talk script - As Caitlin mentioned there are various...

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As Caitlin mentioned, there are various explanations that were given for why LTCM collapsed, and I am going to discuss what our group concluded to be the reason for LTCM’s collapse. First, I want to give you a brief background of what LTCM was investing in. They mainly invested in derivatives and bonds. Derivatives are contracts between two investors agreeing to exchange some amount of cash in the future. They can cause huge amounts of money to be paid relative to their price but the derivatives that LTCM was buying were considered low risk. To finance their investments, LTCM leveraged themselves. This means that they borrowed money and invested it. By doing this, they could make more money, repay their loans, and keep the difference. LTCM borrowed money by borrowing US Treasury bonds and selling them to others. They then invested the money that they got from the sale in other investments that could make a high return. Then, once they made money off of their borrowed capital, they would buy back the US Treasury bonds at only a slightly higher price then they had sold them for. LTCM also often bought bonds that were issued by businesses that offered higher returns than US Treasury bonds. Finally, they had very few investments in stocks, contrary to popular belief. Now that I’ve explained to you what LTCM was investing in, I’d like to address three commonly offered
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This note was uploaded on 04/06/2008 for the course ENGRC 3350 taught by Professor Ahlers during the Fall '07 term at Cornell.

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talk script - As Caitlin mentioned there are various...

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