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We Study Billionaires - The Investor’s Podcast Network

TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck

Mar 21, 2025
01:20:48

Podcast summary created with Snipd AI

Quick takeaways

  • Overconfidence in financial models, excessive leverage, and narrow spreads led to LTCM's downfall.
  • LTCM's reliance on leverage and outdated market assumptions highlighted the dangers of market predictability.

Deep dives

Rise and Fall of Long-Term Capital Management

Long-Term Capital Management, led by prominent financiers like John Meriwether, initially enjoyed massive success with impressive annual returns over 40%, reaching $100 billion in assets mainly borrowed from banks. Their reliance on leverage and thousands of derivative contracts intertwined them with major financial institutions, posing systemic risks. The 1998 financial crisis revealed the flaws in their assumptions, prompting a collapse averted by the intervention of the Federal Reserve.

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