The Costs and Benefits of Moral Suasion: Evidence from the Rescue of Long-Term Capital Management

29 Pages Posted: 13 Dec 2005

Multiple version iconThere are 2 versions of this paper

Date Written: June 2002

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: Long Term Capital Management, Market Discipline, Hedge Funds, Too-big-to-fail

JEL Classification: G14, G20

Suggested Citation

Furfine, Craig, The Costs and Benefits of Moral Suasion: Evidence from the Rescue of Long-Term Capital Management (June 2002). BIS Working Paper No. 103; FRB Chicago Working Paper No. 2002-11, Available at SSRN: https://ssrn.com/abstract=286453 or http://dx.doi.org/10.2139/ssrn.286453

Craig Furfine (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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