Fed liquidating hedge fund
In September 1998, a group of 14 banks and brokerage firms invested .6 billion in LTCM to prevent the hedge fund’s imminent collapse.
The arrangement was facilitated by the Federal Reserve, though the Fed did not lend any of its own funds. The capital infusion forestalled a fire sale of LTCM assets into already turbulent markets and instead allowed for an orderly liquidation of the hedge fund’s holdings.
by hedge funds during the global financial crisis.” “The probability of market runs…is related to the distribution of funding liquidity shocks…
A team from the New York Fed visited LTCM two days later.The effort thereby addressed the near-term concerns of a possible fire sale of LTCM assets, while mitigating long-term moral hazard concerns that might have arisen from the use of public funds.Led by a team of market experts including two Nobel laureates, LTCM was a hedge fund well known for using sophisticated mathematical models to make impressive profits.FRBNY President William Mc Donough (R) and Federal Reserve Chairman Alan Greenspan (L) testify during a hearing on systemic risks to the global economy from hedge fund operations (Photo: Luke Frazza/AFP/Getty Images) On September 23, 1998, a group of fourteen banks and brokerage firms invested .6 billion in Long-Term Capital Management L. While the Federal Reserve brought the market participants together and oversaw the refinancing, it did not put its own funds at risk.Rather, creditors of LTCM—who had the most to lose from its bankruptcy—arranged and financed the rescue.
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When arbitrageurs face constraints on collateral, they are limited in their arbitrage positions…fund managers who are subject to liquidity risk reduce their portion of risky assets in preparation of fund runs.” “By analyzing the types of stocks hedge funds sold off during the crisis, the authors show that s…because high-volatility stocks respond sensitively to price movement and during a market downturn are more likely to experience price drops.