GM,
After all the comments here about the article, I decided it wasn't worth reading.
RE ... want to know is whether this kind of exposure is normal for banks, what are the chances the derivatives will go sour etc.
Normally, the banks would have very tangible collateral backing loans to any customer including hedge funds.
RE LongTerm Capital situation, there were some serious anomalies.
1. In several cases, Officers of the banks making the loans also had personal investments in LTCM.
2. The big names (former Fed Governor, two Nobel Laureates, 1 former golden haired bond trader) seem to have clouded the lending banks judgement concerning collateral for the loans.
Articles in recent WSJ and Barron's editions have highlighted the unique character of the loans made to LTCM vs other customers, hedge funds or not. Even those banks taking losses due to LTCM business seem to have taken much less risk in loans to other hedge funds - at least those that have made announcements.
Each derivative has a counterparty. There will be a winner and a loser. LTCM just picked more than it's share of losers, didn't realize how wrong they were soon enough, and burned a lot of money, including much which belonged to the banks.
IMO, it's unlikely that there' a lot of LTCM's waiting to happen. By the same token, we'll probably see another fiasco within the next 2 years. Remember Drexel; Barings; ...
And the world goes on.
FWIW,
Ian. |
