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BIS Working Papers No 103 The costs and benefits of moral suasion: Evidence from the rescue of long-term capital management by Craig Furfine Monetary and Economic Department August 2001 Abstract 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 fundís 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 fundís 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 fundís resolution. This finding is consistent with an increase in the perceived strength of a too-big-to-fail policy. BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. Copies of publications are available from: Bank for International Settlements Information, Press Library Services CH-4002 Basel, Switzerland E-mail: publications@ Fax: (+41 61) 280 9100 and (+41 61) 280 8100 This publication is available on the BIS website (). © Bank for International Settlements 2001. All rights reserved. Brief excerpts may be reproduced or translated provided the source is cited. ISSN 1020-0959