Long Term Capital Management

The company failure concept of blind spots is demonstrated in the Long Term Capital Management article by way of forecasting model risks, operational risks, and external events that the firm was ill-prepared to meet. The first problem was with the ways in which LTCM dealt with risk management. The exact same risk management methods that originally brought attention to and identified the issue also made it possible for the liquidation of the portfolio to take place in a measured and controlled manner. Second, the banks had extended LTCM an aggregate amount of credit that was far more than what they would provide to a developing nation of medium size. In particular, there was a problem with the mix of personal investment risk and credit risk that was taken on by the persons who were in charge of the institutions. Other notable factors were the poor information dissemination and an extremely flawed credit analysis.

Reference

Downing, J. (2000). The Professional Risk Managers’ International Association.

Comment to Xing Jia Lee

Your breakdown is very informative and factors in all of the major issues in the article. The way you categorize the issues in Long-Term Capital Management is refreshing and easy to digest.