Long-Term’s financial crisis called for the Feds to intervene. The fear was that if Long-Term failed, many others would go tumbling down with them. Peter Fisher, who ran the trading desk for the Feds, went to Long-Term’s offices. There, he was shown the “risk aggregator” which was kept a secret from many of the Long-Term employee and showed the amount of exposure that Long-Term showed. Fisher then realized that all of the trades that Long-Term made were linked together. The partners thought of solutions to end the downfall of the firm and the effects it would have on the market. Bankruptcy was one possibility, but Rickards said it wouldn’t change anything. The potential loss of $3-5 billion between 17 banks didn’t concern the Feds and they thought the losses would be tolerable. The banks had put their own shareholders money at risk so it was their own fault. Fisher made the heads of all the private banks involved meet to see if they could work out a solution, but they were not happy with one another and lobbied for the best interests of their own bank. The Feds continued to have meetings for the banks to figure out a solution and then Warren Buffet sent in his offer of $250 million and Meriwether had an hour to accept the offer. The only issue with the bid was that it was worded in a way that Buffet would buy the assets of LTCM, which he did not want to do. Eventually, the Feds bailed LTCM out and the banks would receive 90% of the equity funds. The existing investors would retain the 10% interest that they were receiving. Meriwether‘s reputation had come crashing down after both the Long-Term crisis and his involvement in the Salomon Brother’s scandal. After many lawyers and revisions to a contract, the LTCM’s funds were taken over by 14 banks.
Questions: Even though LTCM was losing millions of dollars per day and John Meriwether’s reputation and career were on the line, he still seemed very calm. How would you have reacted if you were put into Meriwether’s position?