When Genius Failed (Chapter 5)

      By Spring 1996, Long Term Capital Management had $140 billion in assets, thirty times its underlying capital. Though almost everyone did not know of this, Long Term was twice the size of any hedge fund on Wall Street. Their success almost came as a surprise, with only about 30 traders at the time, Long term grew at a monumental rate. With this, companies were upset with the transparency of the overall size and success of Long Term. Wall Street CEO’s felt as if Long Term kept them in the dark to avoid competition. Long Term was only reporting their numbers to the Commodity Future Trading Commission once a year. When most firms were giving their reports quarterly. This upset the banks because they did not know how big Long Term was in particular trades. Because of this, relationships with firms like Solomon Brothers became very distant. Although with that said, the relationship between Merrill Lynch and Long Term became strong and LTM pushed for more financing. After negotiations, Merrill Lynch provided $6.5 billion in repo financing. Although uncertain of their return, Merrill Lynch believed that financing Long Term was key in being able to trade with them and also allow them access to see LTM’s order flow.

     Long Term also began recruiting Chase Manhattan for help with their fund. At first Chase believed that LTM was too new to invest in. But after two years, David Pflug, the head of global credit at Chase agreed to finance LTM on interest swaps and also backed them on yield-curve swaps. In return. LTM sold Chase a $20 million investment in their fund. Although, this trade helped LTM, what they really wanted was a bank that could provide them with constant cash flow when needed. David Pflug helped Long Term agree to a $500 million revolving loan from several different banks.

     Also in this chapter was the relationship between Long Term and the Union Bank of Switzerland. After trading with Chase, Long Term decided to go further and negotiate an alliance with UBS. The goal for LTM was to an agreement on a warrant with the UBS. After lots of negotiations, UBS agreed to buy a warrant from LTM. This resulted in a huge profit for the union bank.

Questions

-        Who were LTM’s biggest competitors on Wall Street in Spring of 1996?

-        What exactly in repo financing, and how did it help LTM?