How did bear s potential collapse differ from that of ltcm in the eyes of the federal reserve
But to little avail: The perception of trouble quickly becomes a reality as hedge funds and other financial parties engaged with the firm take their money and get out.
Long term capital management case study answers
But in the case of some of them and some of the other institutions not called hedge funds, what they did is decide: "Here's a good idea; we'll invest in these things. Of the series of meetings, actually the only meeting that I personally was involved in was the final one. Treasury, the riskless security became so small that it became very clear that investors everywhere had decided risk had disappeared. That tells you that there is a very large amount of risk-aversion taking place. Almost anything you can name would have been dumped on the market. It spread throughout Asia; that had not been anticipated initially. A hedge fund is supposed to be eliminating risk; that's what "hedge" means. If you have a good, strong shock absorber, at least you get through the pothole and you're still driving in the same direction that you thought you were when you hit it.
It points again, I think, to the only thing we can do which is improve, in Cavallo's words, the rules of the game. Of the series of meetings, actually the only meeting that I personally was involved in was the final one.
Money and its importance relative to the US Government have always been difficult to figure out especially when it comes to interest rates.
The Federal Reserve System is there to help out when a series of financial hardships and panics happen in our economy.
Then Secretary Rubin was being kept informed essentially by me. We can't turn the clock on it even if we didn't think it's a particularly good thing, and therefore we have to learn to cope with it.
That took place. Well, markets are clearing, you know; there's the theory that all information is available to financial markets, and therefore they are setting the right price through the interaction of supply and demand in the market. One would be very unwise to say they're impossible.
There were three objectives for the monetary policy.
Long term capital management meaning
It points again, I think, to the only thing we can do which is improve, in Cavallo's words, the rules of the game. And so you bring the economy, not to a complete stop -- people have to buy food and gasoline and so on -- but it brings the economic to a very much lower level of activity. Since it doesn't make any sense, it tells you that financial markets were simply beginning to fail to function. For a while there was a thought: Could there be a great new financial architecture in which everything would be so brilliantly constructed that there would be no risk? We are in the process of making quite a lot stronger the capital requirements for banks around the world, how they are supervised and how market discipline is brought to bear to make sure that the marketplace is disciplining these major financial institutions, all to make the world's financial system, stronger, more robust, more capable of withstanding shock. When you get into the individual payments and settlements system in various countries, then they come under in the United States, the Securities and Exchange Commission, the Future Trading Commission, The Federal Reserve. These 14 firms in effect bought 90 percent of Long Term Capital Management, leaving 10 percent of it with the management as an inducement for them, since they knew their book better than anybody else did, to stay with the firm and then with an oversight committee from the 14 new investors to work the very large exposure of Long Term Capital Management down, which took about a year, and eventually Long Term Capital Management was just wound down and went out of business. Treasury, the riskless security became so small that it became very clear that investors everywhere had decided risk had disappeared. The situation could well have happened in any event, but it required a triggering event, and the triggering event was the Russian devaluation and default. If that should take place, if financial markets really started freezing up, the ability of that to move over to the real economy where the real people of the United States of America live and work was extremely high. One of the things the Federal Reserve did, you may recall, is we had a rather dramatic easing of monetary policy in a series of three moves in the fall of in which we reduced at a meeting of Federal Open Market Committee the official rate by 25 basis points a quarter of 1 percent. Typically between the on-the-run and the first-off-the-run, there would be two one-hundredths of 1 percent, which in the trade is called two basis points. So we tend to be where the center of the action is, both in implementing monetary policy and then in problem resolving or accident fighting if anything should come along to disturb the tranquillity of the American capital markets or of the functioning of the American economy. I'm just intrigued by this period, this lull that you talked about. That committee is involved in setting standards for payments and settlement systems to make them ever more robust.
So an American investor will buy some European securities, perhaps some Japanese securities. Now when you say what happens if markets froze, the real answer to that is nobody's sure.
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