If I have a margin account, and I buy one share of IBM and then I use that to borrow
another $100 on my IBM, Bear Sterns can take that one share of IBM that’s in my
account and borrow against it for their own purposes. Pledge it as collateral to
another bank and give me a $100 Bear Sterns IOU in my account. Now, I’ll still...
My equity will go up and down based on the price of IBM, but I won’t have a share
in there. I’ll actually have a Bear Sterns IOU.
01:00:08
So if the music stops and Bear Sterns files bankruptcy, suddenly as opposed to my share of IBM in my account, I’m an unsecured creditor of Bear Sterns. And that’s what the hedge fund and other communities realised belatedly, having not gone through this before. The other dress rehearsal was LTCM in 98. And they began to shrink their balances to ensure that they weren’t incurring margin debt, and that was forcing Bear Sterns to return the collateral, and thus...
01:00:08
So if the music stops and Bear Sterns files bankruptcy, suddenly as opposed to my share of IBM in my account, I’m an unsecured creditor of Bear Sterns. And that’s what the hedge fund and other communities realised belatedly, having not gone through this before. The other dress rehearsal was LTCM in 98. And they began to shrink their balances to ensure that they weren’t incurring margin debt, and that was forcing Bear Sterns to return the collateral, and thus...
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