Investigations of the management of the LTCM
account at several institutions found that an overreliance on the collateralization of the current market value of derivatives positions and the stature of LTCM
's managers led to compromises in several key elements of the credit-risk-management process.
Figure 3 shows that in 1997, 49 percent of hedge funds were domiciled outside the United States, and the majority of those - including LTCM
- were incorporated in the tax havens of the Caribbean.
In addition to the 1987 stock market crash, examples of such crises might include the widening of interest rate spreads and decline in liquidity following the collapse of LTCM
in 1998 and the collapse of the junk bond market in 1989-90.
estimated in 1998 that its default could cost its 17 top counterparties between EUR3 billion and EUR5 billion.
's counterparties perceived the impressive firm to be a paragon of the industry's highest values--a combination of intelligence, market savvy, and ambition that was sure to succeed--when a more accurate assessment of LTCM
might have been as an experimental engineering firm, working daringly (or hubristically, as some have argued) on the cutting edge.
The stress experienced by financial markets at the time, despite the ultimate success of the rescue of LTCM
, underscores the need for a well-established arrangement to be set up in advance.
Stresses in all four markets have decreased, indicating that the potential for widespread stress has fallen relative to late 2011 and of course relative to the periods around the LTCM
collapse and the recent financial crisis.
It includes: the LTCM
affair and its Y2K liquidity-fuelled aftermath; the dotcom and TMT bubble; the CDO and CDS-fuelled credit bubble; finance-driven surges in energy and food costs, and in some frontier markets; the implosion of many Western bank and insurer balance sheets.
To do this, LTCM
employed massive leverage, exceeding 1,000:1, mostly with bank-funded repos.
A death spiral in Brent crude is John Meriwether's LTCM
and General Suharto's Indonesian kleptocracy.
, MF Global was leveraged around 30 to 1, and when creditors got nervous over its bets, it was unable to get funding to pay loans.
's failure to foresee temporary market irrationality in bond pricing during August 1998, touched off by the Russian government's default on its bonds, caused LTCM
to lose hundreds of millions of dollars and undermined its financial viability.