Talk:Long-Term Capital Management/Archives/2013

Pennies in front of steamrollers

correct me if i'm wrong, didn't someone make that statement before Taleb using nickels instead of pennies. I think the quote was somewhere in When Genius Failed which was published 7 years before Black Swan. —Preceding unsigned comment added by 128.100.43.18 (talk) 23:56, 20 March 2008 (UTC)

So which of the descriptions of LTCM's activity is correct, and why are there two im this article?

18.26.0.18 04:30, 31 Jul 2004 (UTC)

I think someone should add Warren Buffett's important contribution in resolving the near meltdown of the finance system caused by this.

Last paragraph contains opinion/conclusion unsuitable for encyclopaedia, IMO. 213.202.106.128 19:29, 9 September 2006 (UTC)

Hang on a sec, arbitrage is by definition riskless, so the last part doesn't make sense.

Last paragraph removed - not accurate, not NPOV, purely unsupported opinion. Andrew 09:38, 22 November 2006 (UTC)

Breakdown of $3.625 billion bailout

I have corrected this several times. Somebody keeps editing the amounts contributed by individual banks so that they (a) don't match the cited GAO reference and (b) don't actually add-up to $3.625B. The amounts as listed now ARE CORRECT; please don't mess with them. 1) Credit Agricole was not part of the bailout consortium 2) Salomon Brothers and Smith Barney had already merged at this time to form Salomon Smith Barney 3) Lehman Brothers did contribute $100M Note that the amounts as listed now match the GAO report that this article references and add up to $3.625B. Please don't mess with them. Thanks. Albertod4 (talk) 21:41, 26 December 2007 (UTC)

BBC Horizon documentary

There is an interesting documentary about LTCM: made by Horizon for the British Broadcasting Company: The Midas Touch.

[1]

It has interviews with Myrton Scholes and Robert Merton. It also reveals that LTCM had their offices on East Weaver Street, Greenwich, Connecticut. This is historically the center of the world's hedge funds.

Bb5victor 01:40, 4 July 2007 (UTC)

impact on M&A of LTCM drop down

Can any one please let me know of any report, wherein it is mentioned about the impact on M&A market after LTCM got crashed. Thanks. —Preceding unsigned comment added by 199.67.203.141 (talk) 06:59, August 24, 2007 (UTC)

Selling S&P 500 options

For the statement "In fact, some market participants believed that LTCM had been the primary supplier of S&P 500 vega, which had been in demand by US insurance companies selling equity indexed annuities products for the prior two years.[citation needed]" one reference is Donald MacKenzie's chapter in Cetina, K.K. & Preda, A. (Eds.) The Sociology of Financial Markets. Oxford University Press: 2006. There MacKenzie cities interviews with LTCM ex-partners that confirm that it had sold hedged positions in S&P 500 options that were net short volatility, because of the high implied volatility in those options. I'm not sure about the connection to insurance companies and equity-indexed annuities, though. EugeneM (talk) 04:08, 13 April 2008 (UTC)

Article is full of innacurate use of arbitrage

I skimmed the article, and this article is strife with errors. Arbitrage is consistently wrongly used. Arbitrage is not ever investing in two different companies without 100% correlation in returns. Sentriclecub (talk) 16:48, 15 September 2008 (UTC)

• I fault the popular sources avialable. inventing money (for an example) uses the word abitrage quite a bit and defines it a few times, but the books discusses the financial issues so breezily that it is possible to confuse actions taken to pic up unexploited profit opportunities for the general exploitation of profit opportunities. Protonk (talk) 18:36, 15 September 2008 (UTC)

CNN two nights ago said LTCM used leverage of $250 dollars of debt per dollar of equity? I'll look for a source. Sentriclecub (talk) 13:36, 11 October 2008 (UTC)

FWIW, I know some (former, heh) hedge fund guys who made these sorts of trades (if oil goes up, airlines go down, sort of stuff) and called it arbitrage. So it's not just popular misconception, but also people in finance who use the terms a bit loosely sometimes. I have a copy of When Genius Failed, which I recall being pretty good. I seem to remember always reading the company was leveraged 100-to-1 on some of its trades. I'll check to see if the book says anything --JayHenry (talk) 14:25, 11 October 2008 (UTC)

