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April 22, 2010

Comments

Melinda Romanoff

Understood.

But what tripped up LTCM was the belief that Russia would pay it's debts. It was outside their statistical models, and what the difference between Poisson and Gaussian statistical models mean. One is finite in its horizon, the other, infinite.

So when calculating the probability of an event, how far out do you go with your sigmas? In the case of LTCM, not far enough.

I think we're within spitting distance of an understanding of the GS and reform stuff, but what gets me is giving the White House unlimited authority over all businesses and their potential viability. A lot of room for political whimsy, if you ask me, and plenty of opportunity to insert some permanent campaign contribution channels, a la Chicago.

anduril

But what tripped up LTCM was the belief that Russia would pay it's debts. It was outside their statistical models...

Russia defaulting was an event in the real world. Unfortunately for LTCM, and taxpayers, LTCM's investments were also events in the real world. In the ideal world (in the Platonic sense) of their statistical models LTCM was fabulously wealthy, but in the real world in which they invested they went belly up. Statistical models are wonderful tools for dealing with the real world, but they are not mirror images of reality (cf. Heisenberg, Werner). Nor does it take much sophistication to realize, at least in a general way, the limits of statistical models. Yet these highly educated and experienced guys, who were considered by one and all at the time to be the ultimate in sophisticated investors, couldn't grok the difference between their models and the real world. Sooooo, if you go down a few rungs to people who are smart but greedy or lazy or have minds addled by porn (cf. SEC), imagine what the results could be like! Well, I guess we've seen it, but it could be even worse next time. Of course all this also has implications for the "sophisticated investors" defense, as also for the important question of what is a material misrepresentation or a failure to disclose material information.

I think we're within spitting distance of an understanding of the GS and reform stuff, but what gets me is giving the White House unlimited authority over all businesses and their potential viability.

I never supposed we were outside spitting distance of that. The fact that I assign a fair share of the blame for our current mess to the Bush administration doesn't mean that I'm a socialist, nor even a garden variety Democrat--I have, in fact, never voted for a Democrat. But if you want to imagine the ultimate in campaign contribution channels, just think about Cap 'n' Trade for a bit.

Melinda Romanoff

Oh, but statistics is where LTCM thought they excelled, in their VAR analysis. They thought they were "sucking up nickels" using multiples of leverage (sound familiar?). They sold deep, out-of-the-money, puts, thereby collecting premiums

They also traded using leveraging no one had ever used for trading, twenty and thirty to one dollar of cash, and higher depending on the trade, to ramp up returns.

More specifically, David Kaminsky, Jimmy Cayne, and other Wall Street wizards, committed their firms' respective retirement funds, management only (thank you) into LTCM, and then lent them money for the order flow to their firms.

Yes, Russia's default was real world, but they were betting that it was returning to the real world and would honor their debts.

Ooops.


I know the strategies of LTCM thoroughly, and their respective faults.

More later, dinner.

And we should pick a shorter thread before it's clock runs out, if that's OK with you.

Back later.

anduril

Oh, but statistics is where LTCM thought they excelled...

Any thread. But statistics weren't going to tell them how Russia would react--that was a unique event. That was a dumb bet made by very "sophisticated" guys. Put it this way: it was more like a gamble than a calculated risk. Stats can help you with risk management, but not in a one-off situation. What did they know about the variables that went into Russia's decision? Clearly not enough, and I'll bet very little beforehand.

nathan hale

Wasn't the Russian default, triggered by the Asian collapse, which in turn was provoked by
Soros's playing the renimbi and the baht like
dominoes

Melinda Romanoff

I'll make my "aside" tomorrow, using the word "aside".

LTCM was making the bet that Russia was going to allow their short term rates to go only so high, leaving off the table that they might even consider walking away. The Russians walked away instead. This, by the way of Russia, is the flawed underlying economic principle to the Cloward/Piven strategy, ultimate power will draw all the money towards it.

LTCM was something a bit different than portrayed by Lewis, for a reason, for a lot of people.

Have a good night, I'm beat, and I have some larger installs to accomplish tomorrow. As well as catching up on two whole days of earnings releases.

And, yes, I go through each and every one that is publicly traded in the US.

anduril

Well, Bush certainly played right into Cloward/Piven.

nathan hale

That's more likely a 50/50 proposition, he did embrace 'the home ownership revolution' but he did call attention to the subprime
menagerie and was stalled by the usual suspects

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