Tag Archives: Long Term Capital Management

How Derivatives Will Trigger A Bond Market Melt-Down (Part 1)

Get your money out of the bond market.  Once the default-contagion starts, it will spread faster than the bubonic plague which caused the Black Death in the 14th century.  I just got off the phone this morning with a source in NYC who confirmed that several Wall Streeters he knows all believe a far bigger “Long Term Capital” collapse triggered by derivatives defaults could occur at any time:

Long Term Capital, for those of you who are unaware, was the infamous hedge fund run by an ex-Salomon Brothers bond “guru.” He assembled a Dream Team of Nobel Prize Winning professors who claimed to have figured out how to produce “alpha” (excess returns) without any “beta” (systematic risk). One of the professors was Merton Miller. I was at the University of Chicago when Miller received his Nobel Prize. We bought his snake-oil hook, line and sinker. So did the large pension funds and wealthy investors who threw their money a Long Term Capital.

To cut to the chase, it didn’t take too long before LTCM imploded. I guess the Nobel “Dream Team” had not figure out how to turn lead into gold after all. LTCM was bailed out by the Fed plus several of the big Wall Street banks who also faced collapse if LTCM was allowed to incinerate to the ground. These banks had all plugged LTCM with the derivatives trades that blew up LTCM. I was at one of them, Bankers Trust, which was one of the guiltiest perpetrators and which had been found guilty several years of earlier of ripping off Proctor and Gamble with derivatives.  Bankers Trust is now part of Deutsche Bank, one of the two most risky banks in the world (JP Morgan is the other).

Back then it was the Wall Street banks who were required to put up “equity” to keep their businesses alive. In 2008 it was the Taxpayers and the “equity” put up  by Taxpayers was 8x greater. Only that equity went into the pockets of the people running the banks.

Don’t let your “equity” sitting mutual funds and money market funds get taken from you in the next stage of bailouts, which will be the nefarious “bail-ins.” “Bail-in” means your money that will taken from your pocket and given to the entities who face collapse.