Everyone remembers the high profile blowup of LTCM 10 years ago, but nobody learnt the lesson. The basic reasons of LTCM blowup was:
1. Very high levels of leveraged used to generate huge profits from minuscule arbitrage opportunities,
2. Expectation that liquidity will always remain high in the markets,
3. Financial models are the pennecia of all risk management needed.
Current scenario looks no different, other than the scale of this crisis. Its no more "one hedge-fund" problem now, it spans globe. Its the most biggest banks & financial institutions that are core to global financial system, are facing the heat. LTCM nearly single handedly brought the financial system to near collapse, but then a bailout package was available. Just no bailout is possible this time, the crisis is huge. Nearly $800 billions have been written down till now & few wall street veterans believe that another $400 billion is still to come. Can you imagine that the wealth worth a whole Hedge Fund industry size (of nearly $1.5 trillion) will be eroded by the time this subprime crisis ends.
Probably its the imperfections of global financial markets, assets were so much overvalued which were never worth that much. So they came down! But this reminds us of LTCM, and we have hardly learnt anything. Still Banks & Hedge Funds are highly levered (Carlyle disclosed 32x leverage, LTCM was 30x when it got bust). Risk mamagement measures is far from efficient. yes, trading/ financial models can churn numbers & predict well, but only when economic conditions & markets are stable. In case of "irrational exuberance", nothing works but greed and fear!
1. Very high levels of leveraged used to generate huge profits from minuscule arbitrage opportunities,
2. Expectation that liquidity will always remain high in the markets,
3. Financial models are the pennecia of all risk management needed.
Current scenario looks no different, other than the scale of this crisis. Its no more "one hedge-fund" problem now, it spans globe. Its the most biggest banks & financial institutions that are core to global financial system, are facing the heat. LTCM nearly single handedly brought the financial system to near collapse, but then a bailout package was available. Just no bailout is possible this time, the crisis is huge. Nearly $800 billions have been written down till now & few wall street veterans believe that another $400 billion is still to come. Can you imagine that the wealth worth a whole Hedge Fund industry size (of nearly $1.5 trillion) will be eroded by the time this subprime crisis ends.
Probably its the imperfections of global financial markets, assets were so much overvalued which were never worth that much. So they came down! But this reminds us of LTCM, and we have hardly learnt anything. Still Banks & Hedge Funds are highly levered (Carlyle disclosed 32x leverage, LTCM was 30x when it got bust). Risk mamagement measures is far from efficient. yes, trading/ financial models can churn numbers & predict well, but only when economic conditions & markets are stable. In case of "irrational exuberance", nothing works but greed and fear!
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