Sources: stock market nearly imploded Thursday

I almost laughed out loud when Friday evening's Drudge Report celebrated the stock market's late-week recovery with the headline "DOW ENDS WEEK DOWN 34 POINTS," accompanied by a photo of fireworks and the statistic "DOW UP 40 POINTS IN PAST MONTH... UP 18% PAST 5 YEARS... UP 44% PAST 10 YEARS." Drudge's implicit message was as clear as it was absurd: See, this wasn't such a big deal! All those doom-and-gloom Democrats are blowing it out of proportion!

The reason this is absurd, of course, is because it was obvious to anyone who was halfway paying attention -- even to me, who knows next to nothing about financial markets -- that the only reason the stock market recovered on Thursday and Friday, thus finishing the week with only a slight decline, was because of the extraordinary measures taken by the federal government to prevent a total market meltdown. It is beyond ridiculous to imply that the initial success of these unprecedented and incredibly expensive actions somehow suggests the problem was blown out of proportion. It's a bit like suggesting that a low death toll in a landfalling hurricane, thanks to a highly successful evacuation, proves that the hurricane was overhyped and the evacuation was not necessary.

Well, my instinct in this regard is seemingly validated by a New York Post article out today (which is getting a lower-tier headline on Drudge), titled "ALMOST ARMAGEDDON," which reports on how bad things almost got, according to anonymous but apparently well-placed sources. Excerpt:

The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.

Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor.

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 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.

Here's the Post's chart:



Yikes.