We Forget That the Financial Crisis Had a Trial Run
The collapse of hedge fund Long-Term Capital Management had the same ingredients: lots of leverage, huge risk and a surplus of arrogance.
Bloomberg, October 10, 2018
What happens when too much risk and too much leverage meets too little humility?
That was the question I explored in today’s column.
Lost in reflexive spasm of retrospectives 10 years after GFC — the nationalization of Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, and the collapse of AIG — was the 20-year anniversary of the collapse of hedge fund Long Term Capital Management (LTCM) in September 1998.
The LTCM debacle was a precursor for the financial crisis a decade later.
While the company’s managers were very smart – Nobel Prize-winning big brains thinking about new ways to identify investment opportunities – they made some not very smart decisions.
Roger Lowenstein masterfully details this in his magnum opus, “When Genius Failed: The Rise and Fall of Long-Term Capital Management. Read more about how LTCM set the table for the GFC here . . .