Back then, LTCP was hailed as the most impressive hedge fund in history. Led by the notoriously successful bond arbitrageur John Meriwether, the firm boasted a partnership that included two Nobel-Price-winning economists and a cadre of Wall Street’s and academia’s elite traders.
However, after four years, in which the firm dazzled Wall Street as a $100 billion moneymaking juggernaut, it suddenly suffered catastrophic losses that jeopardized not only the biggest banks on Wall Street but the stability of the financial system itself.
From being a viable entity to no longer being able to operate took only 6 weeks. The biggest problem LTCM had faced was its absolute massive leverage coupled with one-sided trades that, due to external circumstances (Russia and developing countries defaulting), could not be closed out.
As LTCM was sliding into oblivion, their equity dwindled to $1 billion; however, they still controlled $100 billion in assets. That’s 100 to 1 leverage! It would take only a 1% move against their positions to render them bankrupt.
I found it fascinating to read inside story but, at the same time, I had an eerie feeling that this was nothing new because we are currently seeing a very similar scenario with the Subprime/credit crisis. The pig may be wearing a different lipstick, but the underlying facts are the same: Overleveraged institutions holding undervalued assets, which can only be liquidated at a loss.
If you like to read about financial tales of our time, you will enjoy this high drama of fast money and vivid (still living) characters. I couldn’t wait to finish it.