This study examines the level of unsecured borrowing done by the firms that
would ultimately rescue Long-Term Capital Management in the days leading up to
the hedge fund's rescue. Although there is some evidence that these banks
borrowed less at the height of the crisis, further examination reveals that this
reduction in borrowing was demand-driven and did not result from rationing on
the part of the market.
This suggests that the market believed that the troubles at LTCM would not
have solvency-threatening repercussions for the fund's major creditors. Further,
it is shown that large banks that were not involved with the LTCM rescue saw the
rates they pay for unsecured funds decline following the hedge fund's
resolution.
This finding is consistent with an increase in the perceived strength of a
too-big-to-fail policy.