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Sunday, April 26, 2009

Rosenfeld: Ten years after LTCM

Eric Rosenfeld brings us back to ten years ago what went wrong at LTCM. Refreshing if you link the collapse of LTCM to the current financial crisis.

A few take-away points:

1. The benefits from diversification based on historical correlations is great only if correlations don't change during sudden move;

2. The collapse of LTCM is not a problem of flight-to-quality, rather, it's the problem of everybody trying to get out of the same trades LTCM had.

3. We need to seriously deal with counterparty risk, and work out a solution. Otherwise, the too-big-to-fail problem will haunt us, always.