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CRISIS AND PANIC
faxes tend to get lost. I’m not sure that’s just coincidental . . . that was collateral for
whatever lending [prime brokers] had against you and they didn’t want to give it
[away].”
Soon, hedge funds would suffer unprecedented runs by their own investors. Ac-
cording to an FCIC survey of hedge funds that survived, investor redemption requests
averaged of client funds in the fourth quarter of . This pummeled the mar-
kets. Money invested in hedge funds totaled . trillion, globally, at the end of ,
but because of leverage, their market impact was several times larger. Widespread re-
demptions forced hedge funds to sell extraordinary amounts of assets, further de-
pressing market prices. Many hedge funds would halt redemptions or collapse.
On Monday, hedge funds requested about billion from Morgan Stanley.
Then, on Tuesday morning, Morgan Stanley announced a profit of . billion for the
three months ended August , , about the same as that period a year earlier.
Mack had decided to release the good news a day early, but this move had backfired.
“One hedge fund manager said to me after the fact . . . that he thought preannounc-
ing earnings a day early was a sign of weakness. So I guess it was, because people cer-
tainly continued to short our stock or sell our stock—I don’t know if they were
shorting it but they were certainly selling it,” Mack told the FCIC. Wong said, “We
were managing our funding . . . but really there were other things that were happen-
ing as a result of the Lehman bankruptcy that were beginning to affect, really ripple
through and affect some of our clients, our more sophisticated clients.”
The hedge fund run became a billion torrent on Wednesday, the day after
AIG was bailed out and the day that “many of our sophisticated clients started to liq-
uefy,” as Wong put it. Many of the hedge funds now sought to exercise their con-
tractual capability to borrow more from Morgan Stanley’s prime brokerage without
needing to post collateral. Morgan Stanley borrowed billion from the Fed’s
PDCF on Tuesday, billion on Wednesday, and . billion on Friday.
These developments triggered the event that Fed policymakers had worried about
over the summer: an increase in collateral calls by the two tri-party repo clearing
banks, JP Morgan and BNY Mellon. As had happened during the Bear episode, the
two clearing banks became concerned about their intraday exposures to Morgan
Stanley, Merrill, and Goldman. On Sunday of the Lehman weekend, the Fed had low-
ered the bar on the collateral that it would take for overnight lending through the
PDCF. But the PDCF was not designed to take the place of the intraday funding pro-
vided by JP Morgan and BNY Mellon, and neither of them wanted to accept for their
intraday loans the lower-quality collateral that the Fed was accepting for its overnight
loans. They would not make those loans to the three investment banks without re-
quiring bigger haircuts, which translated into requests for more collateral.
“Big intraday issues at the clearing banks,” the SEC’s Matt Eichner informed New
York Fed colleagues in an early Wednesday email. “They don’t want exposure and are
asking for cash/securities. . . . Lots of desk level noise around [Morgan Stanley] and
[Merrill Lynch] and taking the name. Not pretty.”
“Taking the name” is Wall Street parlance for accepting a counterparty on a trade.
On Thursday, BNY Mellon requested billion in collateral from Morgan Stanley.
