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Time for clarity: the Fed did not bail out LTCM in 1998. The Fed brokered a consortium of the largest Wall St clearing brokers (the so called Magnificent Seven) to purchase LTCM’s positions outright.
Technically it was a bailout of Bear Stearns, LTCM’s primary clearing broker.
Technically it was a bailout of Bear Stearns, LTCM’s primary clearing broker.
Clearing brokers are exposed to position losses when clients *go debit*, i.e. lose > than the equity in their account. It’s illegal to cross contaminate other customer $ to cover those losses (shout out to Jon Corzine & MF Global!), so it’s a scary problem for clearing firms.
Inside this den of infidels there’s an omertà b/t the major clearing brokers to *clear the Street* by way of overnight repos (repurchase agreements), which are ostensibly 1 day bridge loans between dealers.
The coda is these dealers trust each other only to a certain extent.
The coda is these dealers trust each other only to a certain extent.
Comity ends when, say, Bear Stearns in 1998 reveals they have a client w/ $4.5bn in equity, then one thing led to another and said client has $110bn in positions. Then correlations went outa whack & they need BILLIONS in balance sheet from their peer clearing firms.
That tends to not go well inside this den of infidels. It usually makes sense to starve the weaker firm & let the Fed make the midnight call they’re letting the wounded die. That’s exactly what happened to Drexel Burnham in Jan 1990. Happened again to Lehman in 2008.
This’ different. Robinhood is not inside this den of infidels. It isn’t a clearing broker, it relies on the consortium of clearing brokers to clear & in instances of duress some margin relief to clear positions.
So here we are. Do the infidels save RH or let it die? Easy answer.
So here we are. Do the infidels save RH or let it die? Easy answer.
Which brings us to what happens if RH calls The Fed, the US Treasury, etc. screaming to be saved b/c the little guy, the Barstool Nation, etc.?
Nothing.
There’s no structural risks here. It’s just knuckleheads doing knucklehead things & as a consequence RH goes insolvent.
/end
Nothing.
There’s no structural risks here. It’s just knuckleheads doing knucklehead things & as a consequence RH goes insolvent.
/end
