MELISSA BLOCK, Host:
From NPR News, this is All Things Considered. Democrats and Republicans, the president and Congress, are negotiating a deal on an economic bailout but exactly are they hoping to prevent. For a few hours last week, it was possible to see what could happen. Some on Wall Street say the U.S. economy had a near-death experience and that is what terrified Washington into action. To understand that moment, when Bush administration officials first realized they had a big problem. NPR has again partnered with the Chicago Public Radio show This American Life. NPR's Adam Davidson and Alex Blumberg from This American Life have this story.
ADAM DAVIDSON: Mark Peterson doesn't work on Wall Street. He's in Memphis. He's got nothing to do with the mortgage industry, but last week had him shaken almost literally.
BLOCK: For those of you, you know, who've experienced an earthquake, you know, some people say it's a soul-wrenching experience because you realize there's a power out there that's doing something that you have no control over whatsoever. And it's massively moving everything, and that's last week. Last week, there was a monster that was unleashed. The commercial paper market, which is the most liquid market, probably in the world, basically froze up.
DAVIDSON: Commercial paper, that's the monster that wrenched his soul.
BLOCK: Yeah, I mean, well, it turns out. Commercial paper, kind of short-term loan, is one of those things that you've never heard of, but that helps makes the world go round.
DAVIDSON: And Mark Peterson knows this because he's treasurer of ServiceMaster, which owns, among other things, a lawn care company, Merry Maids and Terminix, which will get rid of your termites.
BLOCK: Let's just say you have Terminix come out and treat your house. You write a check, so our billing system goes in marks your account as having been paid.
BLUMBERG: So everyday, you know, thousands, hundred of thousands or tens of thousands of Terminix customers and other people are writing checks, and you sort of have the position of like what's our cash position now for the day in this company.
BLOCK: Either we're going too have much money at the end of the day or we're not going to have enough money at the end of the day.
DAVIDSON: Like to today, do you have money or do you need money?
BLOCK: Today, our company, we have money.
BLUMBERG: But tomorrow they might not. It's not a big deal. Maybe they need to buy a lot of termite poison or upgrade their fleet of termite-fighting vans. Every company works like this. Some days they have extra money. Some days they need to borrow. If you are a regular person, you use your credit card. If you're a gigantic company, you use the commercial paper market, a way of borrowing a lot of money.
BLOCK: We would say I'm going to give you a million dollars tomorrow if you give me $999,000 today.
DAVIDSON: Got it.
BLOCK: So tomorrow, whoever sent the $999,000 dollars in, he's going to get an extra thousand bucks tomorrow.
BLUMBERG: And so every day, treasurers all over America and all over the world are getting into their office at eight. They're surveying, sort of like their data, and then they're going and they're issuing commercial paper. How much money are we talking about, do you think?
BLOCK: It's hundreds of billions of dollars.
BLUMBERG: Every day.
BLOCK: Every single day.
BLUMBERG: Now, if you never heard of this, well, there's a reason.
BLOCK: It's been a relatively boring business. It could be somebody down at almost a clerical level, calling every single day to Merrill Lynch and saying, I need to borrow $50 million, and what rate can I borrow at. Post that rate and let's get it done by 11 o'clock in the morning.
BLUMBERG: It stopped being boring sometime this year, huh?
BLOCK: It actually stopped being boring last year.
BLOCK: Most of the banks don't even want to do a hundred million. They want to come in and they want to raise a billion, two billion dollars.
DAVIDSON: This is Tom Corona with Traditional Financial in lower Manhattan, who's also, unfortunately, not at all bored these days. He's the guy these companies call when they want to borrow short-term money. It just so happens that most of the companies who call him are banks, and they can usually get a pretty low rate, at least they could until last week.
MR: Banks were forced to start paying usury rates to get money, and even when they were paying usury rates, even if they could get money, they could only get $50 or $100 million. Now, I don't need let $50, $100 million sounds a little, but now in market, it's nothing. It's so small. These banks normally at that spread could raise billions in an eye blink.
DAVIDSON: This is what happened last week that terrified Treasury Secretary Henry Paulson, Fed Chief Ben Bernanke and President Bush. This is not a bunch of big investment banks getting their comeuppance for making bad loans. This was the fundamental flow of our economy breaking down.
BLUMBERG: Money stopped moving. Big, safe, respected companies that were far away from all the subprime problems had trouble getting the short-term loans they needed to pay their bills.
BLOCK: I don't think I've ever been this nervous in my career because I think the financial system was so close to locking up. I think we were real close to the abyss.
BLUMBERG: This is Paul Balika of Daiwa Securities. We talked with him to figure out, why this happened? Why couldn't companies borrow money?
DAVIDSON: He watched this meltdown from what he calls court-side seats. Although, when you're a bond trader, court-side seats means a chair in front of a computer screen with lots of number on it.
BLOCK: Yet, lot of numbers. And what happened that scared him so much is that for the first time ever, one of the most dreaded events on Wall Street occurred, a money market mutual fund broke the buck.
DAVIDSON: So what does that mean? A money market fund is like a savings account, there's a good chance you have one. It's even more boring than commercial paper. It is in normal times seen as totally safe, pretty much no risk. You put a thousand bucks in you know for sure you get a thousand bucks out. Hopefully, you'll get some interest but you'll never lose any money, that's the key and if you do lose money, that's called breaking the buck. And last Monday, the oldest money market mutual fund in existence, the reserve fund broke the buck and people freaked out.
BLOCK: Breaking the buck is sort of like having a serial killer in a high school, it causes a little bit of panic. When you take a look at some of the returns people, people are not concerned about getting a return, on capital. They just want the return of capital. So that is panic. That is fear.
DAVIDSON: So people took their money out of money market mutual funds, they were afraid there were going to lose all that money, and what is the main thing money market mutual funds own?
BLOCK: Commercial paper, those short-term loans, the big corporations, and that is why no matter how safe and trusted a company was, for a few hours last Wednesday and Thursday, they couldn't borrow money the way they normally had with commercial paper.
DAVIDSON: Because the people running money market mutual funds were too busy freaking out and not lending any money. As far as we can tell, this is one of the biggest things that convinced Paulson and Bernanke that things had gone too far, if this went on for one more day, the economy would start to shutdown. Once again, Paul Balika.
BLOCK: What would happen is nobody would be able to borrow money, and then how does capitalism work if you can't borrow money. You're back to bartering, pretty much you know. You don't know working capital know at - the extension of credit just almost came to halt. Just ending, period.
DAVIDSON: The key word there is almost. The commercial paper market has been awful since last Wednesday. We just called Tom Corona, he says today things took a turn from really bad to even worse. This is what he said exactly. Nothing is trading.
BLOCK: But companies have found other ways to borrow money, mainly lines of credit from their bank. The fear is that someday those lines of credit will freeze too. It's certainly possible. Then there's just won't be any borrowing.
DAVIDSON: Ben Bernanke said that could be worse that the Great Depression, but there are other economists and respected ones who will tell you that's not true. That some businesses will eventually start lending their money when the price is right. Eventually, it will work itself out, maybe. Right now, today, that's the $700 billion question. Adam Davidson, NPR News.
BLOCK: And for this American Life, I'm Alex Blumberg.
BLOCK: You can hear a longer version of this story on next week's This American Life distributed by Public Radio International.