The following is an excerpt from Bloomberg Businessweek:
By doing so, the participants seek to reach a solution to what the Federal Reserve sees as the last systemic risk in the $1.6 trillion-a-day market for short-term funding yet to be addressed: the potential for questions over a bond dealer’s liquidity to unleash a wholesale dumping of assets that causes a crisis of confidence in the financial system.
“The Fed is right to worry about fire-sale risk,” Viral Acharya, a finance professor who focuses on liquidity risk and regulation at New York University’s Stern School of Business, said in a telephone interview on Feb. 25. Lehman and Bear Stearns showed the consequences when “creditors in the repo market started worrying about these counterparties.”
Read the entire Bloomberg Businessweek article here.