{"id":2409,"date":"2008-09-07T14:37:32","date_gmt":"2008-09-07T18:37:32","guid":{"rendered":"http:\/\/chimeraobscura.com\/vm\/?p=2409"},"modified":"2008-09-07T14:37:32","modified_gmt":"2008-09-07T18:37:32","slug":"long-term-my-ass","status":"publish","type":"post","link":"http:\/\/chimeraobscura.com\/vm\/long-term-my-ass","title":{"rendered":"Long-Term, my ass"},"content":{"rendered":"

I recently read When Genius Failed<\/a>\"\", Roger Lowenstein’s chronicle of the rise (1994) and collapse (1998) of Long-Term Capital Management, a hedge fund staffed by Harvard and MIT Ph.D.s. The LTCM team developed “risk management” models that would allow them fund to “vaccuum up nickels” in massive (leveraged) quantities. The formula worked for a while, until it didn’t, at which point people started to realize that LTCM was leveraged out the wazoo, and that the value of its derivatives bets was literally incalculable.<\/p>\n

Once the bottom fell out, the Fed had to coordinate a bailout of LTCM by the world’s leading banks. Many of these banks were treated as doormats by LTCM during its meteoric rise. Trust me; it’s a really entertaining story that Mr. Lowenstein tells. As David Pflug, Chase’s head of global credit, put it, “You can overintellectualize those Greek letters [in LTCM’s formulae]. One Greek word that ought to be in there is hubris<\/em>.”<\/p>\n

Two major issues — beyond the failures of “risk management” — struck me while I read the book. For one thing, LTCM’s collapse was precipitated by a series of regional financial crises in 1997-98. The final straw came when Russia defaulted on its foreign bonds in order to pay workers at home. This means, “Russia welched on its worldwide obligations because it barely had money to keep its government afloat.” And this occurred only ten years ago. So if oil futures didn’t rise 1000% in the past few years, how brazen would Russia be right now? (and if they drop significantly, where will Russia end up?)<\/p>\n

The third issue was that the behavior of LTCM and the major banks sounded remarkably familiar to our current mortgage-driven crisis (right down to Lehmann Bros. suffering rumors about its underfunding and impending collapse). The exotic derivatives, the incalculable, illiquid assets, the “too big to fail” mentality: this could be 1998 writ large! Had these financial genii — and many of the major players involved in the recent Bear Stearns collapse also figure into When Genius Fails<\/em> — managed to ignore every lesson from LTCM’s failure?<\/p>\n

Near the end of the book, Mr. Lowenstein wrote:<\/p>\n

Permitting such losses to occur is what deters most people and institutions from taking imprudent risks. Now especially, after a decade of prosperity and buoyant financial markets, a reminder that foolishness carries a price would be no bad thing. Will investors in the next problem-child-to-be, having been lulled by the soft landing engineered for Long-Term, be counting on the Fed, too? On balance, the Fed’s decision to get involved — though understandable given the panicky condition of September 1998 — regrettably squandered a choice opportunity to send the markets a needed dose of discipline.<\/p><\/blockquote>\n

That’s why I was really gratified to open today’s NYTimes<\/em> and discover that Mr. Lowenstein has a great essay on exactly that topic, “Long-Term Capital: It’s a Short-Term Memory”<\/a>! He does a good job of explaining the issues without getting overly technical (one of the complaints others have had about his book).<\/p>\n

Give it a read<\/a>; I bet you’ll dig it. (And get irate, when you start reading about the Fannie Mae \/ Freddie Mac seizure. . .)<\/p>\n","protected":false},"excerpt":{"rendered":"

I recently read When Genius Failed, Roger Lowenstein’s chronicle of the rise (1994) and collapse (1998) of Long-Term Capital Management, a hedge fund staffed by Harvard and MIT Ph.D.s. The LTCM team developed “risk management” models that would allow them fund to “vaccuum up nickels” in massive (leveraged) quantities. The formula worked for a while, … <\/p>\n

