What could have happened if Merrill etc. & Greenspan had not saved LTCM last summer?
The drop of Nasdaq early this week seems scary to many people. I have looked some charts of major stocks, they all have a vertical line. I was chickened out at one moment and only bought PFE and sold some puts of DELL as I planned. I knew, hopefully, the market is just fine.
The only moment that really scared me was last summer when LTCM claimed the loss of $4 bln. The market charts were well in position to head down. It is the worst bear market in a decade. Charts were not the only thing I was fear of.
I have not seen any estimates for what could have happened. At that time, I could only estimate based on my experience. In 1994, my clients lost $55 mln in LME copper spread and commodity tradings. This was about 10% that China lost in that year ($600 mln for the country). Let me assume those big traders have a lot in common. One particular trade was 2000 contracts of LME spread which lost $5 mln. These contracts were equivalent to 4000 contracts COMEX contracts which were about 400,000 shares of major company, such MSFT or DELL, common stocks. LTCM lost 4 bln. This was about 800 times of 400,000 shares or 300 mln shares. That is if they were forced to dump to meet margin calls, they had to sell/buy 300 mln stocks, such as MSFT's or DELL's, at the same time at the market. Of course, they were mainly in bonds and other derivatives. Other houses like D.E Shaw had the same problems. It is just nobody knows what happens if you are not really involved.
I think I was the very few who fooled themselves by doing analysis like this at that time.
By the way, I was good at saving my clients. People have fate. |
