LTCM and the Financial Crisis of 2008

Nearing the end of When Genius Failed, it is striking to me how similar the situation Long Term found itself in resembles the crisis which Wall Street was bailed out of in late 2008. Both could not find buyers for the assets they needed to sell, just as both found their capital stores diminishing rapidly. In 1998, Long Term found itself losing money on almost all of its trades. The marks that they valued their assets were dwindling, fast, and any attempt to sell only lowered those marks further. In 2008, banks started building up losses on their securities, mortgage-backed ones most dramatically. Long Term believed whole-heartedly that once markets moved past their panicked aversion to the types of assets the firm was losing on, prices would return to more typical levels and their losses would be recouped in part or whole. The problem they faced was that those losses were accumulating so quickly and widely that their capital was vanishing, pushing them rapidly towards insolvency. Wall Street experienced an identical problem: as assets declined in value, they booked huge losses regardless of whether they sold. Hence the capital infusions of the bailout.

To be continued.