How the government froze my money market

From super-sharp financials guru Bill Stacey of global theme players AviateGlobal in HK:

G7 governments are now trying mightily to fix problems that they largely caused and certainly exacerbated. Consider the following policy measures that systematically, if not intentionally, undermined key markets – eventually feeding into the money market.

• Inconsistent bail outs of banks (bond holders protected in Freddie, Fannie, Wachovia but not WAMU) dries up term debt for banks
• Presence of potential government guarantees stops equity investments without government support
• Uncertainty about TARP and related programmes stopped the emerging market for “toxic” assets and eliminated price discovery
• Offers of deposit guarantees in some countries creates “beggar thy neighbor” responses in all countries to do the same
• Government equity injections to banks and talk of warrants creates massive risk of dilution for existing shareholders in financial institutions and creates panic selling
• Ban on short selling eliminates a pool of liquidity and source of buying support in the financial sector
• Ban on short selling undermines some hedge funds, causes losses and redemptions and creates retrenchment in one of the most active groups of investors. It also undermines the convertible market
• Talk about government support for household mortgages in the US, likely creates a moral hazard that will lead to more defaults, stop the market moving to clearing levels for property and extend the work out in the underlying pressured market
• Guarantees in money market funds divert money that would otherwise have flowed to banks away to securities and creates a shortage of treasury paper as funds seek to exit financial and corporate short term exposure

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