sagefr0g said:
i found it interesting that a bunch of financial Guhru's would put so much bank on the principles we discuss here every day lol.....
More interesting are the economic experts who could not get behind Kelly. Like the guys who headed LTC and ran it into the ground. Thorp jumped on one of the BJ boards back in late'98 and was poking fun at them, pointing out that a novice card-counter demonstrates more risk understanding (with Kelly) than the LTC PHDs did. The book alluded that the main LTC PHD was known to be a "martingale man."
The secret part of the story is that it was intended as a meltdown from the beginning and shadowy forces netted over billions in what appeared as a mega-multi-billion dollar bust and bailout. "And now you know the rest of the story." zg
Long-Term Capital Management - LTCM
A large hedge fund comprising 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.
Notes:
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 the height of the fund in 1998 it had $5 billion in assets, controlled over $100 billion and had positions whose worth amounted to 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 had 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 there would have been a widespread financial crisis around the globe, caused by the massive write-offs its creditors would have had to make. In Sept 1998, continuing to sustain losses, the fund, with the help of the Federal Reserve and its creditors, was bailed out and taken over. A systematic meltdown of the market was prevented.
=================
The latest example is a Greenwich, Conn., hedge fund called Long-Term Capital, Ltd. (LTC), which was founded by John Meriwether, a "master of the universe" at Salomon Brothers, along with two Nobel Prize winners, a former Federal Reserve vice chairman and other partners whom Business Week called the "dream team."
Using as much as $100 billion in borrowed money, Long-Term Capital made some disastrously stupid investments and teetered last week on the brink of failure.
What should happen to a firm that makes terrible bets on esoteric markets? It should go bust, of course. Its partners and investors should suffer swift and onerous losses -- at the very least as a signal to others to stay away from risky investments in the future.
Instead, Long-Term Capital is being rescued -- not with government money (thank heaven for small favors) but through not-so-subtle pressure placed by government regulators on banks and investment firms to cough up $3.5 billion. It's a classic case of moral hazard run wild.
