Wednesday, April 27, 2016

Money Wisdom #404

"In 1997, LTCM had '$120 billion of borrowed bonds and $1.25 trillion of derivatives. According to partners Scholes and Merton,' Dunbar reports [in Inventing Money], 'the interlocking parts were now so perfectly engineered that these devices were virtually capable of perpetual motion. As the technology of risk management continued to improve, the tiny sliver of equity underneath the inverted pyramid would vanish completely. There would be no need for excess cash to lubricate the money machines, and no need for irritating shareholders... ...At LTCM's zenith, they had a vision of zero capital and infinite leverage'. This scheme seems to make Marx's notion of capital as an infinitely productive self-reflexive loop operating like a perpetual motion machine a reality. But just when the money machines seemed to be functioning smoothly and at maximum efficiency, everything suddenly changed. Against all odds, the sequence of events that was never supposed to occur began in to unfold in the late summer of 1997 and quickly spread throughout the global economy."

Mark C Taylor Confidence Games (2004) p.259

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