Ah, just found this: [2]. Robert Lenzner of Forbes notes that the ratio between capital and the notional value of its assets was 240:1. CNN might have been rounding off of that. So if you include the off balance sheet derivative positions you end up with that astronomical figure. --JayHenry (talk) 03:13, 21 October 2008 (UTC)

Ravi Batra in Greenspan's Fraud, c. Palgrave McMillan 2005, claims on pages 133-4: "[LTCM] had borrowed almost $ 100 billion ... on an equity base of just 3.5 billion. It was more than 95 percent leveraged. ... With that borrowed money LTCM was heavily invested in short - and long term bonds as well as stock options. It was a hedge fund; that is, it played on both sides of the market. It sometimes made simultaneous bets on an asset's upside as well as downside potential. It would buy put options and sell call options at the same time. In other words, it was a highly risky fund. With that $ 100 billion of borrowed money, it has placed option bets on as much as $ 1.25 trillion of Treasury bonds. Following the Russian default, the hedge fund suffered heavy losses that wiped out its equity overnight - almost $ 4 billion. ... LTCM was about to go down, along with many of its lenders, and possibly the US financial system. ... The fortunes of as many as 16 banks and Wall Street firms were directly tied to LTCM. ... That is where Greenspan and the Federal Reserve came in. With his consent the New York branch of the Fed arranged a $ 3.6 billion bailout of LTCM." Assuming Batra's figures (and my arithmetic)are correct: $ 100 billion borrowed with $ 3.5 billion => 28.5 times leverage. To use the $ 100 billion to buy $ 1.25 trillion in Treasury bonds => 356.25 (i.e. 28.5 * 12.5)leverage. So it seems even worse than 240:1. I haven't changed anything in the text yet and wish to offer these remarks for further discussion. (In passing, in today's Globe and Mail, in the Report on Business, is an article about the Caisse du Depot of Quebec that got badly burned in a similar scheme ("quads"), i.e. another mathematical model claiming to outsmart the market. It didn't and cost Quebeckers billions. The article is here: http://www.theglobeandmail.com/servlet/story/RTGAM.20090130.wcover31/BNStory/Business You might have to register but they never bothered me with anything in years.)

Gatorinvancouver (talk) 18:30, 31 January 2009 (UTC) —Preceding unsigned comment added by Gatorinvancouver (talk • contribs) 18:23, 31 January 2009 (UTC)

Just picked up Inventing Money. I should be able to bookmark a few pages and start expanding this weekend or so. Protonk (talk) 03:25, 21 October 2008 (UTC)

Visuals

Anybody have any ideas for any visual elements. Don't want the article to look like a grey wall of death... Graphs and charts are always good for business articles. There's a nifty graph at the start of Lowenstein we could recreate, about the value of $1 invested in LTCM at the beginning, over time. (It rises quickly and then falls off a cliff). Any other ideas? A good graph of bond spreads closing? Something that would be helpful to readers? Thoughts? --JayHenry (talk) 23:23, 23 October 2008 (UTC)

• A few ideas:

• Image of yield curves, since so much of the LTCM story was in sites of fixed income arbitrage.
• Pie Graph (or something like it) of one leveraged dollar at the height of the crisis--in other words, a visual explanation of that 250:1 leverage.
• Pictures of Black, Merton, Scholes, Meriwether.
• Time series of S&P volatility over time. This can be done a number of different ways. Not sure if it will be instructive or interesting looking.
• Picture of a drunk walking a dog to show a leashed random walk?  :)

Protonk (talk) 23:44, 23 October 2008 (UTC)

Merton and Scholes have pix on their pages. Scholes looks pretty goofy. Meriwether doesn't have a pix her. Neither does Black, but does he belong in this article? There's a good pdf from Berkeley [3] with a "who lost" page. Sherriff, the author, is a risk management guy from the Economist, but I still can't track down the source of the pdf.

As I see it, the various explanations of the bust are:

• the popular "They just had too much debt" - right as far as it goes, but ...
• It was a "perfect storm" - a wonderful excuse for everything, and
• they ignored "model risk" and "liquidity risk" - the debt was ok, as long as they parameters of their models didn't change, and they didn't need to raise money in a hurry.

