The reason for all this trouble is - no liquidity. Richard Bookstabers new book is devoted entirely to the subject. Way more so than WGF.
Actually liquidity risk and the "flight to quality" is only one of the issues LTCM faced. Read Jorion's paper I posted earlier if you can be arsed. Don't forget model risk, credit risk, agency risk, consensus provision risk, etc, etc...
In a melt down, if ther are huge "loses", then there are equal and opposite huge "gains". LTCM melt down was a huge wind fall for those on the other side of the trade. "Fear" of a "market melt down" should be channeled into strategies to make money from it. Zero sum game.z
Considering the big banks were hurting too I think saying that it was a windfall for the other end of the trade is a bit much. Also, when Russia decided to default on debt I'm not sure there was much capitalizing on that. You're missing the whole point that liquidation and value can disappear in an instant. If you have a house in Beverly Hills and it's worth $4M and tomorrow there is some anomalous freak catastrophe that harms the financial world, your house will be worth a shitload less INSTANTLY. If liquidity disappears, value is likely to go with it.
1. The big banks that backed LTCM were hurting, but the funds that ganged up on LTCM were have a FEAST. It explains that in the book. 2. Russia made out like a bandit on the deal. Zero sum. 3. I'm not sure what your point on the last item is, but of course value can dissappear (same with stocks, commodites, baseball cards, etc...) but that certainly doesn't mean money has dissappeared. The money supply is always increasing in the US and that's the only thing that "destroys" value (on a per dollar basis). Nothing else has any effect whatsoever. TNG
1. Which part specifically are you referring to? The market was falling apart and continued to broil until some time after the bailout was arranged...the fund didn't instantly make money. Those who were buying LTCM's positions were buying a lot of obscure positions that continued to lose. What funds? The funds that were blamed for picking at LTCM's dire position were the funds under the banks that were hurting...mostly those with information about LTCM's positions. 2. Do you consider those who file bankruptcy BIG WINNERS!? My point was that piles of money disappear...of course it does. If you buy 1,000 shares of MSFT today for $30k and tomorrow the market is only paying and you sell, then $10k just disappeared. After the bubble burst in 2000 did you say, "oh well, The money supply is always increasing in the US and that's the only thing that "destroys" value (on a per dollar basis). Nothing else has any effect whatsoever.?"
1. Whether they instantly made money or not, a very large part of the LTCM meltdown was due to collaboration on wall st. (and other financial centers around the world). I believe this to be a fact, but of course I do not have proof otherwise I'd probably be involved in the case. I have absolutely no doubt, however, that when wall st sharks find out that a fund has a massive position that they HAVE to unload, they gang up, beat it down and force them to sell at a discount. Why wouldn't they? 2. Lol, yes, sometimes. The fact of the matter is, Russia issued (what was it?) trillions of dollars in bonds that it never paid back. I consider that a win for them, yes. I still contest that piles of money do NOT dissappear. Think about it... where does it go? Do the actual dollar bills get burned up when your stock goes down? Sure, if I was in that situation I'd have lost $10k, but someone else gained it. If not the person who I sold to, then it can be traced back to the company (from the IPO). And yes, during 2000, it was exactly the same. The money supply never once got smaller. It has ALWAYS throughout history increased. The only thing that has decreased was the relative value of each dollar, SIMPLY because there were more total dollars than before. Money does not dissappear EVER it just changes hands. TNG
1. So it didn't really say anything about funds making a killing in the book? It only pointed out that funds were offering deliberately lower prices or even just totally shying away from positions they knew LTCM was trying to unload because they knew that even if they picked up a position cheap, it was illiquid. 2. I think calling that a win is childish. They may have escaped with little infraction, but defaulting on debt isn't victory. Imagine how much pain that caused within the Russian government and to Russian people. I don't think that your argument holds water. Money can of course disappear. If a currency just totally collapses and a country defaults on debt? That isn't money essentially disappearing?
Bud: How much is enough? Gekko: It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.