other counterparties (including investment bank UBS) defaulting also, and so the Fed and a conglomerate of Wall Street banks were forced to step in and bail them out. The market reaction was extreme with the ftse 100 dropping 5 in a day and the Dow Jones shedding.5 while hbos, which owns the UKs largest mortgage lender, suffered.5 one-day loss. In other words, they are subjected to the whims of free global capital flow across borders seeking the best home. Following severe losses during the Asian Financial Crisis, ltcm suffered a 14 loss its biggest loss ever up till then. The US government worked to offer a 700 billion bailout package which failed to pass Congress and subsequently the bank officially went bankrupt.
If this 2-year spread continues to tumble, it likely means the damage we have seen to EM stocks and bonds will look tame compared to the future. The main takeaway here comes down to risk management. Already their currencies have been under lots of pressureand said pressure will likely build with each ratchet higher in Federal Reserve rates. . Therefore, before choosing a broker you should first check whether the broker offers segregated accounts at all and to which extent you can get your money back in case of financial turmoil. Traders who were positioned on the wrong side of the markets under such conditions could easily lose their whole trading account and even end up owing their broker money because, getting an order fill and exiting positions under such circumstances is almost impossible due.
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