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To: Enigma who wrote (2237)	11/12/1999 8:47:00 AM
From: Enigma	Read Replies (1) \| Respond to of 3536

Henry - what I'm struggling with here - specifically as it impacts mutual funds - is what exactly is meant by 'injecting liquidity into the system' - a phrase which is often used. Maybe the first effect is on margin calls at the retail level, but how, specifically? And, going back to my posting, I'm not sure how managers would pay back loans if they use them to 'buy the hell out of stocks'. I'm not talking about a correction here but a crash pure and simple - the market going down like a falling stone! And, in spite of what you say, it does appear that many funds are fully invested (if 4.8% is the average) and must feel encouraged to be so because of the backing of the banks/Fed.

To: Enigma who wrote (2237)	11/12/1999 9:16:00 AM
From: Henry Volquardsen	Read Replies (2) \| Respond to of 3536

D In practice I don't think the Fed is concerned with an individual fund being hit by a wave of redemptions. That has happened and the Fed has done nothing. What I believe they are concerned with is if there is a systemic shock that causes massive withdrawls from all funds regardless of individual circumstance. They are interested in stopping a panic and giving the markets a chance to stop and catch its breath. Under these circumstances the Fed would, as you say, provide liquidity to the commercial banks who would then lend it to the funds to meet redemptions. But it is important to remember that this would be a very short term provision of extra liquidity and that the Fed would work very closely with the banks that the funds were not used to prop up the market but simply to insure that the dissolution of the effected funds was done in an orderly manner. We are talking a matter of days not weeks or months. But at no time, imo, would the word go out to use the money to buy the hell out of stocks. The Fed would make that clear to the banks. The question of whether this effects the actions of fund managers and punishes the prudent manager is an interesting philosphical question. Theoretically the answer can only be yes. However in practice I believe it has very little impact. Remember this is a very rare action on the Feds part. In the 20+ years I've been in the industry I am only aware of the one possible occurence in '87. And even then I don't believe it has been confirmed that the Fed provided immediate liquidity. They did have discussions with the banks however and made it clear they would provide support if needed. Other than I can't think of the Fed taking this action before or since. They have also never made a verbal commitment to do so in the future. So as a practical matter this item of support is not something that effects the day to day or even month to month operations of a fund manager. Fund managers are much more focused on beating their indexes or competitors. So I don't believe this has altered the way any individual fund manager is conducting his business and therefore is not unfairly punishing a more prudent manager. Henry