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 Mario Balotelli: Staff at arson-hit Manchester Dogs' Home convinced Liverpool striker is behind five-figure donation
- 2 Friends 20th anniversary: Alison Jackson photographs reunited cast
- 3 Friends 20th anniversary: The highs and lows of the cast's careers since 2004
- 4 The response to my Pizza Express review has been overwhelming, and taught me a lot about journalism
- 5 Free U2 album: How the most generous giveaway in music history turned into a PR disaster
Scottish independence: Despite defeat history may still point to Alex Salmond as the victor
Scottish independence referendum: Frankie Boyle reacts to nation's 'No' vote - 'To be fair, I've always hated Scotland'
Iranian blogger found guilty of insulting Prophet Mohammad on Facebook sentenced to death
Scottish referendum: Police struggle to control Unionist rally in Glasgow's George Square
Glasgow 'riots': 'Dishonest' social media users accused of fuelling panic with pictures from London riots
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
Scottish independence referendum: A nation divided against itself
Scottish referendum results: Cross-party consensus collapses amid Tory-Labour spat on the 'English question'
Scottish independence: David Cameron is becoming the 'George Bush of Britain'
Russia freezes Ukraine into submission: Kiev admits country doesn't have enough fuel for winter
Scottish independence: The Queen breaks silence on referendum debate – as think tank warns of £14bn black hole if Scotland votes Yes
iJobs Money & Business
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...
£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...