Well, obviously I better check some sources and see what they think! Smallbones (talk) 04:46, 24 October 2008 (UTC)

I've been re-reading Lowenstein and he actually hammers the point that they moved away from their core competency, into information-sensitive fields like merger arbitrage and currency bets; that instead of hedging they were basically making directional bets. Very much in line with an "institutional narcissism" hypothesis ie that part of the reason they failed is they just made bad investments and were so convinced of their own brilliance that they were blind to the possibility of making bad investments. --JayHenry (talk) 21:53, 27 October 2008 (UTC)

Dunbar seems to be moving to the basic conclusion that what they were doing (using mechanisms comprised of swaps and options to get 40% + returns) was doomed to a "black swan" kind of failure (though he obviously doesn't say it or push the point as strenuously as Taleb would later). The narrative in his book points very much to this (though I'm still rereading it). Protonk (talk) 01:39, 29 October 2008 (UTC)

Starting capital

I can't find the $1,011,060,243 figure in Lowenstein anywhere. Lowenstein says they raised $1.25 billion to start. --JayHenry (talk) 01:08, 29 October 2008 (UTC)

• It's not in Lowenstein. It was pulled right out of Dunbar, p 142 (word for word). I realized it last night when I was reading the book (he ends a chapter with it as kind of a 'bang') and changed the article this morning without modifying the cite. I'll do that now. Protonk (talk) 01:12, 29 October 2008 (UTC)

Uh oh! We ought to be careful there aren't more sentences that are direct lifts. Pretty rare to find an article where there's only one sentence like that. Although since we'll probably be rewriting most of it, I suppose we'll scrub out any copy-pasting before we're done. --JayHenry (talk) 02:54, 29 October 2008 (UTC)

Layout of trading strategies

OK. I think the "trading strategies" section needs to be broken down into some basic areas. We need to show the reader what a convergence trade is (I've started to do that, very hamfistedly). We need to show the reader what a swap is (can explain asset swap or default swap, whatever). And we need to explain what an option is, generally. Once we do that we can talk about how LTCM made a business of combining these into money machines and how those work best when highly leveraged. Then we can present a basic schema for how LTCM operated for most of its life.

When that is done, it should be easier to show their divergence from these "finding 100 dollar bills on the ground" tactics to riskier or more directional trades.

So what do we think is the best way to do this without just dropping a whole block of text about finance on the reader? Protonk (talk) 01:43, 29 October 2008 (UTC)

Well, the best way to do this would, in my opinion, be with examples. Wikipedia generally eschews something that didactic, but I think it's the best way to explain. I think most of these things are easy to grasp with examples. In generic terms, merger arbitrage can be confusing but if you spell it out: Westinghouse announced it would pay $82 a share to acquire CBS. CBS shares were trading at $78. Therefore, if you bought CBS, you would make $4 a share if the deal went through. But if the deal collapsed the CBS shares would likely drop, etc. I'd think if we did a bullet (or maybe subheading?) for each major trading strategy, talked about the size of that part of the portfolio (if we know it), and give an example of how an actual trade worked, then our readers would be well-served. --JayHenry (talk) 02:13, 29 October 2008 (UTC)

That seems fine. Dunbar actually does that using examples from Saloman Bros. (for the most part). Convergence trades and yield curves can be explained from the treasury bond interest swap related mechanisms Meriwether managed at Saloman. I've got to go through the rest to check for other related ones--I think he does actually just resort to "you have X shares of MSFT and so forth" in some cases, but it really will be necessary to step people through this (in order to allow someone to walk away and have a good idea what happened in Greenwich. Protonk (talk) 02:28, 29 October 2008 (UTC)

Corporate scandals

The Corporate scandal article linked in the template at the bottom of this article is a bit of a mess, in my opinion. I'm not completely sold on the merits of the template either. Thoughts? --JayHenry (talk) 03:04, 29 October 2008 (UTC)

• Templates are pretty low priority to me. I can take it or leave it. On another note, David W. Mullins Jr. is no longer a red link, and you should be proud that I resisted the temptation to redirect Easy Al to Alan Greenspan. :) Protonk (talk) 05:10, 29 October 2008 (UTC)

