describe the journey of Long Term Capital Management (LTCM) from its inception to the ultimate end

MBA672N700 Spring 2016

When Genius Failed Assignment


In a seven to ten page essay (at least 7 pages but no more than 10 pages excluding transmittal page, title page, references, notes, bibliography), and beginning with the standard Transmittal page on page two of this this assignment, describe the journey of Long Term Capital Management (LTCM) from its inception to the ultimate end, the lessons that should be learned from this and apply those lessons to current day finance.  Use the outline/questions/statements below to guide you.  The form of the essay should not be “question and answer” format, but a prose report on what happened at LTCM, why it happened and its effects, or lack of effect, on the financial markets then and now and your opinion on these events.  I will be looking for you to address the information from the guidance below, but you may include additional points.  The report should be submitted as a Word document, double spaced, 12 point, Arial font with one inch margins. All footnotes, references and bibliography shall be on separate pages at the end of the report.  You must use at least one source outside of this course remember Wikipedia is NOT considered a valid source at Marist.  Be sure to reference pages from “When Genius Failed” or the textbook, if used.  Proofread the papers do not rely on autocorrect.

Grading will be based upon how well you present and support your discussion in a clear and concise manner.  I expect to see a solid, intelligent essay with smooth transitions from one point to the next.

Include information on the following:

Describe in detail what LTCMs initial investment strategy was and how they expected to profit from it.  Be specific.

Describe financial leverage and give a concrete example of how leverage was used to magnify profits at LTCM.  You do not need to use derivative examples, but may make up your own numbers using simple example(s).  Be specific.  Show calculation of return rates, etc.  Explain why LTCM was so heavily leveraged.

Was the initial investment strategy followed toward the end?  If not, why did LTCM change?

Why did LTCM fail?  The trades that lost money were only the immediate cause.  There were a number of possible structural reasons.  List as many as you can think of, describe each one in detail and explain how that factor could have contributed to LTCMs downfall in laymans terms.

What are the lessons to be learned from this failure and have they been learned?  Compare and contrast the risk profile of LTCM and the recent mortgage securities crisis.  How are they similar and/or different?

Why did the Federal Reserve encourage the bailout of LTCM?  Does his activity by the Federal Reserve fall under their six monetary policy basic goals?  If so, which one(s)?

In general, do you think the government should “bail out” private industry? (LTCM was a private fund). Include in your discussion the concept of “moral hazard”.  Discuss whether or not LTCM, specifically, should have been bailed out.

Should the LTCM partners have been sanctioned from any governmental body (lose their professional licenses, prohibitions on working in the investment industry, etc.)?  Why or why not.

Discuss, in light of LTCM, whether you think more regulation is needed for hedge funds.  What are the points for and against increased regulation and then discuss your opinion.

What changes did Meriwether propose for his new fund JWM Partners?  What ultimately happened to JWM partners?

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