CIAO DATE: 04/2010
March 2010
Runs by prime-brokerage clients and derivatives counterparties were a central cause of the World Financial Crisis. Worried about potential losses, many hedge funds withdrew their assets from brokerage accounts at Bear Stearns and Lehman Brothers in the weeks before these banks failed. Although Morgan Stanley did not fail, it also suffered from the withdrawal of prime brokerage assets. These runs, together with runs by short-term creditors, precipitated Bear Stearns’ and Lehman’s demise. Even if these firms would have failed anyway, the runs made their failures much more sudden and chaotic, and made coherent policy responses much harder. In this paper we consider why clients “ran,” how such runs precipitated failure by substantially reducing the broker’s liquidity, and what changes might ameliorate this unstable situation.
Resource link: Seeking Nuclear Security Through Greater International Coordination [PDF] - 164K