Saturday's Wall Street Journal article "In Year of Investing Dangerously, Buffett Looked 'Into the Abyss'" gives a revealing look at the day-by-day thoughts of Warren Buffett during the height of the financial crisis. The piece contains some interesting comments on money market mutual funds, and serves as a timely reminder of how dire the situation was during that fateful week.

The WSJ describes Sept. 15, 2008, "By this point, Mr. Buffett was beginning to worry about the entire financial system.... The commercial-paper market, which helps finance the day-to-day operations of businesses around the country, was seizing up. On Sept. 16, the Reserve Primary Fund, a big money-market fund, revealed huge losses, due in part to holdings of Lehman's commercial paper."

It continued, "If the commercial-paper market had frozen completely, more major financial institutions and possibly even household names such as GE would have failed, Mr. Buffett says, 'because their checks would have failed to clear.' That would have triggered panic in the nation's money-market funds, which held about $3.5 trillion in assets, because some of them held commercial paper. The resulting chaos, Mr. Buffett concluded, could have crashed global financial markets, threatening Berkshire."

The Journal quotes Buffett, "I felt that this is something like I've never seen before, and the American public and Congress don't fully understand the gravity [of the problems]... I thought, we are really looking into the abyss." At a birthday party for a wealthy friend in Omaha, several guests asked Mr. Buffett if their money-market funds were safe. He found the questions worrisome: They suggested widespread fears about the safety of funds long perceived to be invulnerable to losses. He said, "When people who drive Rolls-Royces are worrying about their piggy banks, you know you've got a problem."

The WSJ piece continues, "Mr. Buffett says he still felt the government had the tools to head off calamity. He stayed in close touch with government officials, fielding phone calls from then-Treasury Secretary Henry Paulson, who was cobbling together a bank-bailout package and was interested in Mr. Buffett's thoughts about structuring it. Senators seeking guidance about the package also phoned him. As the government swung into action, Mr. Buffett recalls, he gained confidence that the crisis would be resolved. A government guarantee of assets in money-market funds, which came days after the Reserve fund's troubles emerged, was a big step forward, he says."

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