June 2, 2011, Bob Brinker Discussed "Too Big To Fail" History as it Happened

Posted June 2, 2011 .....................................................[Post or read comments] 

Bob Brinker gave this remarkable monologue the week that Lehman Brothers found out they were not too big to fail.   Here are excerpts from the September 20, 2008 Moneytalk program.

Bob Brinker's take on the historic time that Andrew Ross Sorkin wrote about in his book/movie "Too Big to Fail."  

Bob Brinker said: "It was amazing.......And we certainly have been blessed by the investment gods to have the opportunity to talk directly with you on the weekend during all of this ongoing news breaking, quick developing times that we’ve seen.......Lehman Brothers went down the tube on Sunday night.......the company was run into the ground, in my opinion. In the last six months, once the Bear Stearns news broke, it should have been zero tolerance for bankruptcy at Lehman. They should have done everything in their power to find somebody to take them over, but they didn’t and they’re gone. As far as the stock market is concerned, it’s pennies a share – forget about it. 

And then we had what I regard as a shotgun wedding.......We haven’t seen too many shotgun weddings on Wall street, but I think we saw one last Sunday night when Bank of America took over Merrill Lynch.......Merrill Lynch was getting extremely vulnerable.......And think the fact Bank of America came in there and took them over is probably a really good thing for Merrill Lynch.......Maybe it will work out long-term for Bank of America. I think they have a really impressive Chief Executive Officer at Bank of America, and it wouldn’t surprise me at all if he’s able to make that work.

And then we had the saga…..of AIG Group, the giant insurance company. The situation there was one where counter-party risk was so great that the government really had no choice but to.......come up with a package. And the package is an interesting package – 80% equity stake in the company. They own 4/5ths of the company.......And a $85billion line of credit at a very high interest rate.......8 ½ points over Libor. Libor is roughly 3%........8 ½ and 3 is 11 ½ is the cost of the money – roughly.......not a day at the beach.......And it wasn’t surprising we heard AIG talking this week about trying to come up with a plan to get that loan paid as fast as possible.......that’s expensive money.......not to mention giving up 85% ownership.......It would not surprise me that the United State Government can come out of that with a profit someday.

We had the markets jumping around, gyrating as rarely they have.......We had the situation where Sunday night – remember you heard me say this last Sunday on our broadcast, that government says no taxpayer money to bail out Lehman Brothers. And by the way, they never did bail out Lehman Brothers, they went down.......Well, that government policy lasted about 48 hours. It certainly did apply to Lehman Brothers, but about 48 later they had to do something with AIG. So by Tuesday night they the AIG rescue package together – the $85billion line of credit.

So then we get to Wednesday – markets are jumping around and at this point, we get to a new phase. And I really think we have to look at it this way, as we progressed during the week – very valuable to take a look at what was going on at various time stations during the week. We get to Wednesday, and at this point, we’ve already had the news that one of the very first money market funds of all, this goes all the way back to the 1970s, the Reserve Fund, which is a money market fund of many stripes, including an institutional money market fund had broken the buck.......In other words, it wasn’t going to return a dollar – it was down to about 97 cents on the dollar. That’s a 3% principal loss to the money market fund shareholders.

That’s only the second time in history of money market investing that a fund has broken the buck. Now there have been times when the managing company has thrown money in to keep it at a buck, but this time it broke the buck.......In addition to that, after Reserve made this announcement, during the time there were rumors about the Reserve Fund, money was coming out of the Reserve Fund like water going down the drain. It was fast – tremendous amounts of money, billions and billions and billions going out of the fund.

And that creates problem in the commercial paper market. It creates problem in the short-term financing arena. Commercial paper is a promissory unsecured note issued by a company for up to 270 days. It’s only backed by a promise to pay.......I remember in my early days working on the commercial paper desk at the Provident National Bank, and actually we issued commercial paper for the bank holding company, we also acted as an agency for other commercial paper. And you have to have confidence in the market to have a viable commercial paper market place – without that, you have nothing. So all of this is starting to feed into the commercial paper market.......

Now we get to Thursday and the situation deteriorates further.......Look at it as of Wednesday night: Bear Stearns is gone – went to J.P.Morgan in a takeover which should be described as a shotgun wedding in March.......Fannie, Freddie Mac is gone mostly to the government in a shotgun takeover a few weeks ago. Lehman’s gone Sunday night. Merrill Lynch taken over by Bank of America in what I regard as a de facto shotgun wedding last Sunday night. AIG taken over mostly by the government on Tuesday night in certainly a shotgun arrangement. All of these things are going on. And that gets us to Wednesday night, and we have these money fund rumors out there. This is a whole new chapter. Money Funds? Yeah.......

Then we get to Thursday, and the situation deteriorates further because Bank of New York Institutional Cash Reserve Fund, we find out, has investments in Lehman Brothers paper. Don’t ask me why any money market fund at this late date would have anything in their portfolio from Lehman Brothers. Lehman Brothers has been rumored to be the next to go after Bear Stearns since March. Lehman Brothers stock was bouncing around like a tennis ball last March when Bear Stearns went down. Money market funds invest for the short term. Typical average maturity is a few weeks.......It’s absolutely infuriating to me that any money fund manager would have Lehman paper when six months ago this company became the next to go…….in the rumor mill. And yet, despite all I just said and I’ve said this on Moneytalk just about every weekend for month after month.......that a money market manager should know how to run his or her fund without stepping in a black hole like this.

Anyway, we find out Thursday, just two day ago, that Bank of New York Mellon Institutional Cash Reserve is down about a penny a share in principal value because of holdings of Lehman……And then on Thursday, we get some more news coming out of Boston, Massachusetts – coming out of the Putnam Funds. Putnam Investments, one of the old names in the mutual fund business, they announce on Thursday, during the day, they are closing and liquidating their Putnam Prime Money Market Fund – this is a $12billion fund for professional investors………because there is a run on assets. People want their money. Well, in a money market fund, you are supposed to be able to get your money every day……Well, they had maturities, they didn’t have all the money in one day…….it was not a default issue, it was a liquidity issue. 

So on Thursday, we have something that we’ve never seen before. We don’t have a run on the banks because we have the FDIC. We have a run on the money market funds. And then Thursday afternoon, shortly after the Putnam announcement – no coincidence here – shortly after the Putnam announcement threatened to create a run on the $3 ½ Trillion money market industry, that we get word from Washington that a package is going to come in to hypothetically resolve the mortgage situation. And also provide insurance for money market funds. That’s a brand new item. And also, prohibit selling short financial

stocks, at least until October 2^nd. And you can take it to the bank; they are likely to extend that time line – probably until after the election.  

And there you have it. And once it came from Washington they were going to put a package together, no matter what the cost, and that was part of it, then the markets were calmed. And by the way, at the end of the week, it’s almost comical when you consider the volatility, I mean truly, when you look at the volatility this week, what I am about to tell you is borderline comedy and yet it’s reality, it’s true. The S&P 500 for the week was up 3 ½ points…….It’s ridiculous when you look at the volatility…….The volatility in and of itself is just bizarre."  

Dixiegeezer took these pictures that could easily be  metaphors for what happened in 2008 to the banking system: