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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 Glass-Steagall was repealed in 1999, so that banks could become hedge funds.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.

 

[elided]

 

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Thu, 03/04/2010 - 16:56 | 254029 No More Bubbles
No More Bubbles's picture

Yep, and this time they are going ALL IN.

Thu, 03/04/2010 - 17:13 | 254068 bugs_
bugs_'s picture

they threw us ALL IN

Thu, 03/04/2010 - 17:31 | 254099 Anonymous
Anonymous's picture

not only is their insider collusion going on but institutional corporate fraud. the stock brokers and many of the 800,000 plus people in the retirement fund advisement busines simply cannot face the music if you will. they simply cannot see the proverbial writing on the wall. it is over. face it. it is over. it is not the 80's or the 90's. but they will ride this ship down, because at this point, what choices do they have? the problem is, it is always easy to make bets with other people's money. you know for a long time, it worked good but no more. i was talking to a lady the other day and she was telling me about her 401k. i told her. 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 simply do not trust the government and never have and never will. when i woke up from my slumbers in 2004, i was already 80 percent gone anyway. all i needed was a few pieces to the puzzle. after that, it was all downhill from there. now ,as we watch this episode unfold, sometimes it is easy to make the mistake that this nation as we have known it all of our lives ,will somehow last and continue, as during all of our lives, it has. but i must say. i cannot agree with that scenerio. it is time to guard your wealth by any means necessary before they finish the task that they have started and that is to steal every dollar they can from the baby boomers and anyone else who has money.

Thu, 03/04/2010 - 18:04 | 254159 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 | 254218 Anonymous
Anonymous's picture

you know deadhead. it is easy to go with the flow. to pretend that everything will be alright. it is difficult to stand up and say no.....no that is not so. no. i tell people that the ship is sinking. they laugh at me and call me crazy. i tell them that there is a storm coming. they laugh and make faces at me and question my sanity. many of these same people have large retirement funds that they allow others to watch for them. i tell them not to do this. do not under any circumstances allow someone else to be responsible for your money. there was a time, that this automatically worked. i mean come on now. how could any fool mess something up, when investments increased in value on their own without much input from these "advisors"? let us not forget. how many times have we read time and time again, that the old ways of doing things, are over. buy and hold is dead. long term planning is dead. in order to survive you have to be a trader and a lucky one at that or a insider, to be able to survive in these markets. heck just the other day someone wrote a blog on here about how they could not figure out why these markets did what they did? the mass manipulation is there for us all to see. but when i bring this up to my older friends, they laugh and tell me they don't want to hear it and don't want to talk about it, and for me to quit reading stuff like i read here on zerohedge. they act like i am the enemy for daring to tell them the real truth. they act like i am the one to blame for daring to wake them up from their slumbers. they act like it is none of my business trying to tell them that things are bad and you must, you must protect yourself. they simply do not want to hear it. they wear their chains proudly and without the least complaint. so when the shit hits the fan, and those who must will hit the streets and do what is necessary, where will these naysayers and lovers of lies be? no where to be found. they will look at me with consternation and smoldering respect, knowing full well, that all i have told them in the past was true. my grandfathers slept while my nation was stolen. my fathers slept while my nation was stolen. the baby boomer generation has slept while the nation is stolen. i used to tell my dad. why do you allow these things to happen. he did not answer. i fear that the young will ask me one day. why did you allow these things to happen and you did nothing? as each succeeding generation has been born, lived and died, each time they pass along the sins of that generation to the next. but this time, we are truely as the saying goes, in unchartered territory. frankly i don't want to pass this thing along to the next generation. i want to stand and stop it. there are perhaps 3 percent who will agree with this. i am happy and proud to be a 3 percenter. we must stop this and now. or else we will lose this nation. that is my opinion and that is my view from flyover country sitting high in the cheap seats. the question then is this. can history in this example, repeat itself? i am afraid not. this is the end of the line. if we do nothing, there will be no more history. they say that history is written hy the victor. therefore i question this history that has been taught to me in the government schools. i question everything they have told me. i question it all. nathanel kapner said the other day on a podcast i listened to, that the american people are easy marks. just put a 6 pack of beer on the coffee table, turn on the boob toob and let them watch football and the tits on the cheerleaders move as they jump around and these fools are happy. as george carlin said one time not long before he died. its the american dream, but you have to be asleep to enjoy it. the founding fathers would be sick if they saw this crap. not one bastard has taken a perp walk on this financial calamity except the old man maddoff and he was the convenient fall guy for them i guess. so many thieves and so little justice. it all makes me sick to my stomach.

Thu, 03/04/2010 - 21:46 | 254400 Anonymous
Anonymous's picture

The Fed and the government have done a great job of convincing everyone that this will be a typical V shaped recovery and better times are right around the corner. I get the same response from friends and family. They just want to believe.

The whole thing reminds me of a description of what happened on the Fitzgerald. With the crew unaware that the ship was taking on water they watched the bow plunge into the waves each time expecting it to reappear until it didn't and the ship suddenly sunk.

Thu, 03/04/2010 - 22:27 | 254436 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 | 294128 Broker NotBroke
Broker NotBroke's picture

+3%

 

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.

http://bit.ly/e7FSU

Thu, 03/04/2010 - 18:50 | 254213 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 | 254030 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 | 254057 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 | 254071 lizzy36
lizzy36's picture

yep.

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 | 254128 JJP
JJP's picture

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

Thu, 03/04/2010 - 18:03 | 254156 Anonymous
Anonymous's picture

There is no other side. Matter is so dense, aw, hell, never mind.

Wed, 03/17/2010 - 17:08 | 268633 Celsius
Celsius's picture

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

Fri, 03/05/2010 - 08:16 | 254638 Alexandra Hamilton
Alexandra Hamilton's picture

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

http://en.wikipedia.org/wiki/Neutron_star

 

Thu, 03/04/2010 - 17:01 | 254041 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 | 254185 Anonymous
Anonymous's picture

What planet do you live on? Methinks you haven't been poor in a very long time, if ever. There is no welfare state in this country, except for politically connected corporations and parasitic public-worker unions.

Thu, 03/04/2010 - 19:07 | 254216 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 | 254253 Anonymous
Anonymous's picture

Every dollar 'given' to welfare recipients makes it less likely that they'll commit acts of violence against you, saving money on police/prisons/etc. If $1 in welfare saves $5 in criminal justice costs, is that a bargain?

Thu, 03/04/2010 - 23:34 | 254488 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 | 254640 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 | 254496 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 | 254363 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 | 268645 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 | 254043 Anonymous
Anonymous's picture

If she calls LTCM catastrophe then what will she call what looms ahead in the next 10 years starting with tomorrow's BLS (BS) report ? Check dailyjobcuts.com to find the mayhem happening around you !!

Thu, 03/04/2010 - 17:04 | 254049 Racer
Racer's picture

S*1t or bust is the new Fed motto

Thu, 03/04/2010 - 17:04 | 254050 Anonymous
Anonymous's picture

The banks just turned down a clearinghouse, time for one to be imposed.

Thu, 03/04/2010 - 17:05 | 254051 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 | 254063 Anonymous
Anonymous's picture

That's a great drawing of Rickards.

Thu, 03/04/2010 - 17:14 | 254070 truont
truont's picture

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

Fri, 03/05/2010 - 01:46 | 254556 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 | 254090 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 | 254093 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 | 254138 Anonymous
Anonymous's picture

Sorry, Lissy, but I don't get it. You obviously work in the financial industry, right? Yet your views seem to be the opposite of what I'd have guessed would come from a "market pro".

Could you please explain? Are most pros against this crap as well,or are you an anomaly?

The mood outside the financial industry is obvious, but I'm having trouble reading the general mood inside the industry.

Thu, 03/04/2010 - 18:06 | 254162 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 | 254097 Anonymous
Anonymous's picture

If thus is a prelude, the final symphony, it will be the end of soveignty and the beginning of The New World Order. The US has been a Masonic experiment that has lasted 600 years. It has not failed no matter the outcome. Liberal, Christian based modern society has been the successful result. The US may die, but the ideas of wage slaves, indebted generations has firmly been planted. Hate the Fed, but do you think it is US based? I do not...beware the future.

Thu, 03/04/2010 - 18:45 | 254208 Anonymous
Anonymous's picture

+100

We all sit here railing against our overlords for how stupid they are. The decisions they make are obviously going to end in ruin yet they make them anyway. They aren't stupid. They know exactly what they are doing.

Thu, 03/04/2010 - 18:02 | 254154 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 | 254603 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 | 254158 Anonymous
Anonymous's picture

Im sorry but this is dead wrong.

After LTCM... regulators focused on trading, counterparty leverage and collateral, etc. I worked at a major Ibank and occassionally worked with the SEC and Fed regulators.

This crisis of 2008 ALL stemmed from MORTGAGES and HOUSING. Which had no similarity to LTCM so regulators just ignored, thought it wouldnt happen. The next crisis will also -- BE DIFFERENT. ZH seems oblivious to that. Why?

-BBH

Thu, 03/04/2010 - 18:40 | 254204 Anonymous
Anonymous's picture

Unless I'm very mistaken this crisis has a lot to do with trading, counterparty leverage, collateral, OTC derivatives, mostly relating to MORTGAGES and HOUSING.

Thu, 03/04/2010 - 23:43 | 254498 Anonymous
Anonymous's picture

Nah.

What do "housing bubble"?

And "people not paying mortgages" have to do with derivatives, counterparty lev, prop trading, and OTC derivatives? ANS - Nothing.

Dont complicate a very very simple problem - 10% down on real estate speculation.

Thu, 03/04/2010 - 19:33 | 254274 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 | 254160 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 | 254171 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 | 254180 Anonymous
Anonymous's picture

Check out the two 45 min interviews with Rickards on www.kingworldnews.com (no affiliation). An annoying moderator but absolulely MUST-LISTEN-TO stuff...he also has very insightful things to say about the various Fed conspiracy theories and gold shortage theories floating around

Thu, 03/04/2010 - 21:06 | 254368 Crime of the Century
Crime of the Century's picture

+1  Rickards interviews are always "must hear" mp3s

Thu, 03/04/2010 - 18:58 | 254225 MarketTruth
MarketTruth's picture

Double Down???

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

++MUST SEE++
www.youtube.com/watch?v=RKc4XFK0iVY
++IMHO well worth watching ZH'ers++

Thu, 03/04/2010 - 22:52 | 254465 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 | 254346 JimboJammer
JimboJammer's picture

Good  job  Tyler ....

This  problem  is  still  with  us  all ,  only  bigger.

Jim  Sinclair  at  >>  jsmineset.com   has  been  saying

this  also..  they  still  are  not  outlawed .

Thu, 03/04/2010 - 21:57 | 254410 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 | 254425 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" 

 

http://www.omnisinc.com/

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 | 254500 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 | 254440 Anonymous
Anonymous's picture

Whats the big deal ??????? Dick Cheney said the iraqnam war would pay for itself !!!!!!!!!!!!!! iraqnam will pay the usa back the 708 billion any day now !!!!!!!!!!!!!!!!!!!!!!!

Fri, 03/05/2010 - 07:02 | 254622 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 | 255023 Anonymous
Anonymous's picture

After extensive accounting of where taxpayer funds are allocated, the Grace Commission came to a startling conclusion:

“100% of what is collected is absorbed solely by interest on the Federal Debt … all individual income tax revenues are gone before one nickel is spent on the services taxpayers expect from government.”

-Grace Commission report submitted to President Ronald Reagan - January 15, 1984

http://neithercorp.us/npress/?p=259

Sun, 03/07/2010 - 03:20 | 256726 Anonymous
Anonymous's picture

Interesting article but I have to say that all the things about Gaussian law and power law are just bullshit. Any serious risk manager knows this kind of stuff. Using models don't mean that you don't need to use your brain anymore ! A model is always too much simple. Black Scholes formula is a very powerful formula if you know how to use it and of course you have to know the assumption behind it AND this is not because assumptions are wrong that you can't use it ! You just need to be cautious about how you use this formula.

I would say that I agree with the rest of the article. But as I was disappointed about how he treats something that I am very comfortable with, I am skeptical when he refers to something I am not. Is he really reliable and pertinent ?

Fri, 04/09/2010 - 18:27 | 293787 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 | 303696 mark456
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