As promised, a diary entry with links to articles on the near commerical paper mkt meltdown.
It turns out that if you perform a simple Google search on “Commercial Paper” meltdown, you’ll get accounts of the near meltdown from varioius perspectives below.

And as mentioned, RedState contributor Francis Cianfrocca would give you a more authoritative perspective. Some of his comments can be found here , here , and here .

From a TARP criticReasonOnline…Free Minds and Free Markets

we read

The one-two punch of Lehman’s failure and the government’s $85 billion bailout of AIG on September 16 spooked both Wall Street and the White House. With Fannie Mae and Freddie Mac already in government receivership, there were fears that the weakness stemming from mortgage-backed securities would spread through the entire financial system. Money began leaving the markets to seek the security of Treasury bonds.

Then, on September 18, it was reported that the Reserve Primary Fund and the Reserve International Liquidity Fund, two commercial paper money market funds, “broke the buck,” meaning they lost money. The commercial paper market is supposed to be boring. Every day, companies around the world borrow hundreds of billions to smooth cash flows; the next day they pay it back, giving the bank that lent the money a very small return. When these money market funds lost money, it was a signal that the commercial paper market was drying up, that banks were hesitant to make even these very safe loans.

That’s when the market freaked out.

and at the other end of the hysteria spectrum The New York Post

we read (less some of the

According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.

The panicked selling was directly linked to the seizing up of the credit markets – including a $52 billion constriction in commercial paper – and the rumors of additional money market funds “breaking the buck,” or dropping below $1 net asset value.

The Fed’s dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt.

While many depositors treat money market accounts as fancy savings accounts, they are different. Banks buy a variety of short-term debt, including commercial paper, with the assets. It is an important distinction because banks use the $1.7 trillion commercial-paper market to fund their credit card operations and car finance companies use it to move autos.

Without commercial paper, “factories would have to shut down, people would lose their jobs and there would be an effect on the real economy,” Paul Schott Stevens, of the Investment Company Institute, told the Wall Street Journal.

Cracks started to show in money market accounts late Tuesday when shares in one fund, the Reserve Primary Fund – which touted itself as super safe – fell below the golden $1 a share level. It had purchased what it thought was safe Lehman bonds, never dreaming they could default – which they did 24 hours earlier when the 158-year-old investment bank filed Chapter 11.

By Wednesday, banks sensed a run on their accounts. They started stockpiling cash in anticipation of withdrawals.

Banks, which usually keep an average of $2 billion in excess reserves earmarked for withdrawals, pumped that up to an astounding $90 billion by Wednesday, Lou Crandall, chief economist at Wrighton ICAP, told The Journal.

And for good reason. By the close of business on Wednesday, $144.5 billion – a record – had been withdrawn. How much money was taken out of money market funds the prior week? Roughly $7.1 billion, according to AMG Data Services.

By Thursday, that level, fed by the incredible volume of sell orders pouring in from institutional investors like pension funds and sovereign funds, had grown to $100 billion. It was still not enough to stem the tidal wave.