Financial journalist James Stewart notes that in contrast to its actions with respect to Lehman Brothers: the
Question:
Financial journalist James Stewart notes that in contrast to its actions with respect to Lehman Brothers: “the Fed did lend into continuing runs at both Bear Stearns and A.I.G., although officials argued then that those companies had adequate collateral to guarantee repayment.”
a. What does Stewart mean by “lending into continuing runs”? Why would central banks lend into runs at financial firms?
b. Why is the issue of whether Bear Stearns and AIG held sufficient collateral important legally? Is it also important economically? Briefly explain.
c. How does your answer to part (b) relate to the Fed’s decision not to lend to Lehman Brothers in the days before its bankruptcy?
Step by Step Answer:
Money, Banking, and the Financial System
ISBN: 978-0134524061
3rd edition
Authors: R. Glenn Hubbard, Anthony Patrick O'Brien