. The next day I spotted the escalating panic right away. I wrote in a post, What Happens If There Is A Run On Money Markets? Is There A "Money Market Mutual Fund Holiday" Ahead? :

News that the Reserve Primary Fund, the oldest mutual fund in the country with $64 billion under management, has broken the buck and frozen redemptions for 7 days, is not good.

Edges of panic are beginning to appear throughout the system. There is a flight to absolute safety. 3-month T-Bills are trading to yield 0.558% ( yield not seen since 1954!). Gold, as I write, is up over $88.50.

Real time, baby. Not a year later.

But, hey, at least the story is getting out and getting some needed attention. Nice work by Ivry, Pittman and Harper. They still don't have the real big story of the squashing of the news by the government back then, but, hey, maybe next year. At least, they are working on the story, not like most ice-nined reporters.