Long-Term Capital Management

Long-Term Capital Management ( LTCM ) was a 1994 by John Meriwether (the former vice-chief and head of bond trading at Salomon Brothers), was established hedge funds. Among the directors were Myron S. Scholes and Robert Merton Carhart, where in 1997 the Alfred Nobel Memorial Prize in Economics was awarded.


LTCM was founded in 1994 by John Meriwether (the former vice-chief and head of bond trading at Salomon Brothers).

Success years (1994-1998)

At its peak in early 1998, LTCM had equity of $ 7.3 billion, after the end of 1997 $ 2.7 billion was repaid to investors as a return. The minimum investment investors amounted to ten million USD with a minimum term of three years, virtually without a way to get information on the nature of the business of the Fund. Due to the high capital investment by 80 investors in 1995 were taken no more new investors. LTCM fund his investments almost exclusively on debt and had it deposited low collateral. Strategically arbitrage has been speculated in fixed income. In anticipation of the approaching European Monetary Union about the emergence of a uniform interest rate was expected in the euro area. This meant that the prices of fixed -income securities such as Italian government bonds, which traditionally had still high interest rates, had to tend to rise, while the prices of German Bunds, had to decline with traditionally low rates, compared to more. So was in Italian Fixed-income investments with simultaneous short sale of German fixed -income instruments.

The fund bought also the basis of similar considerations 30 -year U.S. Treasuries with a maturity of ten years and operating parallel by short sale to build a short position of newly issued ten-year U.S. government bonds. Theoretically, with the same residual maturity, the 30-year bonds over the newly issued bonds a liquidity spread, since they are rarely traded in the market. In the first three years after deduction of all costs resulted in a return of 30 % to 40 %.

The LTCM had the beginning of 1998 around U.S. $ 4 billion equity, while a portfolio of USD 125 billion as a short sale to the opposite state. The securities were collateral to borrow more debt in order for derivatives based on the value of the British pound, bond and option contracts could be issued. The securities included Russian and U.S. Treasury bonds and Danish land mortgages. The derivatives reached at the end of a value of 1.25 trillion ( in today's purchasing power 1.86 trillion USD).

Crisis and Resolution ( 1998)

For crisis caused by strong turbulence in the financial markets through the open economy and the currency crisis in Russia in 1998. Large funds and portfolios have been reallocated due to the Russian crisis intensified in safe U.S. government securities ( U.S. Treasury bonds), so that the spread between swap rate and the Treasury bonds rose sharply. In Europe in particular was increasingly invested back into safe German fixed income and at the same time were about Italian fixed income, which has now been mistrusted more, sold, exactly the reverse, as would be expected from the upcoming introduction of the EU monetary union.

Because LTCM had speculated on a reduction of these spreads, there were massive losses. At the same time knew now many market participants of LTCM's positions and problems. Because LTCM had to make smooth his positions sooner or later, drove many market participants to spread further and further apart. In August 1998, shareholders' equity decreased to $ 2.1 billion, LTCM sold in sequence much of the equipment at bargain prices. About credit mechanisms leverage ( leverage effect) was so strong in the statement that a chain reaction on the international financial markets was feared as a result of the decline in capital to $ 2.1 billion offset by a nominal value of 1.25 trillion USD in August. Since not enough equity to balance was available and LTCM was imminent inability to pay, had a rescue operation to be launched, as was to be feared in this situation, a collapse of the U.S. and international financial system.

Among stakeholders at the meeting to rescue LTCM in New York's Central Bank on 23 September 1998 were among other

  • William J. McDonough, president of the New York Federal Reserve System (Fed )
  • Sanford I. Weill, chairman of Travelers Group
  • Jon Corzine, the senior partner of Goldman Sachs
  • David Komansky, chairman of Merrill Lynch
  • The chairman of the Chase Manhattan Bank
  • The chairman of Bankers Trust Co.
  • The chairman of Smith Barney
  • The chairman of Bear Stearns
  • The chairman of Lehman Brothers
  • The chairman of Morgan Stanley
  • The Chairman of Douglas A. Warner, chairman of JPMorgan and also
  • The chairman of the German Bank and the Dresdner Bank.

This rescue operation was unique, and remained so until the financial crisis from 2007.

After the dissolution

Robert Merton now works as a professor at the Harvard Business School. Myron Samuel Scholes passes under the name of Platinum Grove Asset Management back a hedge fund with assets under management of around five billion U.S. dollars. John Meriwether headed since immediately after the resolution of the LTCM under the name JWM Partners until 2009 a new hedge fund. This invested by the same method as before LTCM was speculated by means of high credit to the decrease abnormal price differences on the financial markets. However, JWM Partners LLC suffered with his " Relative Value Opportunity II Fund " a loss of 44% from September 2007 to February 2009. JWM Hedge Fund and JWM Partners LLC were terminated in July 2009.