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LTCM General Counsel: "The U.S. Stared Near-Catastrophe In The Eye, With LTCM, And Decided To Double Down."

Tyler Durden's picture


Must read interview by Kathryn Welling with James Rickards, former General Counsel of Long-Term Capital Management. His observation that the financial system is now as risky as it was back then is something that modern bankers will hear and thoroughly forget immediately, only to be reminded once everything collapses once again: "What strikes me now, looking back, is how nothing was changed: no lessons were applied. Even though the lessons were obvious, in 1998. LTCM used fatally flawed VaR risk models. LTCM used too much leverage. LTCM transacted in unregulated over-the-counter derivatives instead of exchange traded derivatives. So risk models needed to be changed, or abandoned. Leverage had to be slashed. Derivatives had to be traded on exchanges or cleared through clearinghouses. Regulatory oversight needed to be ramped up... The government did just the opposite. Glass-Steagall was repealed in 1999, so that banks could become hedge funds. The U.S., in effect stared near-catastrophe in the eye, with LTCM, and decided to double down."

All this and much more in the attached interview.




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Thu, 03/04/2010 - 16:56 | Link to Comment No More Bubbles
No More Bubbles's picture

Yep, and this time they are going ALL IN.

Thu, 03/04/2010 - 17:13 | Link to Comment bugs_
bugs_'s picture

they threw us ALL IN

Thu, 03/04/2010 - 17:31 | Link to Comment Anonymous
Thu, 03/04/2010 - 18:04 | Link to Comment deadhead
deadhead's picture

 get the money out now. this is my mantra these days. it is difficult to break this connection between the american people and this pie in the sky attitude of trust in their government and the overall feeling that it , is .......too big to fail....

I tell people the same BUT....they will NOT listen.  You summed it up brilliantly as the American people never learn their lessons and history will simply repeat itself.  

Thu, 03/04/2010 - 18:53 | Link to Comment Anonymous
Thu, 03/04/2010 - 21:46 | Link to Comment Anonymous
Thu, 03/04/2010 - 22:27 | Link to Comment wake the roach
wake the roach's picture

"as george carlin said one time not long before he died. its the american dream, but you have to be asleep to enjoy it."


Lol, classic...

But believe me, you can wake people up, just got to focus your efforts on those whose future wellbeing is most important to you...

My folks sold their home last September (on the sunshine coast Australia, biggest property bubble ever) after almost 2 years of my efforts. Mom actually told me to see a Doc, thought I was crazy, serious! but she may be a lil bit right haha...

They purchased a 30 acre hobby farm for half the price of the average suburban mcmansion, secure water, close to rail, close to main transport highway and in a laid back community where half the residents do not lock their doors at night and they're loving it... My dad was ex air force, ex cop and mom a teacher so if they can be reprogrammed, any one can  ;-) 

All you can do is to make your view known and stand buy it come hell or highwater, once they realise that in fact, you are not insane, then it subconscoiusly gives their ego's the all clear to allow the sense's to work magic...

This is what makes the internet such a powerful tool, especially for people who would never read a book which "don't got no pictures"...

When people realise that millions of others share similar thoughts and experiences, they do not feel "different" anymore allowing the ego and its troublesome shadow to release its ninja death grip...


Fri, 04/09/2010 - 22:36 | Link to Comment Broker NotBroke
Broker NotBroke's picture



Nobody wants to hear it. Everyone wants to put their heads in the sand, and maybe this will all go away. It's a delightful deferring of responsibility. The mentality is to let people like us deal with it. Problem is, we alone can't do anything.


Where is the outrage? Where is the fear? Where is the hope? 

It's depressing to think about?, well maybe people should be depressed. or maybe they've got to get mad.

Thu, 03/04/2010 - 18:50 | Link to Comment Zippyin Annapolis
Zippyin Annapolis's picture

Jim is a good man and was there ==and lived to tell the tale.

Thu, 03/04/2010 - 16:57 | Link to Comment SteveNYC
SteveNYC's picture

And lo and behold, doubling down is for wimps!! In 2008/2009, we went all-fkn-in baby!! That's right, maximum leverage, maximum risk, we're all in now.

