Who/what started the $550 Billion 'run on the banks'?

Interview of Paul Kanjorski (D - PA) where what feels like a bomb got dropped at about 2:10:

http://youtube.com/watch?v=INAGMSARPYw

Anyone have the straight dope on who or what prompted that $550 Billion draw down from the Money Markets that was used by Paulson to inject the fear into Congress so they’d buy into what eventually became the TARP blank check?

Well, had I done a little research I’d have discovered it was the whole Lehman Brothers/AIG/Reserve Primary Fund trifecta that was summed up well in a ‘This American Life’ episode:

Nevermind.

=)

Right. Essentially one large money market fund suddenly stopped doing what those funds are supposed to do: provide a safe and liquid place to store money.

Given my (limited) understanding, it went down like this:

  1. Lehman Brothers crashes and burns, to much applause.
  2. Lehman’s stops paying its debts.
  3. Money markets that bought LB’s debts (they had been AAA, the best kind to buy after Treasuries) start being worth a lot less.
  4. Lots of people say, “oh shit” and start pulling their money.
  5. What’s left is worth even less.
  6. GOTO 4

Yes, it’s called “breaking the buck.” The basic idea behind investing in money markets is that you may not get much return on your dollar, but you’ll always, always at least get your dollar back. But many large money market funds were heavily invested in Lehman, and when it went under, one of those funds broke the buck (i.e., could not guarantee that investors would get that dollar back) for what I think may have been the first time ever, at least for a large fund. That was what started the run on the money market funds.

The Village Voice just did a good article on the roots of the issue as well.