This is an amazing post-mortem by Dr. Rosenfeld. 1:21:22: "Could this happen again?" "I think we were a different beast than a lot of hedge-funds. We were more like a little Lehman Brothers, an intermediary" You can't make this up
Classic problem of rising correlation when a crisis occurs. All of the benefits from diversification will be gone, or at least reduced to much lower percentage when seemingly uncorrelated assets become correlated. Thank you very much for uploading this video (and others). It is always nice to hear about the event directly from the people involved. I also like the fact that you use Chopin op 9 no 2 as the sound track. Please keep uploading.
Spot on! Maybe finding a way to estimate the likelihood of a given correlation rising would be interesting - tough to estimate I presume, but, if done correctly, could be really insightful when estimating your risk.
I have found my first convergence and it is a big one. A 2024 bond yielding 7,45% and the 2025 bond at 10,39% with a gap that was a lot larger one month ago when the company had the bond market worried. Intrum, euro-bonds XS...168 vs XS...017 Thank you math wizards, now I can blow up too!
@sir_vival3087 well they had to renegotiate the terms with the bonds owners and are now in chapter 11. All maturities will be shifted forward so one can say the trade would have gone LTCM. In between the bonds were trading at 64% yields.
Thank you very much for the upload, it was a very interesting. The only downside were the very simplistic questions which i feel he had already answered during the presentation.
If spread stays the same, a single percentage point amounts to different amount of dollars because the price of bonds that are long is different than price of bonds that are short.
This is what happens when you borrow beyond your means. That is pretty much it. Quantitative modeling is cool and all until it stops working and it's over. Human Nature, always was and they never account for it.
Thumps up. He was remarkably honest in his presentation. As far as I know, LTCM was over reliant on their mathematical model, human intuition or gute feelings was not really considered. Sadly they were destroyed by a perfect storm of global disasters made worse by an incomplete risk management.
Read "when genius failed". A huge part of their problem was a) leverage and b) the fact that a perfect storm happens much more often in the stock market than they expected. The FED btw didn't play a bad role. They tried to save the situation without risking public money and they still got a bad press out of it.
Damn that kinda sucks they were actually right😂, they just were a bit too levered and no one had any sort of risk appetite to keep lending them funds to keep the trade on.
I don't understand the spread between the 29 and 30 year bonds. Why would anyone buy a 30 year bond at a premium to the 29 year maturity? Wouldn't the preference for a slightly higher yield lower demand for the lower yield, and thus mostly eliminate the spread?
there is generally a preference for on the run bonds when people are looking to buy bonds because they are more liquid than off the run, this means more demand, which brings down the yield
Could someone please explain in a different way, how LTCM was able to structure the trade without using capital? The repo and the reverse repo transactions? Balance sheet moves? This was too "in the know" for me.
Let me try 1 They bought 29y bills with cash. 2 put 29y bills as collateral and get 30y bills from a bank. 3. Sell (short sell) 30y bills in the market. 4. You get cash back to by selling 30y bills. So no money out of pocket. Yes you need cash for sort period of time until you get back by short selling.
@@IvanVesely920 negative carry or financing cost was about 10bp a year which is fine because if the securities converge they make 1.5% in 6 months that was from his book
Watching this in 2022 completely reinforces that you must be certifiably insane to have all your capital within the banking system. $2 Trillion per night is now being injected into the overnight repo. We are dead financially, it is gone folks.
I think they had good strategies, but they looked at it only through a scientific lens. They thought it would always work in any market and any situation. The lesson I think learned is to understand the market is always changing, and it will never be a science.
@@twohitsandjointturnedbrown5404 Good strategies but with huge leverage and without understanding liquidity risk and game theory. The VaR was not correctly calculated; daily VaR for their portfolio was no sense.
Kids! They don't know history. Lotus 1-2-3 was not the first commercially available spreadsheet. It was Visicalc. Not sure how people can get up and give a speech in front of a big room of people and not get their facts straight.
"Something weird has to happen between year 29 and 30. I guess it will have to be a 0 rate for this to mathematically make sens" ---> yep. rates can go to 0 and can even go negative. Welcome to the real world.
The man is a jerk, confuses modified duration and PV01, says VaR is Value Added Risk!...and apparently has learnt nothing from his mistakes. After 20 years, he still believes he was right against the market and the rest of the world. What can you expect from anyone who wears a salmon (brothers?) tie!
