What is Securities Lending?
Securities lending is the temporary transfer of securities on a collateralized basis from one party (the lender) to another (the borrower) for a fee. The borrower must return the securities to the lender after an agreed period or on demand. Securities lending allows the lender to earn enhanced returns on securities through finance charges and provides the borrower with many beneficial opportunities. Most securities lending is collateralized using cash, other securities, or a letter of credit. Securities lending also plays a more general beneficial role by increasing …

Background
Long Term Capital Management(LTCM) was a hedge fund established in 1994 by John Meriwether, a very successful bond trader at Salomon Brothers. At Salomon, Meriwether was one of the first on wall street to hire top academics and professors. Meriwether established a team of academics who applied models based on financial theories to trading. At Salomon, Meriwether’s group of geniuses generated amazing returns and demonstrated an unparalleled ability to precisely calculate risk and other market factors.
In 1994, Meriwether left Salomon and established LTCM. The partners included two Nobel Price-winning economists, …

“By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it - a process that has undoubtedly improved national productivity growth and standards of living.” -Alan Greenspan
Financial derivatives are financial instruments that “derive” value from an underlying item such as an asset or index. The use of derivatives provides exposure to the linked underlying item without necessitating the …

A Mortgage-Backed security(MBS) is a debt obligation (bond) that represents claims to the cash flows from pools of mortgage loans. Mortgage providers sell the loans to an Agency or company that packages or pools loans together for sale to investors, creating a MBS. As the loans are paid, the MBS owner receives payments of interest and principle. Because mortgagors are have the option to pay more than the required monthly payment(curtailment) or pay off the loan in its entirety(prepayment)the monthly cash flow is not completely known in advance, increasing risk. …