YouSaid · the spoken record

Clay Finck

lines on the record: 76
first: 2025-03-21
most recent: 2025-03-21
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“That's the investors podcast.com slash summit. We only have room for around 25 members of our audience, so be sure to apply soon if you'd like to join us. With that, thank you for your time and attention today, and I hope you enjoyed today's episode.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Connections and relationships with like minded people. Many of our attendees will likely be entrepreneurs, private investors, portfolio managers, or just passionate value investors who work in all sorts of industries. We'll have an itinerary plan to do various things such as hiking, go to the lake, go out for dinner and whatnot, but there will be plenty of time to just relax and really get to know other people. TIP has already booked the houses will be staying at, and there's a few photos of it on our website to get a sense of the environment. The houses also have plenty of rooms to do various things, go to the pool, a hot tub, workout room, theater room, a large kitchen. There's a large patio, and then there's a trail out back and just much more. We're thrilled to be hosting this special event for our listeners and can't wait to hopefully see you there. On our website, we have the pricing, frequently asked questions in the link to apply to join us. So if this sounds interesting to you, you can go to the investorspodcast.com.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Promise I wanted to take a minute to share some details on a new event that TIP will be hosting. From September 24th through September 28th, 2025 in Big Sky, Montana. The event is called The Investors Podcast Summit. We'll be gathering around 25 listeners of the show to bring together like-minded people and enjoy great company with a beautiful mountain view. I'm sure that many of you have been to an investment conference in some former fashion in the past. And while this could technically be considered an investment conference, it's likely much different than most investment conferences you've ever been to. My favorite part of these various conferences is meeting people and seeing people that I rarely get to meet with in person. So I'm fine with skipping the formalities and dressing up to sit through a day through of speakers and presentations. So we're looking to bring together listeners of the show who are passionate about value investing and are interested in building meaningful”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Is also just as important. The collapse of long term capital management serves as a cautionary tale that all of us can learn as investors. Even the smartest minds can ignore basic principles of risk management, leverage, and the inherent unpredictability of markets. I guess to piggyback on that idea, I think we should also be wary of looking at a model and telling ourselves that close leverage reflects reality. Reality does not care about your Excel spreadsheet, no matter how fancy it is or how reliable it's been in the past. Towards the end of the epilogue, Loewenstein writes, if Wall Street is to learn just one lesson from the long-term debacle, it should be the next time a Merton proposes an elegant model to manage risk in Foretell odds, investors should run and quickly run the other way. I hope you enjoyed today's discussion on the book when Genius failed by Roger Loenstein. I'll have the book linked in the show notes for those interested in checking it out themselves.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“The fall of long term showed that eggs in different baskets can all break simultaneously. They fooled themselves into thinking that they had diversified in substance, when in fact they had only done so in form. All of their bets were essentially correlated. So for stock investors, we might own different stocks in different countries or industries, for example, but we shouldn't just use that logic alone as a way to say that we're adequately diversified. And then the final lesson I would share is just related to some risk management. So it sounds good when you say that you're chasing the highest possible returns, but we must keep in mind the level of risk we're taking as well. Oftentimes chasing the highest returns out of any investor also means that you're likely taking too much risk. And that strategy can work well until it doesn't. Not only is achieving adequate investment returns important, but managing risk appropriately”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Promotes the stock and the company, and they hold large amounts in their portfolio. This leads to many believing that the stock is far overvalued, and since shares of Tesla have been richly priced historically, this has actually helped them issue new shares to fund future growth. Had the stock been priced lower, they may not have been able to execute on their strategy near as successfully as they have. And actually, it might be fairly likely that they would have gone bankrupt at some point in their history. So reflexivity can work both ways, both on the upside and the downside, and we should keep that in mind whenever we believe something is drastically undervalued or overvalued. The fourth lesson I'd like to share is related to diversification. Conventional wisdom suggests that the more diversified you are across your investments, the less risk you're taking. On the contrary, John Maynor Keynes stated that One Bet soundly considered is preferable to many poorly understood.