Italian bond issues

Dunbar devotes a chapter to a rather shadowy tale of LTCM helping the Italian government to meet the Maastricht Treaty requirements for government debt by capturing first sale auctions and squeezing downstream buyers. He uses a few named but many unnamed sources and couches a lot of the narrative in vague accusations. The basic issue was that Alberto Giovannini is alleged to have used his influence with the Bank of Italy to allow LTCM to squeeze the market for BTP bonds (Buoni del Tesoro Poliennali, what looks to be a pretty boring Italian standard bond, nothing fancy). While not illegal, it looks and smells unsavory. It's an interesting story, but before bits of it go into the article, I want to make sure that it isn't just Dunbar talking about this (for those w/ Dunbar handy or at a library, it is the Italian Job sub-chapter, pp. 149-162). Does it show up in Lowenstein? Protonk (talk) 17:02, 30 October 2008 (UTC)

Lowenstein mentions that they bought Giovannini on as a full-time consultant and that he was a former Italian Treasury official. It describes the Italian bond trading in only minor detail (that they thought risk of Italian default was overpriced relative to risk of private bank default). He says they were "plugged in to Italy's central bank" through Giovannini and Gerard Gennotte. But Lowenstein says "However, Long-Term's approach was so mathematical, it's doubtful that all this intelligence made much difference." (p. 56-59} --JayHenry (talk) 00:59, 31 October 2008 (UTC)

In that case I'm comfortable note going into Dunbar's rather salacious detail. Protonk (talk) 01:01, 31 October 2008 (UTC)

JWM

JWM seems to have actually shut down. —Preceding unsigned comment added by 81.154.6.119 (talk) 11:04, 23 November 2009 (UTC)

The text now indicates this.

Tense

An editor changed "was" to "is" in the lead, writing, "as an encyclopedic topic it "is" in existence despite its closure in 2000". I have never heard of this principle, and I can't find any examples of it. I've changed it to the past tense, but if I'm wrong then change it back.   Will Beback  talk  23:10, 14 June 2011 (UTC)

Off Topic POV?

The paragraph below has little to do with the subject and seems to serve no purpose other than to create a bias towards the founder. My feeling is it should be removed. Comments from others?

• John Meriwether headed Salomon Brothers' bond trading desk until he was forced to resign in 1991 when his top bond trader, Paul Mozer, admitted to falsifying bids on U.S. Treasury auctions. Because Salomon was the largest bidder on treasury bonds at auction, the Treasury department feared that Salomon would be able to take a strategic position on the bonds in order to influence the price.[4]

As such, Salomon (or any single bidder) was restricted from purchasing more than 35% of the bonds sold at any auction. Mozer circumvented this limitation by making fraudulent bids on behalf of Salomon clients and then transferring the bonds to Salomon's accounts following the transaction. The revelation of this scandal depressed the company's share price and drove investor Warren Buffett to sack its chief executive officer, John Gutfreund. Though Meriwether was not directly implicated, calls for his ousting rose within the company and he resigned before he was let go.[5]-- — Keithbob • Talk • 18:11, 15 June 2011 (UTC)

• I probably put it in there at some point. Both of the popular press books on LTCM mention Meriwether's background as sort of a pre-amble to his forming the company. I'm not wedded to it but I'd be happier to ha e it shortened rather than removed. However I won't revert (or complain, hah) if you remove it entirely as it seems a bit superfluous. Protonk (talk) 23:49, 15 June 2011 (UTC)
  • Thanks for the comment and for your collaborative spirit. I'll wait to see if there are any other comments before changing anything. Cheers!-- — Keithbob • Talk • 11:42, 16 June 2011 (UTC)
    • OK I reduced it to one sentence. That was the most I could justify given that the text is clearly about Merriweather and Salamon, neither of which is the topic of this article. Books have more leeway on these things. They are allow to provide background, tie things together etc. But on Wiki we have to avoid Original Research and Coatrack. Thank you again for your support and cooperation. Cheers!-- — Keithbob • Talk • 13:03, 20 June 2011 (UTC)

Partner List Incomplete

The list of partners is missing every person made a partner after about 1996 or so. The names of other partners is well-documented in the New York Times articles from late 1998, When Genius Failed, and other places.76.125.6.49 (talk) 09:03, 6 March 2012 (UTC)

File:Ltcm.png Nominated for speedy Deletion

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