Racer
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Thanks kriesau that is very worrying!!
Below is an interesting read as well for those who don't know about it.
The Midas Formula
BBC2 9:30pm Thursday 2nd December 1999
NARRATOR: In August 1998 something happened no-one had considered possible: the biggest country in the world suddenly and without explanation refused to pay all its international debts and now all the calculations in LTCM’s models were finally, hopelessly out of kilter.
MYRON SCHOLES: August 1998 after the Russian default, you know all the relations that tended to exist in a recent past seemed to disappear.
MERTON MILLER: Models that they were using not just Bachelier’s models but all kinds of models, were based on normal behaviour in the markets and when the behaviour got wild no models were able to put up with it.
ROGER LOWENSTEIN: Although their models told them that they shouldn’t expect to lose more than 50 million or so on any given day they began to lose 100 million and more day after day after day till finally there was one day 4 days after Russia defaulted when they dropped half a billion dollars, 500 million in a single day.
NARRATOR: In Greenwich LTCM faced bankruptcy, but if the company went down it would also take with it the total value of the positions it held across the globe. These were now staggering. For LTCM’s models had led them to bet a total of a trillion dollars. The equivalent of a year’s turnover of the American government was about to be wiped out. The world’s top financial regulators met in crisis.
ROGER LOWENSTEIN: Suddenly they seemed to be staring at this nightmare where one firm linked up to every major firm on Wall Street was going to be seized up and markets might just stop working. That was the great fear.
NARRATOR: In order to prevent a global, economic collapse the American Central Bank, the Federal Reserve, had no choice but to organise a bail-out of LTCM. The terms were humiliating. Merton and Scholes lost millions. So did their investors. Among them pension funds, the Central Bank of Italy and Britain’s Barclays Bank lost an average of $200 million each. Then the public recriminations began.
BERNIE SANDERS (Congress Committee Representative): We expect that they’re going to explain to the members of this Committee why the Federal Reserve has organised the $3½ billion bail-out for billionaires, why Americans should be worried about the gambling practices of the Wall Street elite.
ALAN GREENSPAN (Federal Reserve Chairman): How much dependence should be placed on financial modelling which for all its sophistication can get too far ahead of human judgement.
CAROLYN MALONEY (Congress Committee Representative): If the Nobel Prizewinners of Long Term Capital Management didn’t fully understand what they were doing or the risks involved who else could be expected to understand these activities?
ALAN GREENSPAN: Sometimes, and I suspect it was part of the LTCM case, human beings get bedazzled by the people with whom they are working.
PAUL KANJORSKI (Congress Committee Representative): Who’s going to pay these losses that this fund incurred and these investors incurred? Every senior citizen that’s relying on savings account. We just tapped into their funds because these high-flying dude billionaires went at risk.
Read the full article here
Below is an interesting read as well for those who don't know about it.
The Midas Formula
BBC2 9:30pm Thursday 2nd December 1999
NARRATOR: In August 1998 something happened no-one had considered possible: the biggest country in the world suddenly and without explanation refused to pay all its international debts and now all the calculations in LTCM’s models were finally, hopelessly out of kilter.
MYRON SCHOLES: August 1998 after the Russian default, you know all the relations that tended to exist in a recent past seemed to disappear.
MERTON MILLER: Models that they were using not just Bachelier’s models but all kinds of models, were based on normal behaviour in the markets and when the behaviour got wild no models were able to put up with it.
ROGER LOWENSTEIN: Although their models told them that they shouldn’t expect to lose more than 50 million or so on any given day they began to lose 100 million and more day after day after day till finally there was one day 4 days after Russia defaulted when they dropped half a billion dollars, 500 million in a single day.
NARRATOR: In Greenwich LTCM faced bankruptcy, but if the company went down it would also take with it the total value of the positions it held across the globe. These were now staggering. For LTCM’s models had led them to bet a total of a trillion dollars. The equivalent of a year’s turnover of the American government was about to be wiped out. The world’s top financial regulators met in crisis.
ROGER LOWENSTEIN: Suddenly they seemed to be staring at this nightmare where one firm linked up to every major firm on Wall Street was going to be seized up and markets might just stop working. That was the great fear.
NARRATOR: In order to prevent a global, economic collapse the American Central Bank, the Federal Reserve, had no choice but to organise a bail-out of LTCM. The terms were humiliating. Merton and Scholes lost millions. So did their investors. Among them pension funds, the Central Bank of Italy and Britain’s Barclays Bank lost an average of $200 million each. Then the public recriminations began.
BERNIE SANDERS (Congress Committee Representative): We expect that they’re going to explain to the members of this Committee why the Federal Reserve has organised the $3½ billion bail-out for billionaires, why Americans should be worried about the gambling practices of the Wall Street elite.
ALAN GREENSPAN (Federal Reserve Chairman): How much dependence should be placed on financial modelling which for all its sophistication can get too far ahead of human judgement.
CAROLYN MALONEY (Congress Committee Representative): If the Nobel Prizewinners of Long Term Capital Management didn’t fully understand what they were doing or the risks involved who else could be expected to understand these activities?
ALAN GREENSPAN: Sometimes, and I suspect it was part of the LTCM case, human beings get bedazzled by the people with whom they are working.
PAUL KANJORSKI (Congress Committee Representative): Who’s going to pay these losses that this fund incurred and these investors incurred? Every senior citizen that’s relying on savings account. We just tapped into their funds because these high-flying dude billionaires went at risk.
Read the full article here
Lets try and make the direction a little clear on this thread. Thank You.
