https://www.nytimes.com/2020/07/23/business/economy/hedge-fund-bailout-dodd-frank.html ===== ... Of particular concern: The hedge funds were using trading strategies similar to those employed by Long-Term Capital Management, a fund that collapsed in 1998 and nearly caused a financial meltdown. The bet hedge funds were making earlier this year was simple enough. Called a basis trade, it involved exploiting a price difference in the Treasury market, generally by selling Treasury futures contracts — promises to deliver a bond or note at a set price on a set date — and buying the comparatively cheap underlying securities. The hedge funds made a tiny return as the price of a security and its futures contract converged. To turn those mini payoffs into real money, they tapped a form of short-term borrowing, called repo, and used it to amass huge holdings of Treasuries. Such trades are often incredibly leveraged. The problems started as markets became very volatile in mid-March. The repo funding essential to the trades was suddenly hard to come by as financial institutions that provide the loans backed away. Historical pricing patterns broke down, and many trades were no longer profitable. Some hedge funds were forced to dump government debt. Banks could have acted as stress relievers by buying securities and finding buyers. But they were already holding many government bonds, and could not handle more in part because of regulations established after 2008. Everyone was selling — ordinary investors, foreign central banks and hedge funds. Hardly anyone was buying. The market for U.S. government debt, the very core of the global financial system, was grinding to a standstill. “The severe dislocation in one of the world’s most liquid and important markets was startling,” the Bank for International Settlements, a bank to central banks, wrote in its annual report last month. The Fed stepped in to avert catastrophe, pledging during an emergency Sunday afternoon meeting to buy huge sums of government-backed bonds. ... Relative value funds were not the only financial vulnerability exposed in March. Money market mutual funds, bailed out in 2008, required another rescue. Corporate bonds faced a wave of predictable ratings downgrades. That market ground to a standstill, prompting the Fed to undertake its first-ever effort to buy big-company debt. Risks at lightly regulated financial firms “were not only predictable, but well-documented,” Lael Brainard, a Fed governor, said during a University of Michigan and Brookings Institution conference in late June. “We’ve now seen not once but twice in only 11 years” risks that were considered highly unlikely threatening the economy. Ms. Yellen and other policymakers said Congress might need to make regulators responsible not just for individual institutions but for the overall safety of the financial system. Only the Fed has a financial stability mandate, and it applies just to banks. “There was a flaw in Dodd-Frank,” Ms. Yellen said. “Dodd-Frank gave FSOC the responsibility for dealing with financial stability threats,” but did not convey it with the power to do much beyond cajole other regulators. “If FSOC is to be meaningful, it needs to have power of its own.” =====
The Fed created this monster when they stopped in to back banks, insurers, funds, etc that should have been allowed to go under. Now there is ZERO FEAR in the markets. The only ones who will fail are the little shits who can’t cause a cascade. The monster firms can take all the risk they want b/c they know the Fed will be there to clean up the mess. Moral hazard on steroids
%% I did my part once, profit on TMF, but it got too wild for me to keeps buying/sellin that.Actually the Fed managed/strong armed the banks to bailout LTCM. And LEHMAN +Bear figured they were big to fail; too bad they figured wrong. Interesting AIG lost almost all the court cases/sued FED,i think because of Fed actions/bailout/micromanage ,aig whined...……………………………………………………………. And GM, DAL/ bankruptcy was good for all/good lesson.