There Was No Reason To Panic. After All, They Were Hedged.
I posted a link to this video back in 2006. Let's look at it again in relation to yesterday's post. This might shed a little more light on some of the arcane comments I made.
First, let's remember Long Term Capital Management was run by twenty of the most brilliant people on earth. Two were Nobel Prize winners. Come to find out they were brilliant but had a blind spot. One of many that we all have. How many times do we have to experience these types of situations before people realize Wall Street doesn't know how to quantify risk and money needs oversight and regulation? This is not an anti-free market statement. In fact, it is in support of free markets. The problem isn't Ben Bernanke. It's Wall Street. These problems have been around since the beginning of banking. The outcomes are always the same. Money leads to avarice. Avarice leads to foolishness. Wall Street is often taking severe risks when fundamentals least support it. That is where we are today. Fundamentals never supported their avarice.
Listen very carefully to the commentary in this video. In fact, if you want to play the game, you might want to listen to it a few times. Think about much of the commentary in reference to today's environment.
After watching this video, we can play a game. A quick game. A game involving the Socratic method and Socratic questioning. Here goes. What if an environment existed where there was significant leverage in many assets and very large bets across all assets. And, let's say some of those assets are more liquid than others. And, that some assets are actually quite illiquid. By that I mean there is not a clearinghouse or large auction market with substantial players to trade that asset. A piece of art may be an example of an illiquid asset. And, let's say any one of those bets turns against one of the players or many players. And, let's say one day players have to recognize that bad bet(s). In doing so, the players have to recover a stable financial position. In other words, they need to raise capital to remain liquid and stay in the game. Or, in a bank's case, remain solvent. And, let's say it has become impossible to raise that capital through the sale of semi-liquid or illiquid assets. And, in a worst case scenario, let's say the illiquid assets are the ones that have turned against those players. What are the players forced to do? And what are the consequences for the players and for the asset markets they've invested in? Both short term and long term?
What did we say back in June of last year? "Liquidity shocks you say? But, we are awash in liquidity. And? They will come at some point." Back to the question posed in Saturday's post. Is the market going to rally? Fundamentals will determine the answer. You remember fundamentals? That passé view of the world before Wall Street brought us quantitative investment models.
First, let's remember Long Term Capital Management was run by twenty of the most brilliant people on earth. Two were Nobel Prize winners. Come to find out they were brilliant but had a blind spot. One of many that we all have. How many times do we have to experience these types of situations before people realize Wall Street doesn't know how to quantify risk and money needs oversight and regulation? This is not an anti-free market statement. In fact, it is in support of free markets. The problem isn't Ben Bernanke. It's Wall Street. These problems have been around since the beginning of banking. The outcomes are always the same. Money leads to avarice. Avarice leads to foolishness. Wall Street is often taking severe risks when fundamentals least support it. That is where we are today. Fundamentals never supported their avarice.
Listen very carefully to the commentary in this video. In fact, if you want to play the game, you might want to listen to it a few times. Think about much of the commentary in reference to today's environment.
After watching this video, we can play a game. A quick game. A game involving the Socratic method and Socratic questioning. Here goes. What if an environment existed where there was significant leverage in many assets and very large bets across all assets. And, let's say some of those assets are more liquid than others. And, that some assets are actually quite illiquid. By that I mean there is not a clearinghouse or large auction market with substantial players to trade that asset. A piece of art may be an example of an illiquid asset. And, let's say any one of those bets turns against one of the players or many players. And, let's say one day players have to recognize that bad bet(s). In doing so, the players have to recover a stable financial position. In other words, they need to raise capital to remain liquid and stay in the game. Or, in a bank's case, remain solvent. And, let's say it has become impossible to raise that capital through the sale of semi-liquid or illiquid assets. And, in a worst case scenario, let's say the illiquid assets are the ones that have turned against those players. What are the players forced to do? And what are the consequences for the players and for the asset markets they've invested in? Both short term and long term?
What did we say back in June of last year? "Liquidity shocks you say? But, we are awash in liquidity. And? They will come at some point." Back to the question posed in Saturday's post. Is the market going to rally? Fundamentals will determine the answer. You remember fundamentals? That passé view of the world before Wall Street brought us quantitative investment models.
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