Lecture 5: Crisis II: LTCM II, Russian crisis

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Lecture 5 Crisis II LTCM II, Russian crisis
Galina A Schwartz Department of
Finance University of Michigan Business School
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Plan of todays lecture

• Financial markets the trends
• LTCM case study
• Press 1998
• Press 2000
• John Meriwether renewed?
• FED intervention who was to pay for all this?
• Russian Default
• Why Russian crisis happened
• Big Players incentives
• Lobbyists Politics
• IMF incentives
• Was Russian crisis inevitable?
• Was Russian crisis predictable?
• Nuclear defense of debt expanse?

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Financial markets The trends I

• Increase in correlation of the markets due to
• More financial instruments arbitrage
  possibilities
• Convergence in financial regulation across
  markets
• More openness less capital controls government
  restrictions
• More prudent monetary policies / standards

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Financial markets The trends II

• Increase in market volatility due to
• Higher trade volumes
• More complex technology
• Too big to fail or too well connected to loose?
• Buffet Goldman Sachs was it a rescue plan?
• FED rescue and some mighty events interest rates
  cuts and the dollar freefall

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LTCM, FED Financial markets

• Pareto improvement a definition.
• or How to make everyone happier?
• Too big to fail or too well connected to loose?
  or
• Was FED really internalizing an externality?
• or Was it really a danger of a massive financial
  crisis if LTCM would have filed for bankruptcy?
• Buffet Goldman Sachs was it a rescue plan?
• FED rescue and some mighty events interest rates
  cuts and the dollar freefall

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Theory behind Russian crisis

• In one word what created dis-equilibrium?
• Why the dis-equilibrium was long lasting?
• Players
• Central bank(s) were not key figures
• Government Russian
• benevolent?
• commitment constrained?
• Constraints?
• Government US
• benevolent?
• Constraints?

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Theory behind Russian crisis (continued)

• Players (continued)
• Financial industry (and real industry)
• US (and other Western)
• Russian
• International organizations
• IMF
• Foreign government(s)many
• Who could serve as a rescue quad?
• Only big and powerful
• Who should serve this role?
• IMF and other International organizations

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Summary and what is next

• FED and LTCM
• Was a bailout the only choice?
• Was the bailout the most cost affective choice?
• Regulating Hedge Funds pros and cons
• Russia
• It helps being unique
• It hurts being unique
• Shock therapy or
• Gradual reforms
• Is crisis a revolution?
• Next Monday Crisis III Asia and ?