The costs and benefits of moral suasion: evidence from the rescue of Long-Term Capital Management

Craig H. Furfine

No WP-02-11, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: This study examines the level of unsecured borrowing done by the firms that would ultimately rescue Long-Term Capital Management in the days leading up to the hedge fund's rescue. Although there is some evidence that these banks borrowed less at the height of the crisis, further examination reveals that this reduction in borrowing was demand-driven and did not result from rationing on the part of the market. This suggests that the market believed that the troubles at LTCM would not have solvency-threatening repercussions for the fund's major creditors. Further, it is shown that large banks that were not involved with the LTCM rescue saw the rates they pay for unsecured funds decline following the hedge fund's resolution. This finding is consistent with an increase in the perceived strength of a too-big-to-fail policy.

Keywords: Banks and banking - Costs; Bank capital; Hedge funds (search for similar items in EconPapers)
Date: 2002
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (3)

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