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Strategies & Market Trends : Currencies and the Global Capital Markets
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To: Enigma who wrote (2242)11/12/1999 10:27:00 AM
From: Henry Volquardsen  Read Replies (2) of 3536
 
D,

That is all the Fed would be trying to do, smooth redemption problems. No other agenda. And yes stocks would need to be sold to repay the loans.

To clarify one thing it may be worth commenting on the current situation. All the funds have credit lines that allow them to borrow from the banks to meet redemptions. That is probably one of the main reasons the funds can, if they choose, keep such a low cash position. they know they can draw on the loan if need be. If the funds do draw on the lines they do sell stocks very soon so they can pay of the loans. These are just liquidity lines and not intended to be margin loans but does have the effect of allowing the funds to operate with lower cash reserves. Banks on the other hand are very skittish about credit risk. In normal markets they love making these kind of loans, decent returns for low short term risk. The danger is in a crisis situation such as a panic the banks would all run for the door and cut these lines. The concern is that given this loss of liquidity the funds would sell even more stocks so they can increase their cash position for future redemptions. The impact of course would be that the loss of bank credit would prompt even more selling than is already taking place and greatly exacerbate the panic. The Fed's action in these circumstances is to assure the banks that liquidity is available. The goal is to keep the banks from withdrawing credit from the system. This allows the funds to operate with the same liquidity they had and not force them to accelerate their selling beyond what is needed.

Henry
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