Investopedia: Long-Term Capital Management – LTCM

The following is an excellent article from the Investopedia website site titled “Long-Term Capital Management – LTCM” and I quote:

“Long-Term Capital Management – LTCM”

What was ‘Long-Term Capital Management – LTCM’

Long-term capital management (LTCM) was a large hedge fund led by Nobel Prize-winning economists and renowned Wall Street traders that nearly collapsed the global financial system in 1998 as a result of high-risk arbitrage trading strategies.

The fund formed in 1993 and was founded by renowned Salomon Brothers bond trader John Meriwether.

BREAKING DOWN ‘Long-Term Capital Management – LTCM’

LTCM started with just over $1 billion in initial assets and focused on bond trading. The trading strategy of the fund was to make convergence trades, which involve taking advantage of arbitrage between securities that are incorrectly priced relative to each other. Due to the small spread in arbitrage opportunities, the fund had to leverage itself highly to make money. At its height in 1998, the fund had $5 billion in assets, controlled over $100 billion and had positions whose total worth was over a $1 trillion.

Due to its highly leveraged nature and a financial crisis in Russia (i.e. the default of government bonds) which led to a flight to quality, the fund sustained massive losses and was in danger of defaulting on its loans. This made it difficult for the fund to cut its losses in its positions. The fund held huge positions in the market, totaling roughly 5% of the total global fixed-income market. LTCM had borrowed massive amounts of money to finance its leveraged trades. Had LTCM gone into default, it would have triggered a global financial crisis, caused by the massive write-offs its creditors would have had to make. In September 1998, the fund, which continued to sustain losses, was bailed out with the help of the Federal Reserve and its creditors and taken over. A systematic meltdown of the market was thus prevented.

(IS THIS WHY PRES DONALD TRUMP IS SO EAGER TO MAKE FRIENDS WITH RUSSIAN PRESIDENT VLADIMIR PUTIN?   I UNDERSTAND THAT HE HAS BORROWED MONEY FROM THEM.  ALL OF THE HEDGE FUNDS ARE BUILT ON HIGH RISK AND COULD COLLAPSE AT ANY MOMENT.  THAT’S WHY WE MUST REINSTATE THE GLASS-STEAGALL ACT AND GET SOME REAL REGULATIONS BACK INTO THE MARKET RATHER THAN GETTING RID OF THE REGULATIONS LIKE DODD-FRANK, WHICH PRES TRUMP WANTS TO DO.
LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran.
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About tim074

I'm a retired dairy farmer that was a member of the National Farmer's Organization (NFO). Before going farming, I spent 4 years in the United States Air Force where I saved up enough money to get my down payment to go farming. I also enjoy writing and reading biographies and I write about myself as well as articles and excerpts I find interesting. I'm specifically interested in finances, particularly in the banking industry because if it wasn't for help from my local Community Bank, I never could have started farming which I was successful at. So, I'm real interested in the Small Business Administration and I know they are the ones creating jobs. I have been a member of Common Cause and am now a member of Public Citizen as well as AARP. I have, in the past, written over 150 articles on the Obama Blog (my.barackobama.com) and I'd like to tie these two sites together. I'm also on Twitter, MySpace and Facebook and find these outlets terrifically interesting particularly what many of these people did concerning the uprising in the Arab world. I believe this is a smaller world than we think it is and my goal is to try to bring people together to live in peace because management needs labor like labor needs management. Up to now, that hasn't been so easy to find.
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