When this baby blows, think supernova....

Thu, 03/04/2010 - 17:08 | Link to Comment Ripped Chunk
Ripped Chunk's picture

Not a physicist but doesn't a supernova event generate a black hole?

Thu, 03/04/2010 - 17:14 | Link to Comment lizzy36
lizzy36's picture


how else would one describe AIG, FNM, GMAC, and GM.

they are just the prelude to the final symphony.

Thu, 03/04/2010 - 17:47 | Link to Comment JJP
JJP's picture

Would be funny if Goldman was on the other side of the hole

Thu, 03/04/2010 - 18:03 | Link to Comment Anonymous
Wed, 03/17/2010 - 17:08 | Link to Comment Celsius
Celsius's picture

rofl.... The best laugh that I have had in weeks. Absolutely awesome!!

Fri, 03/05/2010 - 08:16 | Link to Comment Alexandra Hamilton
Alexandra Hamilton's picture

sometimes. if the exploding star is above a critical mass, it might also produce a neutron star.


Thu, 03/04/2010 - 17:01 | Link to Comment SWRichmond
SWRichmond's picture

The needed the leverage to keep the welfare/warfare state going for a little while longer.  They were impressed by how well it worked, so they said "Hell, yes!"

Thu, 03/04/2010 - 18:19 | Link to Comment Anonymous
Thu, 03/04/2010 - 19:07 | Link to Comment SWRichmond
SWRichmond's picture

That is mostly the welfare state I am referring to.  But there are, for example, programs like EIC, where people who have paid no taxes get a tax refund.  Isn't that welfare?  Isn't taking money from me to give to someone else, for social reasons, welfare?

Thu, 03/04/2010 - 19:20 | Link to Comment Anonymous
Thu, 03/04/2010 - 23:34 | Link to Comment SWRichmond
SWRichmond's picture

No it's not.  Every dollar given to welfare recipients robs them of their independence and self-worth.  In many cases it dooms them to a state of permanent child-like dependence.

Fri, 03/05/2010 - 08:22 | Link to Comment Alexandra Hamilton
Alexandra Hamilton's picture

Every dollar given to welfare recipients robs them of their independence and self-worth.

This is pure propaganda babble. Working for some corporation that is robbing people of their independence, self-worth and their human rights.

Good luck writing 200 applications for jobs that some guy from somewhere does for a fraction of your salary or even for free and lets see where your selfworth is then.


Thu, 03/04/2010 - 23:41 | Link to Comment JohnG
JohnG's picture

That may be so.  What happens when it ends? 

That's when the real "fun" starts.

Thu, 03/04/2010 - 20:57 | Link to Comment Crime of the Century
Crime of the Century's picture

My coworker's son (lives "at home") has now drawn UE for longer than he worked. Ever. That is effective welfare, because in my state the system is so broken people don't look for work until the checks stop.

Wed, 03/17/2010 - 17:13 | Link to Comment Celsius
Celsius's picture

Methinks you haven't seen real poverty. Take a trip to a third world country like Vietnam. People on welfare here live better than the average citizen in the third world.

Thu, 03/04/2010 - 17:03 | Link to Comment Anonymous
Thu, 03/04/2010 - 17:04 | Link to Comment Racer
Racer's picture

S*1t or bust is the new Fed motto

Thu, 03/04/2010 - 17:04 | Link to Comment Anonymous
Thu, 03/04/2010 - 17:05 | Link to Comment Rick64
Rick64's picture

This was after Brooksley Born head of derivitives regulation warned them and they had another charade(senate hearing) where they did nothing again. If any of you think the political machine isn't backing this up no matter what they say then research the story. Actions speak louder than words! Rage against the machine.

Thu, 03/04/2010 - 17:10 | Link to Comment Anonymous
Thu, 03/04/2010 - 17:14 | Link to Comment truont
truont's picture

Jim Rickards is a genius--and nobody listens to him.  Figures.

