Long Term Capital Management were the "go to" guys in the 90's for institutional money. They kind of came from nowhere, had a couple Nobel Laureates among their group and they were printing money for their investors. They created some models that, in their mind, effectively priced risk - and then they began buying and selling risk in dozens on different markets with the goal being great returns with virtually zero risk. The buys/sells were paired up in such a way that they made money on the "spread" no matter what happened.

The issue for LTCM was that there were violating one of the immutable laws of finance - you don't get something for nothing (more formally said, risk and return are correlated). What they really had was a model with a blind spot. Instead of return with no risk, they got return for risk they couldn't see. It's like the commercials you see/hear around that promise market returns with no risk - the true statement is market returns for risk you don't understand.

When Russia collapsed in the last 90s, LTCM got a first hand training block in correlation risk - the risk that things you expected to move opposite each other to mitigate market risk suddenly start moving in the same direction. In the course of 4 trading days - these guys lost about 2.5 billion dollars. The reason was that in a crisis - all risk assets correlate...that means there wasn't anything moving in "the other direction" to mitigate their losses on their Russia positions.

2.5 billion might not sound like much today but in those days, it was big money. The Fed called a meeting of all the big investment banks that were on the other side of the trades gone bad. The Fed told them they were all going to take a haircut in an organized way to avoid this thing spinning out of control. Goldman, Bear Sterns, Lehman...all the usual suspects. They ponied up - all except Bear Sterns. 10 year later it was said that Hank Paulson (CEO of Goldman during the LTCM debacle and Treasury Secretary in 2008) repaid Bear Sterns by letting them go under.

Fast forward to today - PIMCO Total Return is one of, if not the largest bond funds out there. Just about anyone who has a company 401k probably owns some Total Return. For 401k managers, it's long been consider the safest of the safe investments. To steal a phrase - nobody every got fired for buying Total Return. IIRC Total Return has some something like 2 TRILLION under management and their strategy is a modification of the LTCM strategy - they have both long and short positions that technical should move in different directions.

I'm not a big fan of PIMCO (often referred to as PimpCo) but, IMHO, it's not a good sign to see them infected with the Russia bug right now. For LTCM management the people effected with the counterparty banks - the guys on the other side of the trades. For PIMCO, the people effected are us - the guys who have scrimped and saved to have some kind of retirement account.

Hopefully, someone finds a way to gracefully land this financial airplane we're all riding in somewhere on flat ground cuz the status quo seems to be running out of fuel.

It was invented by Swedish banksters in the 60s so they could legitimize the reactionary economic ideologies of people like Fred Hayek and Milton Friedman as a way of attacking Swedish social democracy.

(heading to Wikipedia)

Nobel Memorial Prize in Economic Sciences

So it's sort of like a Nobel Prize in some ways, but it isn't one really?

Disclosure: I bought into an index fund after the -LTCM debacle-induced price decline. It was one of the rare instances in which I was able to time things just right. I did not replicate that "wisdom" {read: luck} during the dot com debacle.

I'm going to link to some PBS websites about LTCM:

The Crash - Unraveling the 1998 Global Financial Crisis

Trillion Dollar Bet

Welcome to the companion Web site to "Trillion Dollar Bet," originally broadcast on February 8, 2000. The film tells the fascinating story of the invention of the Black-Scholes Formula, a mathematical Holy Grail that forever altered the world of finance and earned its creators the 1997 Nobel Prize in Economics. Here's what you'll find online:
{snip}

It was done intentionally to fool people.

You are correct that this is not one of the original 1901 categories and was created by the Nobel Foundation upon receipt of a large donation/endowment from a Swiss Bank. While often referred to as the Nobel Prize in Economics, it's technically the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. It's granting is overseen by the Nobel Foundation as "one of it's own" using the same standards of impact as for chemistry, physics, or physiology/medicine.

en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Sciences (for anyone interested in the details).

I would, however, argue that over the past 45 years, the breadth of contributions recognized by the Economic Sciences committee has broadened beyond Hayek and Friedman. Many of the awards are much more technical in nature, dealing with understanding the structure of capital markets (Modigliani or Fama for example) with limited commentary on or implication for society. A lot of them (Sharpe for example) are really just high powered math applied to money/markets. The prize winners at LTCM (I think it was Merton and Scholes) got it for developing a method to price risk...and it worked great until real life got in the way. And my fav, Paul Krugman, certainly can't be lumped in with Friedman just because he's got a gold disk.

The reason I called it a Nobel Prize is that, for whatever the reason in 1969, the Nobel Foundation adopted Economic Sciences as one of it's own. 45 years later, I think it still recognizes "pretty damn good work" in the field. And besides, it's a lot easier that being a Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel Laureate.

So, I get your point and it's technically accurate but I think we've reached the days where the distinction is a nuance of perfection rather than a meaningful differentiation in communication.

As a fun aside, I worked with a guy who had dinner a couple years ago with Harry Markowitz - a guy who shared the 1990 prize for his theory on efficient portfolio construction that is at the heart of many asset management programs. His current attitude about the efficient frontier (his language for getting the right balance of risk vs. return) is "yeah - it was interesting for a while but I don't subscribe to it any more." Gotta love a guy who's not even practicing what he's known for.

William H. Gross Stamp Gallery



Dear Santa: I have finally figured out what I want.

You know what a "bullish ruble option contract" is? It is a stupid bet made by stupid people often with other peoples' money.

The fact that it is worthless is not a bad thing at all, it is the natural consequence of a stupid action.

- Now we see that the last pages in the ''Planned Economy'' playbook are all blank......

Whoops......