Page 385 - untitled

 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

On Monday, September , the Dow Jones Industrial Average fell more than 
points, or , the largest single-day point drop since the / terrorist attacks.
These drops would be exceeded on September —the day that the House of Repre-
sentatives initially voted against the  billion Troubled Asset Relief Program
(TARP) proposal to provide extraordinary support to financial markets and firms—
when the Dow Jones fell  and financial stocks fell . For the month, the S&P
 would lose  billion of its value, a decline of —the worst month since
September .
And specific institutions would take direct hits.

MONEY MARKET FUNDS:
“DEALERS WEREN’T EVEN PICKING UP THEIR PHONES”

When Lehman declared bankruptcy, the Reserve Primary Fund had  million in-
vested in Lehman’s commercial paper. The Primary Fund was the world’s first money
market mutual fund, established in  by Reserve Management Company. The
fund had traditionally invested in conservative assets such as government securities
and bank certificates of deposit and had for years enjoyed Moody’s and S&P’s highest
ratings for safety and liquidity.
In March , the fund had advised investors that it had “slightly underper-
formed” its rivals, owing to a “more conservative and risk averse manner” of invest-

ing—“for example, the Reserve Funds do not invest in commercial paper.” But
immediately after publishing this statement, it quietly but dramatically changed that
strategy. Within  months, commercial paper grew from zero to one-half of Reserve
Primary’s assets. The higher yields attracted new investors and the Reserve Primary
Fund was the fastest-growing money market fund complex in the United States in
, , and —doubling in the first eight months of  alone. 
Earlier in , Primary Fund’s managers had loaned Bear Stearns money in the
repo market up to two days before Bear’s near-collapse, pulling its money only after
Bear CEO Alan Schwartz appeared on CNBC in the company’s final days, Primary
Fund Portfolio Manager Michael Luciano told the FCIC. But after the government-
assisted rescue of Bear, Luciano, like many other professional investors, said he as-
sumed that the federal government would similarly save the day if Lehman or one of
the other investment banks, which were much larger and posed greater apparent sys-
temic risks, ran into trouble. These firms, Luciano said, were too big to fail. 
On September , when Lehman declared bankruptcy, the Primary Fund’s
Lehman holdings amounted to . of the fund’s total assets of . billion. That
morning, the fund was flooded with redemption requests totaling . billion. State
Street, the fund’s custodian bank, initially helped the fund meet those requests,
largely through an existing overdraft facility, but stopped doing so at : A.M. With
no means to borrow, Primary Fund representatives reportedly described State Street’s

action as “the kiss of death” for the Primary Fund. Despite public assurances from
the fund’s investment advisors, Bruce Bent Sr. and Bruce Bent II, that the fund was