Fri, 03/05/2010 - 01:46 | Link to Comment Benthamite
Benthamite's picture

I feel the same way.  After I saw him mention this 

"And that is the nature of Goldman. Gather up as many customers as possible, aggregate the available information to achieve a superior market view and then relentlessly extract rents from the marketplace. Better yet, tell yourself you’re smarter than everyone else and you’ve earned the rents from the symbiosis."


I pay close attention to what he has to say.

Thu, 03/04/2010 - 17:24 | Link to Comment bjennings
bjennings's picture

Off topic.  Was wondering if any contributors here noticed the action in TIVO today.  I know you all have reported on this stuff with other stocks but was wondering if trade activity looks a bit suspect here too.  It seems the stock began it's 67% increase 45 minutes before the news actually broke.  Just wondering but don't know where to inquire about this sort of stuff.

Thu, 03/04/2010 - 17:27 | Link to Comment lizzy36
lizzy36's picture

Today was classic, "we have learned nothing and above all we are not responsible". 

Vic Pandit said short sellers were to blame for the banks near collapse in 2008: and

Herb Allison (Assistant Treasury Secretary) said “There is no too big to fail guarantee on the part of the U.S. government" for big financial firms. 

What is it about revisionist history that makes one want to hurl things?

Thu, 03/04/2010 - 17:52 | Link to Comment Anonymous
Thu, 03/04/2010 - 18:06 | Link to Comment deadhead
deadhead's picture

Vic Pandit said short sellers were to blame for the banks near collapse in 2008

Yes, the Dick Fuld school of high finance.

I can't believe Allison said that.   Can someone tell all of these phucks that if they are going to continue to spout bold faced lies to at least get to a couple of training sessions and learn to do it with at least some level of sophistication?

Thu, 03/04/2010 - 17:29 | Link to Comment Anonymous
Thu, 03/04/2010 - 18:45 | Link to Comment Anonymous
Thu, 03/04/2010 - 18:02 | Link to Comment carlo
carlo's picture

The best article I've ever read explaining the game we see playing out in our capital markets. A must read even though it's sort of long.

Fri, 03/05/2010 - 05:32 | Link to Comment Escapeclaws
Escapeclaws's picture

I enjoyed the article, but what he is lambasting he also seems to be promoting. That is, mathematical theories that are not fully understood. It's true that financial derivatives are based ultimately on Black and Scholes which is based on the lognormal distribution of returns, and that this was parlayed into multi-trillions of notional amounts through asset securitization. It really does seem like a fragile house of cards about to come tumbling down. I would have thought the 2008 collapse would have done that, given the fragility of the system. Why this didn't happen needs to be explained from a mathematical point of view if the new mathematical framework cited by Richard is to have any validity, especially before we start using them to predict what will happen next.

In place of using the normal distribution and standard deviation we are now enamored of dynamical systems theory, and his argument for power laws is based on that. A subset of dynamical systems theory is Rene Thom's catastrophy theory, which dovetails nicely with non-linear dynamics. A possible weakness in Richard's discussion was when he was implying that a huge number of inputs or variables necessarily leads to impossible-to-model phenomena. One of the nice things about catastrophe theory is that is shows that any complex system has at most six or seven important state variables that determine the system even if there are hundreds or thousands of inputs. I was surprised that he seemed to be unaware of this groundbreaking result of catastrophe theory.

Last time I checked most of this non-linear dynamics, while fascinating and lots of fun in the mathematical sense, has not seen that many non-trivial concrete applications. There are nice applications that are rigorously developed, such as the capsizing of ships or buckling of beams, but most of the other applications are more touchy-feely than convincing. So I think that Richard, who probably does not actually do mathematics, has been applying the "implications" of non-linear dynamics that have been explained to him. To me, this is not a whole lot different in spirit from what went before with value-at-risk. I would be interested to see if econophysicists have developed and tested rigorous models using these ideas, or whether it's all just anticipation of future research.



