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Finance 319 Lecture 03.12.01

Finance 319 Lecture 03.12.01 . Course Website http://www.citi.umich.edu/u/galka/319 Galina Albert Schwartz Department of Finance University of Michigan Business School. Lecture 03.12.01 Crisis: LTCM, Russian crisis. Galina A Schwartz Business School University of Michigan.

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Finance 319 Lecture 03.12.01

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  1. Finance 319 Lecture 03.12.01 • Course Website • http://www.citi.umich.edu/u/galka/319 • Galina Albert Schwartz • Department of Finance • University of Michigan • Business School Finance 612: Summary Finance 319

  2. Lecture 03.12.01 Crisis: LTCM, Russian crisis • Galina A Schwartz • Business School • University of Michigan

  3. Plan of today’s 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?

  4. 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

  5. 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

  6. 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

  7. 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?

  8. 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

  9. Summary [and what 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: Crisis: Asia and ?

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