CASE STUDY 2.

1:
LONG TERM
CAPITAL
MANAGEMENT
(LTCM)
Group Members:
Zunaira Zaka
Farrukh Jamil
Zubair Bhatti
Ahsan Mahmood
Mahnoor Munir
 Introduction
LTCM was a hedge fund founded in 1994 by John Meriwether and had
board members Myron Scholes and Robert Merton who shared Nobel
Prize in economics.
The company arbitraged deals in American, Japanese and European
government bonds.
The fund generated heavy investment and was highly successful.
In 1998, when Russian government defaulted on its bonds, LTCM lost US
$2 billion of its capital.
To save the business from collapse, Federal Reserve Bank organized
financial assistance of over $US 3.5 billion by major creditor institutions.
LTCM was wound up in 2000.
Q. Should the Federal Reserve Bank have arranged a
bailout of LTCM?
Fed is the central bank of US and the most powerful financial institution in the
world.
Federal Reserve Board has regulatory and supervisory responsibilities over
banks that comprise monitoring foreign activities of member banks.
The bailout decision was right as Feds job is to foster a sound banking system
and a healthy economy.
The collapse of LTCM could have grave consequences as it used heavy
investment from many financial institutions and arbitraged deals on a large
scale.
Chase Manhattan Bank, the nation's largest bank at that time, disclosed that
roughly $3.2 billion of its total loan portfolio was exposed to hedge funds.
Fed chiefs arguments in favor of bailout
In the financial world, the best known board of governors is that of Fed.
Federal Reserve Chairman Alan Greenspan defended the bailout saying that
the failure of hedge fund could have hurt many economies including the US.
Unpredictable market conditions called for a speedy solution to LTCM
problems.
LTCM was financially assisted but federal reserve funds were not used and
individual firms were not pressurized.
Hedge funds, investment pools are unregulated. Their financial influence is
massive so they should be indirectly regulated through regulation of their
sources of funds.
Compare & contrast the case of Northern Bank
UK (Case Study 8.1)

In LTCM all experts in investing in derivatives to make above-average

returns and outperform the market.
They begin to undertake trading decisions beyond its experience
including option & merger arbitrage.
LTCM's investment strategies were based upon hedging against a
predictable range of volatility in foreign currencies and bonds.
Federal Reserve Intervene
Compare & contrast the case of Northern Bank
UK (Case Study 8.1)

In 2008 the Northern Rock bank was nationalized by the British Labor
Government, due to financial problems caused by the subprime
mortgage crisis. Key Players responsible for crisis are.
Executive Directors & Non-Executive Directors
External and Internal auditors and lawyers
Financial analysts,
credit rating agencies
Financial Services Authority (FSA)
Bank of England, Politicians and government
Reference
https://www.thebalance.com/long-term-capital-crisis-3306240
(The Balance)
http://www.investopedia.com/university/thefed/fed2.asp (Investopedia)
http://money.cnn.com/1998/10/01/economy/greenspan/ (CNN Money)