Greenspan defends LTCM rescue
Friday 02 October 1998
It was "a rare occasion, warranted because of the potential for serious disruptions to markets," the Chairman of the Federal Reserve Board told a Congressional committee.
He said that the Fed had jumped in to co-ordinate a rescue package because it was worried about the impact of a collapse.
"Had the failure of LTCM triggered the seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations including our own," he said in an unusually frank comment.
Mr Greenspan was defending the Fed against charges that it had helped prop up an uneconomic enterprise, thus encouraging moral hazard.
The rescue was run by 14 large commercial banks and no public money was involved, he pointed out. If the fund had been left to its own devices, the effects could have been catastrophic.
William McDonough of the New York Fed, which co-ordinated the package, said that to allow the fund to unwind its positions on its own would have caused "unacceptable risks". The Fed feared that "markets would have moved sharply and losses would have been exaggerated," he said.
The Fed's concerns were partly over the size of the fund's investments.
LTCM had used $2bn in capital to buy 125 billion in securities, with which it had entered into financial transactions worth $1.25 trillion, subsequent investigations showed.
"Creditors as a whole most likely underestimated the size and scope of the market bets that LTCM was undertaking, an issue that is currently under review," said Mr Greenspan.
- 1 What happens to your body when you give up sugar?
- 3 Japanese island overrun with cats after population explodes
- 4 Delhi bus rapist blames dead victim for attack because 'girls are responsible for rape'
- 5 Have sex with your iPad thanks to the new sex toy no-one asked for
California teacher appears to have hanged herself in her classroom
The City of the Monkey God: Archaeologists claim to have found city lost for 1,000 years in remote Honduran jungle
Ed Miliband deemed less influential than One Direction's Louis Tomlinson by official Doncaster power list
Japanese island overrun with cats after population explodes
Delhi bus rapist blames dead victim for attack because 'girls are responsible for rape'
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Durham Free School: 'Creationism taught at' free school facing closure
Ukip would cut billions from Scottish budget to fund English tax cuts
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
End of the licence fee: BBC to back radical overhaul of how it is funded
Ukraine crisis: Top Chinese diplomat backs Putin and says West should 'abandon zero-sum mentality'
iJobs Money & Business
£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...
£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...
£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...