It used to be hedge funds that endangered the existence of banks. In September 1998 Bear Stearns threatened to stop trading with its reckless client Long-Term Capital Management (LTCM). Thirteen days later the Federal Reserve Bank of New York orchestrated a bail-out of ltcm, believing it posed a threat to the financial system. This year the direction of counterparty risk has reversed. Some hedge funds worry they could be dragged down if a bank goes under. After all, Bear Stearns was the industry's second-biggest prime broker (see chart), providing hedge funds with a myriad of services including lending and the custody of assets. As Bear approached bankruptcy, these clients rushed to move their accounts to other banks. Customer balances shrank by one-quarter in the month before JPMorgan Chase came to the rescue.
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