November 23, 2012

100 Years of Federal Reserve Stories

100 years of Federal Reserve stories.

St Louis Fed recaps the actions of the Federal Reserve in various crisis over the last 100 years.

For example, Long Term Capital Management 
LTCM began to incur losses with the Asian crisis in 1997, which worsened considerably with the Russian default in 1998. Following the Asian crisis and into 1998, risk spreads widened and implied volatility in asset markets increased. LTCM viewed the level of spreads and volatility as out of line with historical experience and took positions that would profit if spreads narrowed and implied volatilities declined (Lowenstein 2000, pp. 124-146, 187-188). Instead, in the wake of the Russian default, risk spreads widened as investors rushed to Treasury securities, the preferred safe-haven security, and implied volatilities surged. While LTCM reportedly had tested its positions for possible loss, its models were based on historical patterns in the data and did not anticipate the size of the movements in asset prices that followed the Russian default (Dunbar 2000, pp.202-207). Given the fund’s high leverage, these losses quickly eroded its capital (Edwards 1999). As LTCM’s losses mounted, its counterparties began to tighten margin and collateral requirements so that the firm’s liquidity started to dry up (Lipin, Murray, and Schlesinger, 1998).

Tags: lender of last resort stories, federal reserve history, federal reserve stories, federal reserve and financial crisis, 100 years of federal reserve, TAF, TSLF, PDCF, AMLF, CPFF, TALF, QE