Thu, 03/04/2010 - 18:03 | Link to Comment Anonymous
Thu, 03/04/2010 - 18:40 | Link to Comment Anonymous
Thu, 03/04/2010 - 23:43 | Link to Comment Anonymous
Thu, 03/04/2010 - 19:33 | Link to Comment Rick64
Rick64's picture

LTCM had off balance sheet derivitive positions totaling 1.25 Trillion. The financial crisis in both times are due to derivitives no matter what kind of derivitive it is. They had a 1.6B loss in swaps.

Thu, 03/04/2010 - 18:05 | Link to Comment jm
jm's picture

Good article though I have issues with his comments about VaR on pg 4 and 5.  Everybody knows VaR has problems.  He presents power law modelling as an easy solution.  I don't think it is so easy.  The problem is the aggregation of risk across a portfolio of assets. 

I've seen some work on VaR and CVaR with self-similar distributions and even a Pearson Type IV, but the problems make it still a rather theoretical construction.

Anybody done any applications of power law risk measurement?  

Thu, 03/04/2010 - 18:12 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

This guy gets it.  I recommend reading it as well. The truth is not out there, it's hidden away.

Thu, 03/04/2010 - 18:17 | Link to Comment Anonymous
Thu, 03/04/2010 - 21:06 | Link to Comment Crime of the Century
Crime of the Century's picture

+1  Rickards interviews are always "must hear" mp3s

Thu, 03/04/2010 - 18:58 | Link to Comment MarketTruth
MarketTruth's picture

Double Down???

That reminds me of Presidential candidate Fred Thompson's video.

++IMHO well worth watching ZH'ers++

Thu, 03/04/2010 - 22:52 | Link to Comment Hulk
Hulk's picture

Sad. I feel very bad for our children
But its our wives and kids that motivated the hell out of us to build our farm retreat.
Hopefully, that will be enough to get us through.....

Thu, 03/04/2010 - 20:40 | Link to Comment JimboJammer
JimboJammer's picture

Good  job  Tyler ....

This  problem  is  still  with  us  all ,  only  bigger.

Jim  Sinclair  at  >>   has  been  saying

this  also..  they  still  are  not  outlawed .

Thu, 03/04/2010 - 21:57 | Link to Comment ThreeTrees
ThreeTrees's picture

Absolutely love his analysis. His prescriptions not so much as they bleed with the typical regulatory hubris that believes it's somehow possible for men to objectively regulate the selfish interests of other men by drawing on empirical data, the entirety of which is unknowable, better than free market competition.

Either way, gotta read more about power curves. They seem like they make so much sense.

Thu, 03/04/2010 - 23:09 | Link to Comment Johnny Dangereaux
Johnny Dangereaux's picture

 I looked up your old boy. And a good ole boy he is.  He knows of which he speaks. I went to his site. Pretty fancy, if you ask me. Mr R. and his firm are DEFINITELY........."Co-Located"

I love their tag line........

"A strategic partner for applied solutions to the challenges of complexity"


General counsel? Meaning a lawyer? Maybe he taught LTCM how to cook the books? Prolly!


Thu, 03/04/2010 - 23:47 | Link to Comment JohnG
JohnG's picture

Some of us lawyers....aren't so bad???

I do my very best to help people.  Sure I get paid (I do have to eat, a very hard habit to break once you get used to it...)

I can at least keep the banks from forcing my clients to live in tents for the time being.


Thu, 03/04/2010 - 22:31 | Link to Comment Anonymous
Fri, 03/05/2010 - 07:02 | Link to Comment Abraham Snake
Abraham Snake's picture

I really appreciate how this is written with the average person in mind. If anyone asks me why a CDS is bad, or any general question about the financial crisis, I'll direct them to this article.

And since nothing has changed yet, we must assume it's deliberate, and that the great pussy footing will continue, at least until then next hideously traumatic crisis occurs, which is probably soon.

Fri, 03/05/2010 - 13:43 | Link to Comment Anonymous
Sun, 03/07/2010 - 03:20 | Link to Comment Anonymous
Fri, 04/09/2010 - 18:27 | Link to Comment svendthrift
svendthrift's picture

I can't open the PDF. Is there another way for me to access it? I try not to miss JR's commentary.

Fri, 04/16/2010 - 08:57 | Link to Comment mark456
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