LONG-TERM CAPITAL MANAGEMENT

Laurent L Jacque

Chapter 15 in Global Derivative Debacles:From Theory to Malpractice, 2015, pp 245-273 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Long-Term Capital Management (LTCM) was a hedge fund like no other. Its relentless delivery of low volatility outsized returns for the first four years of its existence was unparalleled. Its demise and near-collapse in the fall of 1998 was as calamitous as its rise had been spectacular. Indeed the world economy had very narrowly escaped the abyss but regulators failed to draw any lessons which would have avoided the current crisis. At its apogee, in early 1998, with debt of $125 billion and off-balance sheet derivatives exposure in excess of $1 trillion piled up on a puny equity capital base of $4.7 billion Long-Term Capital Management had perfected financial leverage to a science. Unlike other derivatives debacles discussed in this book LTCM precipitous collapse stoked fear of systemic risk—that is of a domino effect engulfing the entire global financial system—so much so that the New York Federal Reserve Bank coerced fourteen major Wall Street firms — which were LTCM main creditors — to come to its rescue with a bail-out package of $3.6 billion. This chapter retraces the saga of the rise and fall of LTCM and exposes the alchemy of its phenomenal successes which also seeded its collapse.

Keywords: Derivatives; Debacles; Options; Swaps; Futures; Forwards; Financial Engineering; Market Manipulation; Rogue Traders; Speculation; London Whale (search for similar items in EconPapers)
Date: 2015
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