Long Term Capitol Management

[Giant Communist Robot]

I just finished "When Genius Failed," by Lowenstein, about the failure of LTCM. Almost without exception people seem cheerful and happy talking about how wealthy investors lost money in a fund run by Nobel Prize winners. I thought it was scary--to me the message is "this could happen to anyone." I'm not sure you can do anything about it, things just happen.

Today, all the annoying wags like to point out LTCM overlooked systematic risk, but no one knew then. Hindsight can't help you.

[Shapley]

The Cato Institute issued a briefing paper at the time arguing against the rescue of LTCM, arguing that the failure was not inevitable. They were also concerned that the rescue would lead to greater regulation of the hedge fund market.

[Giant Communist Robot]

The Cato Institute issued a briefing paper at the time arguing against the rescue of LTCM, arguing that the failure was not inevitable. They were also concerned that the rescue would lead to greater regulation of the hedge fund market.

Maybe the rescue wasn't necessary, but its failure was assured by stubbornly following their model without looking at events in the market. Lowenstein said it would have left a trillion dollar hole in the banking industry.

While the Fed orchestrated the bailout, it was done with private money--unlike today. Had LTCM been able to last for another eight or nine months, the model would have proved correct and made money. Today LTCM's ex-manager is operating another fund using the same model. One of his team left to start his own fund--presumably using the same basic idea (Black-Scholes model).