The guy is head of risk management at Salomon: they rig auctions and close down, then partner at LTCM: they blow up and could have brought down a decent piece of global finance, then partner of JWM: the performance tanks and they close down, then of Quantitative Alternatives which has to close down. With such a track record, if he dares to give presentations on risk management, you would expect him to be apologetic but he somehow manages to portrait himself as a victim. On top of which his argumentation is half baked at best. Genrating an alpha through arbitrage should not make sense to everyone or else the market anomaly should not exist. It is necessary to understand why anyone in his right mind could take the other side of the trade to understand the nature of your position. Almost all LTCM "arbitrage" were liquidity trades which as everyone know becomes very valuable in times of crisis. Yet he still seems flabbergasted twenty years later that the correlation of his "arbitrages" was so high. This intuitively makes sense.
that dv01 not pv01, and it measures approximate price change per 1% change in rates, so he is right. he misspoke on var. they were right on the market, it did converge. so easy to be right in retrospect, but what have you done with your life?
Is he for real? Good citizens. They nearly brought the market to a standstill and he think he is a good citizen? Where is the responsibility? I do like how the talk is so close to the financial crisis and how they were a little Lehman. Yes, you were.
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This is an amazing post-mortem by Dr. Rosenfeld.
1:21:22: "Could this happen again?"
"I think we were a different beast than a lot of hedge-funds. We were more like a little Lehman Brothers, an intermediary"
You can't make this up
Ouch. If only the people in that classroom knew what the following year would entail.
Clearest explanation ever(!) provided for RTM: repo to maturity. He really knows his stuff.
Classic problem of rising correlation when a crisis occurs. All of the benefits from diversification will be gone, or at least reduced to much lower percentage when seemingly uncorrelated assets become correlated.
Thank you very much for uploading this video (and others). It is always nice to hear about the event directly from the people involved. I also like the fact that you use Chopin op 9 no 2 as the sound track. Please keep uploading.
Spot on! Maybe find a way to estimate the likelihood of a given correlation rizing - tough to model but if done correctly could be really interesting
Spot on! Maybe finding a way to estimate the likelihood of a given correlation rising would be interesting - tough to estimate I presume, but, if done correctly, could be really insightful when estimating your risk.
"do i think it can happen to someone like a lehman? yeah" -eric in 2007
eerie
I have found my first convergence and it is a big one. A 2024 bond yielding 7,45% and the 2025 bond at 10,39% with a gap that was a lot larger one month ago when the company had the bond market worried.
Intrum, euro-bonds XS...168 vs XS...017
Thank you math wizards, now I can blow up too!
how did it go? 👀
@sir_vival3087 well they had to renegotiate the terms with the bonds owners and are now in chapter 11. All maturities will be shifted forward so one can say the trade would have gone LTCM.
In between the bonds were trading at 64% yields.
@@erbterb damn, unfortunate
next one is gonna be better
Fantastic discussion and explanation of the LTCM crisis. Refreshing to hear someone be so honest and clear.
Buffet had a time factor written into his offer. That way LTCM did not have time to try to make counter deals. That is why the deal fell thru.
This is a Document. Save it. Thanks for sharing.
Thank you very much for the upload, it was a very interesting. The only downside were the very simplistic questions which i feel he had already answered during the presentation.
If spread stays the same, a single percentage point amounts to different amount of dollars because the price of bonds that are long is different than price of bonds that are short.
1:21:20 oh booy this is from april 2007 lol
Hate that the videographer decided not to pan back to see all the slides. SMH
“It wasnt me it was the other guys” 😂….that’s hilarious
This is what happens when you borrow beyond your means. That is pretty much it. Quantitative modeling is cool and all until it stops working and it's over. Human Nature, always was and they never account for it.
Thumps up. He was remarkably honest in his presentation.
As far as I know, LTCM was over reliant on their mathematical model, human intuition or gute feelings was not really considered.
Sadly they were destroyed by a perfect storm of global disasters made worse by an incomplete risk management.
Read "when genius failed". A huge part of their problem was a) leverage and b) the fact that a perfect storm happens much more often in the stock market than they expected.
The FED btw didn't play a bad role. They tried to save the situation without risking public money and they still got a bad press out of it.
Damn that kinda sucks they were actually right😂, they just were a bit too levered and no one had any sort of risk appetite to keep lending them funds to keep the trade on.
I don't understand the spread between the 29 and 30 year bonds. Why would anyone buy a 30 year bond at a premium to the 29 year maturity? Wouldn't the preference for a slightly higher yield lower demand for the lower yield, and thus mostly eliminate the spread?
more liquid
there is generally a preference for on the run bonds when people are looking to buy bonds because they are more liquid than off the run, this means more demand, which brings down the yield
Could someone please explain in a different way, how LTCM was able to structure the trade without using capital? The repo and the reverse repo transactions? Balance sheet moves? This was too "in the know" for me.
