LTCM’s board of directors included many geniuses in from the financial world, who collectively created complex models allowed them to calculate risk of securities much more accurately than others. LTCM’s trading strategy was featured by the divergence in price between long-term U.S. Treasury bonds. It shorted the more expensive “on-the-run” bond and purchased the “off-the-run” security at the same time to exploit the price divergence. In order …show more content…
3. Compare and contrast Bear's demise to a traditional bank run. How did a "run on the bank" cause the demise of Bear?
Bear’s demise differs from a traditional bank run in terms of two aspects. First of all, the major participants are different. While unsophisticated investors like us tend to be the ones demanding our deposits in a traditional bank run, institutions like hedge funds and firms are the ones asking back money from Bear. Secondly, the deposits in the bank are now insured up to $250,000 by FDIC but the funds invested in Bear is not. Thus, this makes a “bank run” on Bear more likely to erupt, even to the slightest rumor. Furthermore, the investors are more concerned about how much Bear takes, opposing to a common depositor.
The rumor about Bears having a liquidity problem set off the series of bank run and later pushed Bear into demise. First, it were the major banks that started the explosion of “novation requests,” acting as a bad signal and support for the rumor. Then live interview from Bear’s annual media conference triggered the run from hedge funds. Hedge funds were pulling money out from their accounts. Furthermore, repo lenders started to refuse to renew borrowings, which