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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: smolejv@gmx.net who wrote (211715)12/29/2002 10:59:14 AM
From: GraceZ  Read Replies (2) of 436258
 
If you examine the LTCM case thoroughly you will see that the problem wasn't the amount of derivatives or even the complexity (they were using fairly straightforward transactions) it was that the transactions were dependent on the market acting in a rational manner (that both ends of the seesaw do not travel in the same direction) and because the transactions were seen as so low risk they didn't have adequate reserve capital (too highly leveraged) to cover the market acting in a totally irrational manner for an extended period of time. The other thing they didn't count on was that other market participants, once they sensed their risk, would act in a concerted way against them.

Here is an excellent article in six parts covering that fiasco:

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