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Reflexivity after the market crash in March 2020. As I check the markets hour by hour, sometimes a minute by minute, the week of March 9th and March 16th, I believe that markets were simply pricing in the reality that the entire economy was shutting down and thus corporate profits would fall off a cliff. What I didn't necessarily realize or fully appreciate was that since the market was falling so swiftly, this can lead to massive margin calls by leveraged institutions. So it becomes a self-reinforcing cycle where because the market's falling, these firms are forced to sell their positions, which causes the market to fall even lower. Had I understood the reflexivity of markets at the time, I feel that I would have been more excited to buy discounted assets at the time instead of simply holding my positions at a fear of what lied ahead. Reflexivity can also apply to the upside. With a company like Tesla, for example, they have a cult-like following and shareholder base that promotes”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Then you limit your potential downside. It's also important to remember that we humans are emotional. Warren Buffett, for example, referred to the management team at Dexter Shoe as one of the best managed companies he and Charlie had ever seen. Berkshire purchased Dexter Shoe in 1993 and ended up losing all of their money on that investment. If the greatest investor in the world can make the mistake of being overconfident, I have no reason to believe that I won't be in a similar position at some point in my investing lifetime. The third lesson I'd like to share is just around the reflexivity of markets. Long term models did not account for the fact that markets aren't 100% rational 100% of the time. As humans are what make markets. Investor George Soros believes that financial markets always provide a distorted view of reality and never reflect all available knowledge. So he's essentially saying that market prices are always wrong. Sometimes the divergence is minuscule, and other times the divergence is massive. From my personal experience, I learned about”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“To buy discounted assets, I can see that case as well. The second lesson is to avoid overconfidence. Related to this is another buffet quote. Never risk what you have in need for what you don't have and don't need. The partners that long term were already financially independent many times over, and they were overconfident that their models accurately aligned with reality. No matter how smart you think you are, when it comes to investing, we should also account for the unthinkable happening. That card in the deck that you just don't simply know about. In Michael Battenett's book, Big Mistakes, he added, the lesson us mere mortals can learn from this seminal blowup is obvious. Intelligence combined with overconfidence is a dangerous recipe when it comes to markets, end quote. One way to help guard yourself against overconfidence is by putting limits on the amount that you will invest in any one stock, industry, or asset class. This ensures that if you end up being wrong,”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“It's hardest to get. Buffett as a quote that cash is to a business as oxygen is to an individual. Never thought about when it's present. The only thing in mind when it's absent. Using leverage looks smart in a bull market when it seems that only good things can happen, but using leverage can also prove to be disastrous when things turn against you, especially when the leverage can be margin called. It's one thing to have a mortgage on your home at a low interest rate that just can't be margin called as long as you're making your monthly payments. And it's another thing to have your portfolio liquidated if your portfolio or stock happens to fall by 50%. Since cash can just be so valuable in these rare instances when markets are crashing and the economy is in disarray, I can see the case for holding a good amount of cash in emergency fund. Perhaps it can be used for emergencies, such as if you temporarily lose your job, or if you decide during a crisis that you're going to tap into that a little bit.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“With the bank's permission, of course, and move on with their lives and their careers. Many of the partners also strongly believed that they had done nothing wrong and had blamed the irrationality of other traders portraying themselves as victims of outside events. Ironically, credit spreads in 99, the year after, the bailout, it ballooned to even wider levels. So according to the partners, an event that was practically impossible had now happened two years in a row. After earning a modest return post-bailout, the fund was liquidated in early 2000. So what is there to learn from the downfall of long-term capital management? I would say the first lesson is to avoid the use of excessive leverage in investing and ensure you have a very solid financial foundation. Buff and Amongger have stated that their investment returns would have been higher