My opinion: The chief transmission mechanism then was the nexus of the commercial paper market and Money Market Funds. Because Lehman went bust so fast and the Reserve Funds had way too much Lehman paper, the Principal Reserve MM Fund broke the buck spectacularly and froze investors’ funds on top of that. So there was a quiet run on non-Treasury MM funds that led to the commercial paper market freezing up.

Doesn’t it trouble you that not only are many of the same executives who got us into this mess still managing their banks and financial institutions, but also that so many of the government enablers of the regulatory debacle (Summers, Bernanke, Geithner) are also maintaining their grip on power?

Just to cite one specific example, there were rumors in late Feb and early Mar 2008 that Bear Stearns had serious liquidity problems. This article from Vanity Fair gives a wonderful insider-view perspective:

http://www.vanityfair.com/politics/features/2008/08/bear_stearns200808

Now apparently Bear Stearns’ liquidity problems weren’t massive though the whole mortgage market and B/D balance sheets were a bit frozen, so on Tuesday March 11th the Fed announced the “TSLF” to address the problem.

Now that did two things. The first tangible thing is that the Fed created a program to allow banks and B/Ds to exchange illiquid mortgage securities for highly liquid Treasuries, BUT the announced the program wouldn’t be implemented until March 27th. The second thing accomplished by the Fed announcement was to announce to the world that there was a serious liquidity problem in the markets, which caused investors to give all major financial institutions a quick once-over to see who might be in difficulty.

That Wednesday, I sent an email to a friend calling the TSLF “The Bear Stearns Bail Out Act of 2008″. What I didn’t realize quickly enough is that the Fed itself had sealed Bear Stearns’ fate: by creating the TSLF, the Fed had all but announced to the world that one-or-more major institutions could be having serious trouble, making the crisis worse, and by delaying implementation of the TSLF until approx. two weeks later on March 27th, the Fed guaranteed that extra liquidity to offset the panic wouldn’t be available soon enough to help. Under the circumstances, it’s not surprising that Bear Stearns pretty much went out of business on the evening of Friday March 14th. What is surprising is that Bernanke and Geithner are still viewed as being responsible people who are part of the solution rather than being part of the problem.

Your post assumes and suggests that its only the presence of the corrupt and powerful vested interests on Wall Street that have rigged the investment game, when that’s just utterly false. In a different industry but similar game, what exactly did Tom Daschle do to earn his millions as Chairman of InterMedia Partners? Not much of anything as best I can tell — I mean, the not-reported-as-taxable-income car and driver were used 80% of the time for personal use!

Or go back and look at what happened to Brooksley Born in 1997-98 when she tried to get approval for the CFTC to regulate certain derivatives. Some form of regulation was a great idea, but she was shot down by Greenspan, Robert Rubin and a powerful Treasury department figure who told her that her ideas could provoke a financial crisis. Who was that? Well, Larry Summers, that’s who. Given that history, why on earth do you assume that Larry Summers is going to do the right thing when using Rahm’s Doctrine?

Don’t believe me, please check out this URL:

http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html