Comment by hn_throwaway_99 | Hacker News Reader

Comment by hn_throwaway_99 | Hacker News Reader

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hn_throwaway_99

The 98 bailout of Long Term Capital Management was pretty legendary - there were books about it: https://en.wikipedia.org/wiki/Long-Term_Capital_Management#1...

Now, granted, public funds weren't used for the bailout, in this case it was more the Fed organizing private banks for the bailout. Also, the investors in LTCM still lost a ton of money.

But LTCM is still a great prototypical example of "vacuuming up nickels in front of a steamroller", i.e. these traders can take these positions (LTCM was focused on merger arbitrage IIRC) that seem like a license to print money, except they invariably can lead to some giant risk blowup. And when they fail, they have a knack for taking down the whole financial system with them so the government has to get involved (even if it is just cajoling other bankers in a room) to bail them out.

The point is though there's never been another LTCM in nearly a quarter of a century. LTCM was one of the first major fixed income arbitrage funds, a strategy that's uniquely sensitive to cheap leverage.

They were able to exploit their prime brokers to give them tons of leverage at essentially zero costs. Since LTCM was one of the first, the banks didn't really know how to model their counterparty risk and they were dazzled by the prestige. Since that occurred there's been a ton more hedge funds, and banks have way better systems for managing that level of counterparty exposure. Plus the post-GFC regulations severely limit bank leverage anyway, so they couldn't give cheap leverage to their hedge fund clients even if they wanted to.

Again that's why we've never seen another LTCM in nearly a quarter of a century. Pointing to LTCM as an example of risk in the financial system of 2021 would be like pointing to Chernobyl as an example of risks in modern nuclear reactors.

> The point is though there's never been another LTCM in nearly a quarter of a century.

cough Lehman Brothers went down in 2008.

Lehman was a bank, not a hedge fund.

A difference with no distinction

Poorly written Wikipedia page, but I fo see LTCM was co-founded by a Nobel prize winner in economics. Their overly risky strategy seems at odd with someone earning a Nobel prize.

The thing was that non of the 'genius' Nobel prize winners saw the strategy as "overly risky" since they had worked out very clever and very complex mathematical models describing exactly how safe their strategy was.

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