Back on September 19, Comissar Hank’s Treasury announced that they are planning to provide as much as $50 billion from the Exchange Stabilization Fund to insure money market holdings against a collapse in the markets. (By the way, there are trillions of dollars in money market funds, and that number is growing). By doing so, the government acknowledged how important money market funds are, and also how dire the circumstances are with the commercial paper markets.
Under the program, Treasury will insure (aka “bailout”) the holdings of any publicly offered money market fund, retail and institutional, that pays a fee to participate in the program. Many fund companies have been in the process of determining whether or not to participate.
It is my understanding that the balances held in funds that choose to participate in the program would be covered up to the amount invested in the funds as of the end of business on September 19, 2008. That’s right. Any money you added to that bullshit money market fund after that date won’t be insured. Sorry to be a killjoy.
Finally, how might the money markets foreshadow the stock market?
The following chart shows the Discount Rate Spread (Source: Federal Reserve). Notice how the spread has rocketed almost off the charts to over 400 basis points now. A widening spread is a good indicator that the stock market is still looking for a bottom. There is a very serious “flight to quality” going on here. So much so, that the spread is wider than that of a drunk Russian hooker’s.
Notice the “spike” in the spread in Q4 of 2001 to about 110 basis points. At the time, the S&P was at 1,057 on 10/09/01. The S&P finally made a bottom at 777 a year later on 10/09/2002, a 26.49% drop in 12 months.
