Credit Hedging

Introduction

The global financial crisis of 2007 to the present day has sent shock waves throughout the neoliberal world, forcing into focus the inherent instability and risk underlying the international financial system and hastily rejuvenating the concept of a decline in US hegemonic power and neoliberal hegemony within the global political economy. This analysis of US power in international finance seeks to address if the global financial crisis has marked the beginning of the end of American hegemony in international relations and the realm of international finance. Additionally, if the crisis and responses to it have signaled the US's ability to sustain its hegemonic role within the global political economy, to uphold the contemporary formation of the neoliberal order and to retain its power in international finance (Wallison, 18).

Discussion

For the analysis of the fact that the credit over-dependence on credit hedges threatens the solvency of the United States banking system, we will discuss two cases below.

Long Term Capital Management Collapse

LTCM was initially a small hedge fund that founded in early 1994 with relatively little equity of $1.3bn, most of which came from financial institutions and wealthy individuals connected with the industry. The hedge fund incorporated a Delaware limited partnership LTCM, LP., but the Fund, LTC Portfolio, LP., was a Caymans Island entity. By 1997, the equity had risen to $7bn, but by the beginning of 1998, this had fallen to $4.8bn ($2.7bn or 36 percent of its capital having been returned to investors in 1997, to reduce its position relative to the market, without any corresponding adjustment in its investment stance). It had assets of $129bn with a borrowing of a further $124.5bn implying a leverage ratio of 25:1 and the asset base was four times that of the next largest hedge fund. For a few years LTCM offered investors spectacular ...