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Didn’t Archegos do this too? Literally took down Credit Suisse.
I was under the impression Archegos had somewhat cloaked how levered they were. LTCM is interesting because they basically got lenders to agree to skip the biggest part of DD.
"Show me your books"
"nah"
"ok here's a couple billi"
I think it was kinda the same. No individual bank thought Archegos / LTCM was levered to the tits with most of the banks?
Banks and other counterparties were willing to work with them because they seemed very smart professionals launching a fund (remember many of them had PhDs) combined with they had a really good start with double-digit returns. The math behind their trades was so complicated that even when their lenders asked to see the model no one could comprehend what was going on. It was similar to FTX in that lenders would receive pushback if they tried to audit their positions. Plus, leverage was normal in the financial system during that time, this was before the GFC regulations came in. Banks themselves were running on crazy high leverage, although LTCM took it too far from the 90s standard too.
Also lenders wanted to be involved in LTCM since it would boost their own reputation. You'd be surprised how much rationality gets thrown out the window when grown adults try to look cool.
Yep this is it. In addition to smart, I'd say they carried some moral/ethical currency too because they had academic backgrounds as opposed to Wall St backgrounds. Always gonna trust the disheveled professor more than the slick guy in the $5,000 suit.
Your last point is huge. I see something similar in startup/early stage investing where a lot of the motivation to write a check comes from the investor wanting to brag to his friends about the latest round he "was able to get in" because he knew someone.
That happens when target people hire only target people to lend to target people that hangs at the same target country club.
Dont think they went to targets, they were probably just popping at the time
How did all those parents let their kids go play with Michael Jackson? It’s not complicated. People ignore common sense when you show them fame and prestige.
It never makes sense from a top down perspective. Invert. It makes total sense from a “bottoms up” perspective. Start with the dude or gal making the loan.
He’s being paid to deploy capital and make money. If he doesn’t deploy capital - he won’t have his job for too long. Especially if everyone else who is smart / etc is doing the trade. So all of a sudden if you’re the odd duck out you look like an absolute idiot at best and at worst your bank literally thinks you are in a way losing them potential income.
okay so then what? Think through incentives. If that guy or gal piles in the trade - along with everyone else. Best case - it all goes swimmingly and everyone makes money. Worst case - everyone was wrong and hey…. They fooled everyone.
long story short there’s a lot of asymmetric upside in all risk taking careers. This applies to VC, HF, PE, and everything else. Principal / agent problem, herd mentality, social proofing, confirmation bias, FOMO. It’s all there.
Great explanation. Reminds me of the football coach who punts when he should go for it, because he has a chance to keep his job if he loses by the book.
Well said, Enron was the exact same issue.
Isn't this basically the same thing with the current MM HFs?
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