Continue reading “Long-Term, my ass”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[27,4],"tags":[308,307],"class_list":["post-2409","post","type-post","status-publish","format-standard","hentry","category-big-business","category-literature","tag-long-term-capital-management","tag-roger-lowenstein"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p4C7K-CR","jetpack_likes_enabled":true,"jetpack-related-posts":[{"id":3050,"url":"http:\/\/chimeraobscura.com\/vm\/write-what-you-know","url_meta":{"origin":2409,"position":0},"title":"Write What You Know?","author":"Gil","date":"December 13, 2008","format":false,"excerpt":"I don't know whether the Sulzberger family exerts any influence on the NYTimes' editors. All I know is that today's business section seems pretty heavily loaded on the Bernard Madoff case. Bernie's a legendary money manager who appears to have been bilking hedge funds and the super-wealthy out of their\u2026","rel":"","context":"In "Big Business"","block_context":{"text":"Big Business","link":"http:\/\/chimeraobscura.com\/vm\/category\/big-business"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/chimeraobscura.com\/vm\/wp-content\/uploads\/kittyad.jpg?resize=350%2C200","width":350,"height":200},"classes":[]},{"id":1868,"url":"http:\/\/chimeraobscura.com\/vm\/risky-business","url_meta":{"origin":2409,"position":1},"title":"Risky Business","author":"Gil","date":"January 29, 2008","format":false,"excerpt":"It's gettin' so a businessman can't expect no return from a fixed fight. Now if you can't trust the fix, what can you trust? For a good return, you gotta go bettin' on chance, and then you're back with anarchy. Right back inna jungle. \u00e2\u20ac\u201dJohnny Caspar, Miller's Crossing In the\u2026","rel":"","context":"In "Big Business"","block_context":{"text":"Big Business","link":"http:\/\/chimeraobscura.com\/vm\/category\/big-business"},"img":{"alt_text":"","src":"http:\/\/www.assoc-amazon.com\/e\/ir?t=virtualmemories-20&l=as2&o=1&a=0312420366","width":350,"height":200},"classes":[]},{"id":2264,"url":"http:\/\/chimeraobscura.com\/vm\/what-it-is-81808","url_meta":{"origin":2409,"position":2},"title":"What It Is: 8\/18\/08","author":"Gil","date":"August 18, 2008","format":false,"excerpt":"What I'm reading: Finished that book on Steve Ditko by Blake Bell, started When Genius Failed, Roger Lowenstein's chronicle of the collapse of Long-Term Capital Management, and am continuing with Montaigne's essays (still reading his Apology for Raymond Sebond). What I'm listening to: Boxer, by The National, Songs from Venice\u2026","rel":"","context":"Similar post","block_context":{"text":"Similar post","link":""},"img":{"alt_text":"","src":"http:\/\/www.assoc-amazon.com\/e\/ir?t=virtualmemories-20&l=as2&o=1&a=1560979216","width":350,"height":200},"classes":[]},{"id":3425,"url":"http:\/\/chimeraobscura.com\/vm\/unrequired-reading-feb-13-2009","url_meta":{"origin":2409,"position":3},"title":"Unrequired Reading: Feb. 13, 2009","author":"Gil","date":"February 13, 2009","format":false,"excerpt":"It's an extra-spooky, hockey-mask-wearing Friday the 13th edition of Unrequired Reading! Boo! The A.V. Club offers back-to-back Random Roles interviews with two VM faves: Illeana Douglas and Bruce Campbell! * * * Roger Ebert contemplates the long-term view, as in that Flaming Lips lyric, \"Do you realize that everyone you\u2026","rel":"","context":"In "Art"","block_context":{"text":"Art","link":"http:\/\/chimeraobscura.com\/vm\/category\/art"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":12,"url":"http:\/\/chimeraobscura.com\/vm\/on-the-couch-with-dr-schadenfreude","url_meta":{"origin":2409,"position":4},"title":"On the Couch with Dr. Schadenfreude","author":"Gil","date":"March 26, 2003","format":false,"excerpt":"(Of the Millennium Dome, Talk, Enron, and the culture of arrogance) I've long been fascinated by failure. Not the run-of-the-mill, never-been, B-list sort of failure that Howard Stern used to trot out so masterfully on the glory days of his radio show. No, the failure I appreciate most is the\u2026","rel":"","context":"With 2 comments","block_context":{"text":"With 2 comments","link":"http:\/\/chimeraobscura.com\/vm\/on-the-couch-with-dr-schadenfreude#comments"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":3939,"url":"http:\/\/chimeraobscura.com\/vm\/unrequired-reading-may-15-2009","url_meta":{"origin":2409,"position":5},"title":"Unrequired Reading: May 15, 2009","author":"Gil","date":"May 15, 2009","format":false,"excerpt":"Oh, it's on. Just click \"more\"! American Idol's in decline, evidently, but that's a relative term. \"In the 2003-4 season, the first in which 'Idol' was the top-rated prime-time series, its lead over the second place show was about 7 percent. That margin has grown every year since and this\u2026","rel":"","context":"In "Big Business"","block_context":{"text":"Big Business","link":"http:\/\/chimeraobscura.com\/vm\/category\/big-business"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"http:\/\/chimeraobscura.com\/vm\/wp-json\/wp\/v2\/posts\/2409","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/chimeraobscura.com\/vm\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/chimeraobscura.com\/vm\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/chimeraobscura.com\/vm\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/chimeraobscura.com\/vm\/wp-json\/wp\/v2\/comments?post=2409"}],"version-history":[{"count":1,"href":"http:\/\/chimeraobscura.com\/vm\/wp-json\/wp\/v2\/posts\/2409\/revisions"}],"predecessor-version":[{"id":2410,"href":"http:\/\/chimeraobscura.com\/vm\/wp-json\/wp\/v2\/posts\/2409\/revisions\/2410"}],"wp:attachment":[{"href":"http:\/\/chimeraobscura.com\/vm\/wp-json\/wp\/v2\/media?parent=2409"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/chimeraobscura.com\/vm\/wp-json\/wp\/v2\/categories?post=2409"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/chimeraobscura.com\/vm\/wp-json\/wp\/v2\/tags?post=2409"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}