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

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  • Craig Furfine

    (Federal Reserve Bank of Chicago)

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    Abstract

    This study examines the level of unsecured borrowing done by the firms that ultimately rescued Long-Term Capital Management in the days leading up to the hedge fund's rescue. Although these banks borrowed less at the height of the crisis, evidence suggests that this reduction in borrowing was demand-driven and did not result from rationing by the market. 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 strength of a too-big-to-fail policy.

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    File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB790205
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 79 (2006)
    Issue (Month): 2 (March)
    Pages: 593-622

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    Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:2:p:593-622

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Robert A. Eisenbeis, 2006. "Home country versus cross-border negative externalities in large banking organization failures and how to avoid them," Working Paper 2006-18, Federal Reserve Bank of Atlanta.
    2. Marguerite Schneider & Lori Ryan, 2011. "A review of hedge funds and their investor activism: do they help or hurt other equity investors?," Journal of Management and Governance, Springer, vol. 15(3), pages 349-374, August.
    3. Stephen Quinn & William Roberds, 2010. "How Amsterdam got fiat money," Working Paper 2010-17, Federal Reserve Bank of Atlanta.
    4. Gatev, Evan & Strahan, Philip E., 2009. "Liquidity risk and syndicate structure," Journal of Financial Economics, Elsevier, vol. 93(3), pages 490-504, September.
    5. Bartolini, Leonardo & Hilton, Spence & McAndrews, James J., 2010. "Settlement delays in the money market," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 934-945, May.
    6. Masami Imai & Seitaro Takarabe, 2009. "Bank Integration and Local Credit Cycle:Evidence from Japan," Wesleyan Economics Working Papers 2009-002, Wesleyan University, Department of Economics.
    7. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.

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