The Wall Street Psychologist’s Gyroscope encourages periodic self-examination that includes a refresh on key concepts, such as fiduciary responsibility. It also requires an intimate understanding and application of virtue. Once you have performed these exercises, it becomes possible to avoid the pitfalls that dragged the principals of LTCM to their knees.
Lacking such internal mechanisms, highly intelligent people seek justifications elsewhere. Warren Buffet had offered to buy LTCM for $250 million, but they couldn’t contact him as Buffet was out of town, and on a new satellite link phone.
In reality, Roger Lowenstein in “When Genius Failed” talks about the fact that Buffet wanted to buy LTCM, but after meeting with the principals, he backed off the deal. Goldman Sachs, AIG, and Berkshire Hathaway offered to buy out the fund’s partners for $250 million, to inject $3.75 billion and to operate LTCM within Goldman’s own trading division. On September 23, 1998, the offer was rejected and that same day the Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets.
Many viewed the bailout of LTCM as a bailout for the rich, a precursor to this “Too Big to Fail” concept we are now all painfully familiar with; shades of AIG, Bank of America, and Citigroup.
Every LTCM move was calculated, every angle considered, every hedge contemplated, and they became expert at manipulating their lenders and credit sources.