The real story of LTCM crash told by Eric Rosenfeld in MIT

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4 Responses to The real story of LTCM crash told by Eric Rosenfeld in MIT

  1. Mike Newland says:

    Can anyone explain the pairing difficulty in bankruptcy? Both sides lose was the statement.

    OK the firm which advanced cash against collateral of bonds ends up holding the bonds which have now fallen in price so loses.

    But the lender of bonds for the short-sell how does that work? Eric Rosenfeld says they will get killed trying to buy back the bonds they’ve loaned. How so if they’ve fallen in price?

  2. Mike says:

    I’ve answered my own question.

    Very easy so simple to miss. You can think things must be so clever (being LTCM, Nobel prizes etc) that you miss the obvious.

    The bonds put up as collateral fell in price during the crisis since they were less liquid than those shorted and panicked traders wanted the most liquid items.

    Thus the shorted bonds went up in price and a loss would be made buying them back on the part of those who lent them.

    Thus both sides to the trade would lose.

    Hence the fears of the Fed about the effects on the system as a whole of LTCM’s failure and the capital injection it arranged.

  3. Respect to op , some great information .

  4. But a smiling visitor here to share the love (:, btw great design .

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