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