This interesting New York Times op-ed covers the bailout of Long-Term Capital Management, organized by the Federal Reserve Bank, back in 1998. Who were the creditors? “The major creditors of the fund included Bear Stearns, Merrill Lynch and Lehman Brothers, all of which went on to lend and invest recklessly.” Other highlights…
“The ad hoc aspect of the bailout created a precedent for what has come to be called “regulation by deal” — now the government’s modus operandi. Rather than publicizing definite standards and expectations for bailouts in advance, the Fed and the Treasury confront each particular crisis anew.”
“It has become increasingly apparent that the market doesn’t know what to expect and that many financial institutions are sitting on the sidelines, waiting to see what regulators will do next. Regulatory uncertainty is stifling the ability of financial markets to engineer at least a partial recovery.”
[The Wikipedia page on LTCM is interesting. It clarifies that the bailout, though it involved the Fed as a matchmaker, did not end up costing taxpayers. The Ivy League’s best and brightest collected some of America’s highest salaries for their sophisticated financial engineering at LTCM. Their hard work is reduced to one phrase: “picking up nickels in front of a bulldozer”.]
Have you read The Black Swan?
Taleb doesn’t pull any punches with the LTCM guys.
Rob: I have skimmed the Black Swan, but the main point of my posting was not to pile more derision on the geniuses of LTCM. I think the interesting part of the Times op-ed is the link between the bailout of LTCM’s creditors (regardless of the reason that LTCM tanked) and our current bailout culture where we throw most of America’s wealth to our most provably incompetent institutions (since they wouldn’t need taxpayer money if they hadn’t run their companies into the ground).