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>LTCM lost $4.6B in investor funds. [...] All of these situations are obviously somewhat different, [...] biggest financial frauds/scandals in history. LTCM s

by jasode 4y ago

>LTCM lost $4.6B in investor funds. [...] All of these situations are obviously somewhat different, [...] biggest financial frauds/scandals in history. LTCM shouldn't be in that list because that wasn't fraud. That hedge fund had a flawed math model of volatility of their holdings when a cascade of events got triggered by Russia defaulting on their bonds. LTCM losses were magnified by their over leveraged positions. A bunch of PhD traders lost their wealth and got their reputations tarnished but it wasn't criminal activity.

isthisthingon99 4y ago
Correct. Arrogance is not illegal (yet).
- DebtDeflation 4y ago
  Taking customer money and using it for something else is absolutely a crime. And it has nothing to do with the regulatory status (or lack thereof) for crypto. If a car dealership takes customer down payments on cars and instead of ordering the cars they gamble the money away in Vegas, they don't get to just declare bankruptcy and say "too bad so sad", they go to jail.
  - isthisthingon99 4y ago
    To be clear, SBF/FTX total fraud. The PhD guys from LTCM, not so much. Just arrogant.
  - deleted 4y ago
    [deleted]
wbl 4y ago
Not just PhD. World famous economists with Nobel prizes.
- alainchabat 4y ago
  I can't find which Nobel prize were in, do you have any names? Robert C. Merton got the nobel prize, but it seems 3 years later (ironic)
  - pinkwinds 4y ago
    Myron Scholes and Robert Merton, Economics 1997. LTCM imploded in 1998.
naijaboiler 4y ago
this is exactly what happended at FTX/Alameda. A bunch of "smart" guys who backstopped and over-extended loans to players, and their losses were magnified with their over-leveraged positions, that was backed up with assets with no values. That's exactly what happens in just about every financial scandal.
- simiones 4y ago
  FTX took customer deposits (which were supposed to be held in custody and untouched, according to their TOS) and loaned them out to Alameda to gamble with. That is entirely different from being over-leveraged and having your debts default.
  - JamesianP 4y ago
    I think the "gambling" you referred to was their point, not the accounting games they subsequently played to try and get back into the black.
    - simiones 4y ago
      My point is that the real problem isn't that Alameda was over-leveraged or gambling, it's that SBF stole user funds from FTX to try to rescue Alameda. This is not what (some of) those other companies did.
      - naijaboiler 4y ago
        from SBF perspective Alameda & FTX are the same. Yeah yeah they are separate legal entities, but in actual practise, one market-made for the other, and he treated them like one is left hand, the other is right hand So yeah Alameda gambled, overleverated and lost money just like nearly every other financial crises in history, SBF then fraudulently moved money from FTX to cover Alameda's gambling losses. I won't be shocked if FTX has alway been the source of funding for Alameda's gambling, just that Alameda was winning when everything was rosy. then the crypto market turned
  - 4y ago
SilasX 4y ago
It had the potential to cascade to the rest of the market because of how they used leverage, and the only reason it didn’t was because of emergency Fed intervention.
- kumarvvr 4y ago
  That does not make it a fraud. They took investor money and leveraged it and made bets on basis of their mathematical models. Their models didn't work out. I don't think their intention was to rob / hide / betray / hoodwink.
  - SilasX 4y ago
    I was replying to this: > A bunch of PhD traders lost their wealth That is, the only reason the losses were limited to them was because of special intervention. Otherwise, it would have caused losses for many others.
    - ghufran_syed 4y ago
      right, but if a counter-party ends up losing money because of incorrect assessment of credit or liquidity risk, isn’t that their own responsibility? It’s like when someone can’t pay the mortgage loan a bank lent them - the borrower isn’t performing under the terms of the contract, but part of the payments that borrowers make to the lender is to account for that credit risk - what matters is if the lender has accurately priced this over their portfolio, taking into account how “independent” (or otherwise…) the individual loan risks really are. The liquidity problem is usually when it turns out that the individual loans credit and liquidity risk are NOT independent at times…
      - SilasX 4y ago
        Yes, I understand how financial contracts work. But like I said in my original comment[1], at the top of this subthread, that provides vital context for the point I'm making, this was big enough to have the potential to cascade, i.e. be such a big loss -- against such a formerly-safe capital buffer -- as to spill over to other financial institutions, bankrupt them, then spill over to their counterparties etc, and eventually to the broader markets that are many degrees removed. The kind of situation they were worrying about and rushed to prevent in 2008, IOW. You are correct, in a trivial sense, that maybe the entire market should have just not trusted anyone else, except perhaps under extreme constraints, which would have amounted to almost no financial intermediation and thus almost no financial industry whatsoever. But even the most hardcore "you should have vetted your counterparty" finger-waggers aren't willing to go that far. [1] https://news.ycombinator.com/item?id=33608638 https://news.ycombinator.com/item?id=33608638
deleted 4y ago
[deleted]
danrocks 4y ago
The book about LTCM’s failure, “When Genius Failed”, is a fascinating account of what happened, and a quick read.
- emit_time 4y ago
  Highly recommend reading it, one of the greatest books I've read from a perspective of understanding the financial industry.

by jasode 4y ago

isthisthingon99 4y ago

Correct. Arrogance is not illegal (yet).

