Posted on 09/13/2008 7:42:19 AM PDT by TigerLikesRooster
The bailout culture turns 10
Commentary: Today's bailouts find roots in the Fed's handling of LTCM
By David Weidner, MarketWatch
Last update: 12:01 a.m. EDT Sept. 11, 2008
NEW YORK (MarketWatch) -- In less than two weeks, Wall Street will pass a milestone that on the surface probably doesn't seem to have much relevance today: the 10th anniversary of the bailout of Long-Term Capital Management.
But the LTCM near-collapse and rescue set in motion Wall Street's unchecked rush to risk during the decade by signaling to the market that the government would ultimately come to the rescue.
Wall Street is a kids' game, so let's refresh our memories. Everyone born before 1990 can skip ahead a couple of paragraphs. LTCM was a hedge fund run by former Salomon Brothers bond whiz John Meriwether and a half dozen other traders. They raised $1.01 billion in 1994 and ended up with derivative positions of about $1.25 trillion, built on leverage, when the bets turned bad and lenders started asking for their money in the summer of 1998.
LTCM was strapped for cash. So, rather than unwind its positions and send the market into turmoil, the Federal Reserve Board of New York organized a $3.75 billion bailout paid for by Wall Street banks. The cash allowed LTCM to meet its obligations as it unwound its trades.
As the market works to digest a fresh wave of bailouts, David Weidner takes a look at Long-Term Capital Management, the company that started it all. Has Wall Street learned its lesson? (Sept. 11)
Maybe it's because the numbers seem small by today's standards, but LTCM caused a lot of anxiety at the time. The day after the bailout was announced, the Dow Jones Industrial Average fell 2%, mostly because investors feared the banks would lose ...
(Excerpt) Read more at marketwatch.com ...
The Fed used its own money, not the taxpayer's.
Emphasizing the facts.
In other words, there was no bailout. The money allowed them to flatten out their positions. It wasn't a gift.
Macroeconomics has two primary factors, essential elements and time.
Essential elements are the critical parts of the machine, and time is how fast risks to those parts are avoided. A good analogy is your car.
Companies like Bear Stearns and Lehman are like the headlights. Nice to have, but only essential at night. If they fail during the day, you just shrug and look to replacement some time. But companies like Fannie Mae and Freddy Mac are like the tires. You must deal with them immediately if there is a problem, or you are in trouble.
Lots of companies fail every year, and it does not threaten the economy, as long as they don’t start failing all at once. But some companies are too valuable to be allowed to fail if at all possible, because they would almost invariably drag many otherwise good companies down with them—again, all at once.
So both what they are—how important they are, and how fast you must deal with are the two big elements.
Granted, a bailout should be the last ditch effort. A buyout by another company is far preferable. But if no other company has either the money, or the desire, every now and then a bailout is not such a bad thing.
And don’t grumble about “rich companies getting away with it”, because an outright failure is actually the best for the personal profit of the corporate executives. They will get a LOT less if it is a buyout, and may just be shown the door if it is a bailout—if they are lucky.
Because if you run a critical company, and it fails, you are likely facing prison time as well.
The bailout culture turns 10 (LTCM bailout).......
No. The bailout is much older than that. The floodgates actually opened when Chrysler was the first to be bailed out.
That was the actual “camel’s nose under the tent.” The rest of it simply followed 10 years ago.
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1971 Lockheed
1975 New York City
1979 Chrysler
1984 Continental Illinois
etc.
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Congress has been misappropriating money for as long as there has been a Congress. We should expect no less from our “representatives”.
jas3
You might want to substitute the word “intervention” for “bailout.”
There really wasn’t a “bailout” of LTCM — the gubmint brokered the deal.
Thanks for the ping.
Today, hit me like a 20 ten heavy thing, that this market, is exactly like 1998. LTCM is small in comparison to today’s hedge fund nightmare. That said, the solution, and aftermath are the same. It is interesting too, that if you look at what the thirty year treasury did during that crisis, is unfolding EXACTLY the same this time.
Today, I finally feel like I know what/how/why this is going on, and why there is this glaring disconnect between the market, and the real economy.
Absolute fortunes can be made understanding this, although trying to make money in call options are not going to work, as they are priced with this being the expected outcome.
I just did a search on LTCM, found your article. Would like to hear any other thoughts you might have.
LTCM was a bet gone wrong. This thing is a lot of different types of bets gone wrong.
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