In the society in which we live, success is rewarded greatly. Winning and becoming the best is always the goal or desired outcome for any endeavor. We are taught to always strive for success, for with such accomplishment comes many immediate and tangible benefits. However, the lasting benefits of these successes are not always substantial and principally apparent. In the business world, a company's goals translate more specifically to profit and other commercial aspects such as revenue, productivity, and market share. It is not hard to see that success in the business world is often simply equated with the accumulation of more money. Despite this engrained mindset, the benefits of such material successes are not always an enduring source of strength and value. Just as we eventually see in life, the often temporary nature and fleeting utility of the benefits from success become apparent in the business world as well.
[...] The primary flaw of LTCM's strategy of relying on market values to converge to fair value over time is that capital is not always as patient as you would like or even as it should be. In reality, lenders can and will lose their patience in times of market crisis- exactly when the funds most need them to keep it. Thus the main lesson here is that flight to liquidity, as well all systemic risk, should be accurately accounted for and built into risk models. [...]
[...] Since Long-Term Capital Management did business with nearly everyone important in the U.S. financial industry, Wall Street feared that LTCM's failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system. With limited options, the Federal Reserve Bank of New York finally organized a bailout of $ 3.625 billion by the major creditors to avoid a wider collapse in the financial markets. By early 2000, the fund had been liquidated, and the group of banks that financed the bailout had been paid back, although the collapse remained as very destructive and destabilizing for the many involved. [...]
[...] If the management of LTCM had employed the effort and manpower to calculate and analyze the levels of risk on the global scale as they did for calculating their arbitrage opportunities, the fund would have been sheltered against such risks and protected from such a massive and destructive failure. What They Did Not Learn The case of LTCM ended up being one of the biggest failures of its kind, but it was not the first and definitely not the last. [...]
[...] Although returns from the fund were already beginning to drop substantially in the early part of 1998, the initial shock that would help lead to the ultimate collapse of LTCM was Russia's default on its government bonds and obligations. LTCM believed it had somewhat hedged its Russian bond position by short-selling rubles, since Russia defaulting on its bonds would cause the value of its currency to severely drop and the fund could turn a profit through the foreign exchange market. [...]
[...] The Fundamentals and Trading Strategy of Long-Term Capital Management LTCM employed a series of complex mathematical models to take advantage of fixed income arbitrage deals, also called convergence trades, primarily with U.S., Japanese, and European government bonds. Effectively, these trades involved finding securities that were mispriced relative to one another, taking long positions in the cheap ones and short positions in the more expensive ones. Government bonds are a fixed-term debt obligation, meaning that they are contracted to pay out predetermined amounts at specified times in the future. [...]
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