WhatGoesAroundComesAround_DavisRob

of seasoned Wall Street pros, collaborating to develop their trading and
execution strategies. The Firm’s mystique grew as both strategies and
trades were kept top secret, and Wall Street firms competed fiercely for
their business.
So fierce in fact, that firms with strict criteria for doing business,
including allowable levels of margin and capital requirements, began to
abandon their own hard learned standards, offering previously unheard
of terms on rates and leverage to LTCM, to capture their piece of the
action. They were also required to keep their dealings with LTCM,
including pricing and trades in strictest confidence. The result was that
none of the investment banks who were financing LTCM’s positions
knew what the others were doing, or had the big picture of LTCM’s
over-all risk exposure.
The LTCM partners though, obviously believed their own rhetoric. They
took all the capital they could get the Wall Street firms to lend them,
bending every rule of borrowing/leverage in the book and building a
mountain of assets on what became, relatively speaking, a very small
capital base.
Then suddenly, in the blink of an eye those secret strategies stopped
working. Their positions all started going against them at the same time.
Because of their enormous leverage they rapidly blew through their
capital to the point where bankruptcy was almost at hand.
It would have been another story of “just desserts,” were it not for the
huge portfolio of securities that such a bankruptcy would have forced
the market to absorb. So huge that it was feared many unsuspecting
market participants would have been swiftly put out of business, and
necessitating then Fed Chairman Alan Greenspan to get involved in
working out a solution.