Roger Lowenstein
Appearances
Planet Money
The rise and fall of Long Term Capital Management
The street knew what their basic trade was. So the street, either for self-protective reasons because they were in the same trades as LTCM and they said, hey, I don't want to be exposed to the kind of losses they're having. I'm going to get out, which moved markets against them. Or sort of more aggressive posture saying, I think LTCM is vulnerable. What they own, I'm going to bet against.
Planet Money
The rise and fall of Long Term Capital Management
Wall Street stocks were crashing. Credit all around Wall Street was drying up because nobody knew how far or deep the reverberations from LTCM would run.
Planet Money
The rise and fall of Long Term Capital Management
In four years, they had quadrupled their investors' money. They seemed to have the black box. Over the next month, they lost half their assets. And in the ensuing couple of weeks, they lost virtually all the rest. It was all over.
Planet Money
The rise and fall of Long Term Capital Management
Bill McDonough, the president of the New York Federal Reserve, called in the 16 biggest banks.
Planet Money
The rise and fall of Long Term Capital Management
But when the Fed calls you, you go, obviously. And he said, it's up to you guys. It's private money. But I don't want to see these guys fail chaotically. Is there a way that we can orchestrate their funeral, so to speak?
Planet Money
The rise and fall of Long Term Capital Management
the Federal Reserve chief, had his thumb on their necks. And the other thing is they each had the comfort that no one potential investor would have had alone, which is, I'm not going in alone. So they could put in enough capital, presumably, to withstand more market moves against them. It took a group effort to staunch the bleeding.
Planet Money
The rise and fall of Long Term Capital Management
I think it was better from a public policy, certainly, that there was no, you know, they didn't take money from food stamps and give it to LTCM.
Planet Money
The rise and fall of Long Term Capital Management
That would sound worse. But I think from the standpoint of the example it set for markets, it didn't make, you know, much difference whatsoever.
Planet Money
The rise and fall of Long Term Capital Management
I think that's a bad example. I think capitalism works best with real traders taking real losses when they occur. It disciplines the way people try to make real profits.
Planet Money
The rise and fall of Long Term Capital Management
It was just sort of the height of financial hubris. I don't mean hubris in a personal way that they were bad people. I don't mean that at all. But I think they were wrong on a key point, which is the assumption that any black box, any formula based on the historic patterns of how prices have moved can be a guarantee and therefore can give you license to take such tremendous leverage.
Planet Money
The rise and fall of Long Term Capital Management
That black box has not been inventive.
Planet Money
The rise and fall of Long Term Capital Management
For the first three years plus of their fund, the world moved exactly the way they thought it would move.
Planet Money
The rise and fall of Long Term Capital Management
You know, they seem to have a formula. People are always looking for a formula, a technique, a model, you know, something that they can say, I just plug this in and tomorrow I'll be X percent richer. The day after tomorrow, I'll be, you know, X plus Y percent richer.
Planet Money
The rise and fall of Long Term Capital Management
If you own a stock and it triples, that stock that you own is a lot more expensive than it used to be. That might still be a good investment, but it's probably not as good an investment as before it tripled.
Planet Money
The rise and fall of Long Term Capital Management
All you know is, hey, the math isn't as good as yesterday. We're a little richer today, but that means tomorrow doesn't look as enticing. And they could and should have adjusted their portfolio.
Planet Money
The rise and fall of Long Term Capital Management
It wasn't that one asset went against them or another did, but that every asset, every asset that they traded went against them.
Planet Money
The rise and fall of Long Term Capital Management
You had what I call the human factor, which tilted the odds.