DebtDeflation 4y ago
Taking customer money and using it for something else is absolutely a crime. And it has nothing to do with the regulatory status (or lack thereof) for crypto. If a car dealership takes customer down payments on cars and instead of ordering the cars they gamble the money away in Vegas, they don't get to just declare bankruptcy and say "too bad so sad", they go to jail.
- isthisthingon99 4y ago
  To be clear, SBF/FTX total fraud. The PhD guys from LTCM, not so much. Just arrogant.
- deleted 4y ago
  [deleted]

wbl 4y ago

Not just PhD. World famous economists with Nobel prizes.

alainchabat 4y ago
I can't find which Nobel prize were in, do you have any names? Robert C. Merton got the nobel prize, but it seems 3 years later (ironic)
- pinkwinds 4y ago
  Myron Scholes and Robert Merton, Economics 1997. LTCM imploded in 1998.

naijaboiler 4y ago

this is exactly what happended at FTX/Alameda. A bunch of "smart" guys who backstopped and over-extended loans to players, and their losses were magnified with their over-leveraged positions, that was backed up with assets with no values. That's exactly what happens in just about every financial scandal.

simiones 4y ago
FTX took customer deposits (which were supposed to be held in custody and untouched, according to their TOS) and loaned them out to Alameda to gamble with. That is entirely different from being over-leveraged and having your debts default.
- JamesianP 4y ago
  I think the "gambling" you referred to was their point, not the accounting games they subsequently played to try and get back into the black.
  - simiones 4y ago
    My point is that the real problem isn't that Alameda was over-leveraged or gambling, it's that SBF stole user funds from FTX to try to rescue Alameda. This is not what (some of) those other companies did.
    - naijaboiler 4y ago
      from SBF perspective Alameda & FTX are the same. Yeah yeah they are separate legal entities, but in actual practise, one market-made for the other, and he treated them like one is left hand, the other is right hand So yeah Alameda gambled, overleverated and lost money just like nearly every other financial crises in history, SBF then fraudulently moved money from FTX to cover Alameda's gambling losses. I won't be shocked if FTX has alway been the source of funding for Alameda's gambling, just that Alameda was winning when everything was rosy. then the crypto market turned
- 4y ago

SilasX 4y ago

It had the potential to cascade to the rest of the market because of how they used leverage, and the only reason it didn’t was because of emergency Fed intervention.

kumarvvr 4y ago
That does not make it a fraud. They took investor money and leveraged it and made bets on basis of their mathematical models. Their models didn't work out. I don't think their intention was to rob / hide / betray / hoodwink.
- SilasX 4y ago
  I was replying to this: > A bunch of PhD traders lost their wealth That is, the only reason the losses were limited to them was because of special intervention. Otherwise, it would have caused losses for many others.
  - ghufran_syed 4y ago
    right, but if a counter-party ends up losing money because of incorrect assessment of credit or liquidity risk, isn’t that their own responsibility? It’s like when someone can’t pay the mortgage loan a bank lent them - the borrower isn’t performing under the terms of the contract, but part of the payments that borrowers make to the lender is to account for that credit risk - what matters is if the lender has accurately priced this over their portfolio, taking into account how “independent” (or otherwise…) the individual loan risks really are. The liquidity problem is usually when it turns out that the individual loans credit and liquidity risk are NOT independent at times…
    - SilasX 4y ago
      Yes, I understand how financial contracts work. But like I said in my original comment[1], at the top of this subthread, that provides vital context for the point I'm making, this was big enough to have the potential to cascade, i.e. be such a big loss -- against such a formerly-safe capital buffer -- as to spill over to other financial institutions, bankrupt them, then spill over to their counterparties etc, and eventually to the broader markets that are many degrees removed. The kind of situation they were worrying about and rushed to prevent in 2008, IOW. You are correct, in a trivial sense, that maybe the entire market should have just not trusted anyone else, except perhaps under extreme constraints, which would have amounted to almost no financial intermediation and thus almost no financial industry whatsoever. But even the most hardcore "you should have vetted your counterparty" finger-waggers aren't willing to go that far. [1] https://news.ycombinator.com/item?id=33608638 https://news.ycombinator.com/item?id=33608638

deleted 4y ago

[deleted]

danrocks 4y ago

The book about LTCM’s failure, “When Genius Failed”, is a fascinating account of what happened, and a quick read.

emit_time 4y ago
Highly recommend reading it, one of the greatest books I've read from a perspective of understanding the financial industry.