LTCM Vignette

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It is dead quiet this morning (I am typing this before the open, and the ES is up 0.01%), so I thought I’d fill the space with a little something that occurred to me when I woke up.

Anyone here remember Long Term Capital Management? Yes, I see some hands in the back of the room. For those of you who aren’t, LTCM was a hedge fund in the mid 1990s which blew up. That in itself isn’t very interesting, but what makes the blowup distinct is that it was rescued by the federal government. Looking at the four years prior, one wouldn’t have seen this coming:

So, simplistically, the order of events was:

  1. some rich people pooled their money together to make risky investments;
  2. things went well for a while;
  3. the risk came back to bite them in the ass, and investment banks began circling like vultures (as well as Warren Buffett) to make them a lowball deal and get a bargain;
  4. finally, the federal government swooped in and, with taxpayer money, bailed everyone out;
  5. afterwards, there was much public debate as to whether the fund should have simply been allowed to collapse, and the term “moral hazard” entered the vernacular. Indeed, entire books were written about this topic.

Sound familiar? If it doesn’t, I can tell you the answer: parts (1) through (4) have been repeated, on a vastly, vastly, vastly larger scale, on the entire U.S. economy since 2008. Indeed, the bailout of LTCM that everyone was running around screaming about was – – from today’s perspective – – a laughably small 3.625 billion.

In today’s world, there’s $180 billion thrown each night, completely inorganically, at the big banks just to keep this circus tent up. And, as you know, the nation is now $23 trillion in debt (growing at least $1 trillion a year as far as the eye can see) based on this similar construct. So the idea that entire volumes were written analyzing the bailout of LTCM and the wisdom behind it is……..I guess the word would be “quaint.”

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