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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: Enigma who wrote (16937)	11/1/1998 9:24:00 PM
From: Carl R.	Read Replies (2) \| Respond to of 18056

Actually no, I don't think the difference is semantic. First of all you have to recognize that the Fed had no regulatory power over LTCM. If LTCM were a bank, the Fed could have taken it over and liquidated it. But LTCM was in a non-regulated area over which the Fed had no power. I can't think of any reason why the Fed could have intervened in a bankruptcy proceeding, but I don't claim to have all the answers. The Fed was concerned that if LTCM crashed and burned, it might start a variety of chain reactions, so it jaw-boned the banks into going the orderly liquidation route. But remember it couldn't force them to do anything. It just helped to negotiate a settlement that all the lenders found fair, and encouraged them to accept the settlement. In the absence of any action by the Fed, the banks hopefully would have eventually looked at the situation they were in, and taken the exact same actions. The problem is that none of them wanted any additional risk, yet all of them wanted an orderly liquidation. Thus a fair settlement with all lenders putting up additional capital was the only way to go. The Fed simply acted as a facilitator. I really don't see the big deal about this. Who was harmed by this settlement? The investors in LTCM would have lost everything without it. The lenders would have taken a huge bath, too. The markets would have been damaged, too. I suppose that people who realized the extent of the problems and gambled on a collapse of LTCM were harmed, but I don't see any reason to protect them. I just don't see this as anything unusual. Nor do I see this so much as a market intervention, but rather as a way of forcing the market to solve its own problems. Carl