LTCM / Securities and stock exchange

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Long term Capital management (LTCM) was one 1994 of John Meriwether (former vice-boss and director/conductor of the pension trade with Salomon Brothers) created Hedge rear. Among the directors also Myron Scholes and Robert C were. Merton, which received 1997 the Nobelpreis for economic science.

Success

At the beginning very successfully with an at the beginning of of 1998 on its high point ordered LTCM over own capital funds of 7.3 billion USD and he lost 1998 in less than 4 months 4,6 billion USD. Those minimum investment amounted to ten million USD with a minimum running time of three years to get with almost no possibility information about the kind of the business of the fund. Due to the high capital investment by 80 investors 1995 no more new investors was taken up. LTCM bought e.g. Italian government loan with simultaneous sales of German Federal loans or bought US-Treasuries, with a remaining time of 10 years and operated paralell the structure of a Short position of again emitted US government loans. There was a net yield from 30% to 40% in the first three years after departure of all costs.

The LTCM had approximately 2.2 billion USD own capital funds in August 1998, while over securities for 125 billion USD as Leerverkauf was present. The securities were to be borrowed the collateral around still more outside capital, thus for derivatives, which were based to the value of the British Pound, obligation, option-sharpened and were enough from Russian and American government notes to over Danish property and reached at the end a value of 1.25 trillion USD.

Mathematical concept

With the help of a mathematical model (Black Scholes model) the trend of prices were computed and prognosticated a case of crisis with a probability of billions year, but could not them the human factor not into their complicated mathematical formulas also flow let. A classical stock exchange model originates from molecule physics and describes the movement of a molecule. According to the theory the share quotation is affected like a molecule by gas particles by the transactions of the participants. With a purchase there is a movement still above and with a sales a small movement downward. This process can be described by the Brownian movement. The model proceeds from the assumption, this concerns smaller purchase and sales cycles. This model does not consider large movements on the stock market by largely dealers, domino effect or over reaction (small) of the investors. Also no overestimated ranges, blisters so mentioned, also into the computation, flow which can at any time like the Dotcom blister blow-out.

Crisis

To the crisis it came, because by the open economy and monetary crisis in Russia 1998 large funds and Portfofilios were shifted strengthened into US government stocks (US-Treasury bond). The LTCM invested a large mixes capital in US-Treasury bond and had thereby one scarcely 60% loss to accept. LCTM had to sell a majority of its capital to under-cost price. Over credit mechanism it worked the lever force (Leverage) so strongly into the loss calculation that US central bank head Alan Greenspan had to lower the key interests. By a rescue operation LTCM had, in order to be prevented, introduced breaking down American and international financial system. Among the participants with among other things William J. McDonough, of the New Yorker Federal reserve system (Fed) meet, Sanford Ith Weill, the chairman of the Travelers Group, Jon Corzine, the senior partner of Goldman Sachs, David Komansky, the chairman of Merrill Lynch, Douglas A. Warner, the chairman von JPMorgan Chase & CO for rescue LTCM in the New Yorker central bank on 23 September 1998 were. and also central bank bosses of the Germans and the Dresden bank. It was decided that LTCM should to get and the LTCM to 90% with a new management take over fresh capital of about in each case 300 million dollar (altogether 3.75 billion USD) of the new investors.