A Financial Failure
September 28, 2011 by Chip Wood
Do you think we’ve seen some financial turmoil this year? Let me tell you what happened 13 years ago this week, when one of the most highly touted investment vehicles ever created failed.
On Sept. 22, 1998, Long-Term Capital Management shocked the financial markets when it revealed that it was at risk of imploding and destroying billions of investors’ dollars when it did.
LTCM was founded and backed by some really smart and really wealthy people. But in 1998, disaster struck. When a series of interest-rate bets went bad, the company lost $4.6 billion in a matter of months.
“At the beginning of 1998, LTCM had equity of $4.72 billion, with borrowed capital of more than $124.5 billion and assets of about $129 billion,” wrote Adnan Siddiqi and Peter Hrubi in Islamic Investments Funds Versus Hedge Funds. “From the beginning of 1998 until September 1998, LTCM’s equity fell from $4.72 billion to $600 million… Total losses were found to be $4.6 billion.”
Faced with a potential financial catastrophe, the Federal Reserve organized a bailout of $3.625 billion from 15 investment banks. “On September 29, 1998 the control of the LTCM was passed on to Oversight Partner 1 LLC,” wrote Siddiqi and Hrubi.
There was an extraordinary amount of weeping, wailing and gnashing of teeth over the LTCM bailout back in 1998. It seems hard to believe all the fuss was over a “mere” $3.6 billion, doesn’t it? Especially since Uncle Sucker … I mean Uncle Sam … has spent more than $1 trillion since then, in a futile effort to revive our flagging economy.
The more it changes, the more it all stays the same — except the price tag keeps getting higher.