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2a.k“Fire-sale externalitystytoo big to fail

Assets

Long-term assets

  • -

    mortgages

  • -

    firm loans

-

Low market liquidity

Liabilities

Equity Long-term funding

Short-term funding

  • -

    CP

  • -

    Repo

  • o

    subprime crisis hits

    • o

      equity shrinks, volatility increases

    • o

      short-term financing is harder to obtain No roll over (since margins/haircut widen) Sell assets at fire-sale prices

expensive

Not available!

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