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Revisiting LTCM: When the Safe Harbor Hurts More Than It Helps
Nor is it clear how we all knew that LTCM's failure or the post-September 11 malaise posed grave risks to the system, but could seriously doubt that the dot-com craze was a bubble.
For example, the Russian financial crisis in 1998 was a major contributor to the collapse of aforementioned LTCM fund, but mathematical modules could not and did not predict the crisis.
(2.) The collapse of LTCM was significant because it was the hedge fund of Merton and Scholes, two key proponents of price options theory.
The partners in LTCM were at first just as successful as their initial prospectus suggested they would be.
According to Lewis, the "young professors" of LTCM goofed by underestimating the probability of a supposedly 1-in-50-million event--a sudden, unprecedented divergence in the prices of bonds they'd shorted versus bonds on which they'd gone long.
Another is that unlike 1987, and unlike LTCM, this is not a liquidity crisis in which fear of panic-selling by others causes investors to unload intrinsically sound assets at bargain-basement prices.
Looking back again at LTCM, the trigger for LTCM's failure was a default in the Russian debt market, a market where LTCM had little if any exposure.
In 1998, when prominent hedge fund Long Term Capital Management (LTCM) was on the brink of collapse, there were fewer than 14 major players in the credit markets.
Ten years back one of the big failures was LTCM, a hedge fund revered on Wall Street as the quintessence of financial genius, until it collapsed.
LTCM was a hedge fund trading on the small differences in rates on government bonds believing in the long run that the interest rates on different government bonds would converge.
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