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Money Market Fund May Have Led To Dow Slide

MICHELE NORRIS, host:

From NPR News, this is All Things Considered. I'm Michele Norris. Relief may have been the goal, but it was not the reality on Wall Street. The government's 85-billion-dollar loan to AIG was supposed to calm the markets, but they remain in turmoil today. On the Dow, stocks fell more than 400 points. NPR's John Ydstie reports.

JOHN YDSTIE: As the U.S. financial markets opened sharply lower this morning and continued to trend down, commentators on the business news channel CNBC were struggling to figure out why the AIG rescue hadn't heartened investors.

(Soundbite of business news channel CNBC)

Unidentified Presenter: Stocks, of course, are sharply lower today. We have it covered for you, live team coverage of the markets and the financial crisis that is still brewing on Wall Street despite what everybody thought would be the solution for that company AIG. And of course it all started...

YDSTIE: There were plenty of theories including continued concern about which company might be next to crumble. Shares in the two remaining independent U.S. securities firms, Goldman Sachs and Morgan Stanley, were plunging the most ever. And comments from White House Press Secretary Dana Perino weren't reassuring either.

Ms. DANA PERINO (White House Press Secretary): We remain concerned about other companies, and that's why the secretary of the Treasury continues to work with the team to see if we can stand any other losses. But they're - as I said, they're taking this on a case-by-case basis.

YDSTIE: Investors were nervous, running for the safety of gold and short-term U.S. Treasury bills. The huge demand for Treasuries drove the annual return on them down below one percent, a rate not seen in 50 years or more. Jeremy Siegel, professor of finance at the Wharton School at the University of Pennsylvania says what unnerved investors today were the troubles of a huge money market fund for institutional investors, the Reserve Primary Fund. It should have been a super-safe investment, but it turns out the fund had invested in Lehman Brothers' debt and took huge losses as Lehman collapsed. That drove its share value below one dollar, a huge red line for money funds.

Dr. JEREMY SIEGEL (Professor of Finance, Wharton School, University of Pennsylvania): And this sent shocks of panic through the system. And people are saying, oh, my God, what is safe now?

YDSTIE: Siegel hastens to add that individuals should not be concerned that their money fund might have invested in Lehman Brothers' debt. Funds for regular folks are prohibited from making that kind of risky investment. The question of who is next and what was safe also drove the London interbank lending rate up very sharply, indicating a re-intensification of the credit crunch. Banks were unwilling to lend to other banks because they wondered if they too held Lehman debt or other toxic investments. Professor Siegel argues that the market's response was not a verdict on the government's takeover of AIG. He says the rescue was absolutely necessary.

Dr. SEIGEL: And my personal feeling is - I mean, right now I'm looking at a DOW down 320. We would be down over a thousand points today if AIG was not arranged yesterday. I think that would have thrown the market into total panic because no one would know what was safe.

YDSTIE: There was general acknowledgment that AIG was too big to fail. But Democratic Congressman Barney Frank, chairman of the House Financial Services Committee, decided the huge rescue provided an opportune time to take a potshot at the administration's line in the sand drawn on Monday to let the market work and let firms fail. Frank said he would introduce a resolution to declare September 15, "Free Market Day."

Representative BARNEY FRANK (Democrat, Massachusetts; Chairman, House Financial Services Committee): Because the national commitment to the free market lasted one day, it was Monday. On Sunday, Lehman Brothers was allowed to fail, and everybody was for the free market, and we had a lot of celebration of it on Monday. And it died yesterday. But I think we ought to at least commemorate September 15 as that brief moment of quarry for the let it go belly up faction.

YDSTIE: At the end of the day, the stock market was down sharply. The Dow Industrials lost nearly 450 points. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

John Ydstie has covered the economy, Wall Street, and the Federal Reserve at NPR for nearly three decades. Over the years, NPR has also employed Ydstie's reporting skills to cover major stories like the aftermath of Sept. 11, Hurricane Katrina, the Jack Abramoff lobbying scandal, and the implementation of the Affordable Care Act. He was a lead reporter in NPR's coverage of the global financial crisis and the Great Recession, as well as the network's coverage of President Trump's economic policies. Ydstie has also been a guest host on the NPR news programs Morning Edition, All Things Considered, and Weekend Edition. Ydstie stepped back from full-time reporting in late 2018, but plans to continue to contribute to NPR through part-time assignments and work on special projects.