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To: The Duke of URL© who wrote (143420)	9/13/2001 5:39:12 PM
From: GVTucker	Read Replies (1) \| Respond to of 186894

OT, RE: LTCM Although it is a little more complicated than this, the main reason that LTCM melted down was liquidity. For a while now, 'on the run' Treasuries traded more expensive than 'off the run' Treasuries. Back the LTCM time, that meant that the current 30 yr gov't bond might yield 5 basis points less than the same bond that had a maturity of 3 months less. LTCM would buy the cheap bond and short the expensive bond. Then they levered the living daylights out of the position. This was fine in theory, because they were long and short the same security, and given that their long position expired earlier than the short position, they would have the cash to cover the short position when it matured. Alas, the LTCM theory turned out to have a Keynsian basis, because in the long run, LTCM died. The Russian debt crisis came along, and a lot of funds bought the most liquid instrument they could find, which was the 'on the run bond'. They didn't really care about losing 5 basis points. They didn't care about losing 25 basis points. They wanted liquidity, so they weren't going to quibble about a quarter of a percent. LTCM's bankers, seeing that their leverage was working in the wrong direction, did indeed quibble about a quarter of a percent. And LTCM had to go hat in hand to their clients (who wouldn't give them more money), then Warren Buffett (who wanted to ask for a rather high cost of capital) and then finally the Fed, who helped them tide over into an orderly liquidation.