/biz/ - Business & Finance

>>57091601
> if an extended liquidity crisis in the securities industry began to threaten the solvency and viability of brokerage houses and specialists. This possibility first loomed on the day after the crash.[22] At least initially, there was a very real risk that these institutions could fail.[23] If that happened, spillover effects could sweep over the entire financial system, with negative consequences for the real economy as a whole.[24] As Robert R. Glauber stated, "From our perspective on the Brady Commission, Black Monday may have been frightening, but it was the capital-liquidity problem on Tuesday that was horrifying."[25]


>nvestors needed to repay end-of-day margin calls made on October 19 before the opening of the market on October 20. Clearinghouse member firms called on lending institutions to extend credit to cover these sudden and unexpected charges, but the brokerages requesting additional credit began to exceed their credit limit. Banks were also worried about increasing their involvement and exposure to a chaotic market.[27] The size and urgency of the demands for credit placed upon banks was unprecedented.[28] In general, counterparty risk increased as the creditworthiness of counterparties and the value of collateral posted became highly uncertain.[29]

>The Fed successfully met the unprecedented demands for credit[43] by pairing a strategy of moral suasion that motivated nervous banks to lend to securities firms alongside its moves to reassure those banks by actively supplying them with liquidity

>The Fed's key action was to induce the banks (by suasion and by the supply of liquidity) to make loans, on customary terms, despite chaotic conditions and the possibility of severe adverse selection of borrowers. In expectation, making these loans must have been a money-losing strategy from the point of view of the banks (and the Fed); otherwise, Fed persuasion would not have been needed