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To: GVTucker who wrote (178971)	8/10/2004 1:00:18 PM
From: Robert O	Read Replies (1) \| Respond to of 186894

Next, LTCM didn't fail just because of illiquidity. It was the combination of illiquidity and imperfect hedges. They were not buying and shorting the same thing. And the Hunts? They were just stupid. ######################## For those who want more detail, some time ago I read (and recommend) the following: Beyond Greed The story of the Hunt brothers. The gov't in changing the rules on the Hunts who basically had cornered the Silver market was not exactly 'fair play.' When Genius Failed: The Rise and Fall of Long-Term Capital Management Good read! One add'l way I'd like to describe the failure was these great minds missed seeing the possibility of the 'perfect storm' which wiped them out by mis-calculating the probabilities of what was required to wipe them out. Indeed, they figured that only one instance in the time span of many universes could leave them decimated! What they failed to model correctly was the idea of non interdependence. Thus, they assumed a number of events to be non-inderdependant and they could simply multiply their probabilities together like calculating craps table odds. Turns out that for a periods of time at least: 1) humans can take actions that are not 'rational' 2) one event will cause a wave of events that are not independent in the way they probabilistically figured and 3) people and gov'ts in the market who 'smell blood' will behave in ways that will crush the weakened prey and potentially garner them profits. There's more of course but hey buy the book folks ;-) RO

To: GVTucker who wrote (178971)	8/10/2004 2:13:57 PM
From: BelowTheCrowd	Respond to of 186894

I didn't mean to imply that LTCM failed because of illiquidity. It failed because some of their key assumptions failed when foreign markets became political and thus ceased to behave "normally" during the Asian and Russian crises. Illiquidity in some of those markets certainly played a role, but it was only a small piece of the puzzle and was largely caused by outside influences. The Enron picture was complex, and much was put into place that established huge risks. The final fall occured when the stock price broke below $42 (or was it $47?) the magic number below which everything blew up. Skilling (not Fastow) resigned citing "personal reasons" when the stock broke that level, in August 2001. Clinton had imposed price controls on electricity to California before leaving office, which were temporarily, then permanently adopted by the Bush administration (http://www.cnn.com/2001/US/01/23/power.woes.03/). The Enron strategy and many of the hedges they put in place presumed a political landscape in which they would be free of those types of restrictions -- as they had been prior to Clinton's order. The unexpected political environment was largely responsible for the stock slide that triggered everything else. (Lesson here: any market strategy that presumes no political intervention during a crisis is doomed to failure.)