Let me try
1 They bought 29y bills with cash.
2 put 29y bills as collateral and get 30y bills from a bank.
3. Sell (short sell) 30y bills in the market.
4. You get cash back to by selling 30y bills.
So no money out of pocket. Yes you need cash for sort period of time until you get back by short selling.
@@Ronak.Purohit ok, thank you.
Wouldn't that leave you in negative carry from the short 30y?
I guess you can buy another trasury with the cash...
What do you mean by negative carry? I assumed they start with 1mil cash and buy 1mil 29y bills bank exchange 1mil 30y bills and you sell at 1mil.
@@Ronak.Purohit But the initial repo-ed treasury provides no yield. And a position in a UST sold short has negative yield (carry). No?
@@IvanVesely920 negative carry or financing cost was about 10bp a year which is fine because if the securities converge they make 1.5% in 6 months that was from his book
Anyone read the book the guy keeps advertising, and know if its better than Lowenstein's?
so these guys have separate rules compared to others? they played separate rules
James Simons said this is why I hire mathematicians, not economists.
Lol!
«Aaaaaaand it’s gone»
When was this? 2007?
16:00
Could this happen again? Ask Meriweather and look at hus post-LTCI track record…
Watching this in 2022 completely reinforces that you must be certifiably insane to have all your capital within the banking system. $2 Trillion per night is now being injected into the overnight repo. We are dead financially, it is gone folks.
still going strong!
LTCM went burst after only 5 years and that guy still think their strategy were good....
youre just being racist
I think they had good strategies, but they looked at it only through a scientific lens. They thought it would always work in any market and any situation. The lesson I think learned is to understand the market is always changing, and it will never be a science.
@@twohitsandjointturnedbrown5404 Good strategies but with huge leverage and without understanding liquidity risk and game theory. The VaR was not correctly calculated; daily VaR for their portfolio was no sense.
More like STCM (Short Term Capital Management)
During the end, they deviated from their own strategy, by lot.
Physical gold and silver
Kids! They don't know history. Lotus 1-2-3 was not the first commercially available spreadsheet. It was Visicalc. Not sure how people can get up and give a speech in front of a big room of people and not get their facts straight.
I dont think most people ever heard of Visicalc.
History is written by the victors hun. Visicalc wasnt the victor, therefore they vanish from spreadsheet software history
"Something weird has to happen between year 29 and 30. I guess it will have to be a 0 rate for this to mathematically make sens" ---> yep. rates can go to 0 and can even go negative. Welcome to the real world.
The man is a jerk, confuses modified duration and PV01, says VaR is Value Added Risk!...and apparently has learnt nothing from his mistakes. After 20 years, he still believes he was right against the market and the rest of the world. What can you expect from anyone who wears a salmon (brothers?) tie!
why are u so rude? He said value At Risk, you probably heard him wrong. And you know, the strategy does intuitively make sense.
The guy is head of risk management at Salomon: they rig auctions and close down, then partner at LTCM: they blow up and could have brought down a decent piece of global finance, then partner of JWM: the performance tanks and they close down, then of Quantitative Alternatives which has to close down. With such a track record, if he dares to give presentations on risk management, you would expect him to be apologetic but he somehow manages to portrait himself as a victim. On top of which his argumentation is half baked at best. Genrating an alpha through arbitrage should not make sense to everyone or else the market anomaly should not exist. It is necessary to understand why anyone in his right mind could take the other side of the trade to understand the nature of your position. Almost all LTCM "arbitrage" were liquidity trades which as everyone know becomes very valuable in times of crisis. Yet he still seems flabbergasted twenty years later that the correlation of his "arbitrages" was so high. This intuitively makes sense.
that dv01 not pv01, and it measures approximate price change per 1% change in rates, so he is right. he misspoke on var. they were right on the market, it did converge. so easy to be right in retrospect, but what have you done with your life?
I know him in person and can tell you he is an incredibly kind and generous man.
@@lucasbrien5008 Kind has nothing to do with hubris
Is he for real? Good citizens. They nearly brought the market to a standstill and he think he is a good citizen? Where is the responsibility? I do like how the talk is so close to the financial crisis and how they were a little Lehman. Yes, you were.
racist as fuck
Absolutely, dude is a hero.
Watching this in 2022 is making me physically ill.
All that shit just to say that their investments were correlated.
the started music is like someone died :)