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Strategies & Market Trends : Margin Calls - Share The Pain

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To: Mama Bear who wrote (132)	12/12/2000 7:19:20 AM
From: Wyätt Gwyön	Read Replies (1) of 158

Of course it wasn't the use of the paired strategy that killed LTCM, it was the use of leverage Their strategy was dependent on using leverage because the profits on individual convergences were so small. There were a lot of things that did them in--extreme leverage, reducing their capital but not reducing their positions, straying from their original convergence strategy into things where they had no expertise like equity arbitrage, etc. In addition to the headline leverage number (which exceeded 100 when their capital fell below 1 billion near the end), they had enormous amounts of swap positions off the balance sheet. Who the heck is dumb enough to give this guy money to manage? Believe it or not, some of the original investors in LTCM are supposedly backing Meriwether. These guys think they just had bad luck--like they ran into the 100-year storm or something. For an interesting read on LTCM, check out When Genius Failed.

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