had they used more leverage, but ensuring you have a strong financial position and aren't overlevered ensures that you aren't going to be short cash when”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Term continued to lose money, so not only did the value of the firm continue to implode, but they were bringing all of Wall Street down with them. And then by mid-October, the Federal Reserve cut interest rates twice after the bailout, and it signaled to the market that new liquidity was coming for investors. And finally, the storm had passed. Most of long-term investors actually came out ahead because they invested early on and had that capital return at the end of 97. And the funds employees received most of their pay in the form of year-end bonuses and most of those bonuses were invested in the fund, which just went down the drain. So many of the employees at long-term essentially worked for nothing over that time period. The partners continued to manage the fund on a more moderate salary, and they were under the whims of the big banks that bottom out. The bank's only interest was to simply just get their money back. Over time, the partners in long term would step away one by one.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“The portfolio company that was a separate entity. Horzine then convinced 14 banks to pitch into the bailout, raising $3.65 billion to acquire 90% of long-term. The existing investors would retain the other 10%, while the partner shares would be liquidated to cover their debts. The partners once had $1.9 billion invested, and in just five weeks, their stakes would be worth zero. This was, of course, a tragedy for the partners as they now worked on a salary for the fund in order to make good on the damage that they've done. And from the public's perspective, they had been branded as just purely irresponsible speculators in their reputation had of course been ruined in the eyes of Wall Street. Meriwether was well known as the face of long-term, and he never spoke publicly about the downfall of the firm. And after the bailout from the banks, the credit spreads continued to widen and longer.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“That Berkshire Hathaway AIG in Goldman Sachs would be willing to buy the fund for $250 million, and if they accept it, they would immediately invest $3.75 billion more dollars to stabilize the operation. In other words, Buffett was proposing to pay $250 million for a fund that had been worth over $4 billion at the start of the year. Essentially a 95% discount to its previous value. To ensure that Meriwether wouldn't shop around for another offer, Buffett gave him just 50 minutes to make his decision. Merriweather was shocked, to say the least, to receive such a lowball offer. When he looked at Rickards and asked what to do, as they contemplated their decision, the offer got withdrawn. As it was rumored that an investment banker let Buffett in on the risk that Berkshire would be taking by purchasing exposure to such complex derivatives, and he would just own the portfolio's assets, not necessarily”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“The correlations always go to one. Fisher estimated that if long term were to suddenly go under and they needed to liquidate their positions, then its 17 biggest counterparties would stand to lose anywhere from $3 to $5 billion. Depending on how much they could get for the collateral that long term had. And that was if they could find buyers for what they were selling. Fisher came to the realization that he probably had three days or so to come up with a solution to this mess. And the banks were ensuring him that long-term wasn't going to be bailed out privately, as he probably would have hoped. Horizon brought more than a dozen banks together to quickly formulate a solution to this mess. After many long, drawn out discussions and debates, Meriwether received a call from none other than Warren Buffett. Buffett worked with Goldman Sachs to put in a last-minute bid for the portfolio hours before the value of the equity had gone to zero. The offer that long-term received shared”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“In added desperation, they were willing to show all of their books. Solomon was shocked to learn that in just the last five trading days, long-term lost $530 million. Goldman Sachs had told them that very few would be able to provide the amount of capital they needed, perhaps Warren Buffett, George Soros being two candidates, but long-term had already asked them. John Corzine from Goldman Sachs thought that the Federal Reserve should be brought into the loop to prevent the collapse of long-term severely impacting the broader market. The Federal Reserve was initially created to help regulate banks, not necessarily bail them out for making poor capital allocation decisions. Richard Fisher from the Fed was just as surprised as everyone else when he uncovered what was happening in the portfolio. An outsider would have believed that long term was well diversified. But once he looked under the hood, he realized that their trades were correlated from the start. They had spread trades all over the world. Gary Gensler had remarked that in a crisis,”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“45% of its capital. And if their bets on spreads continue to go against them, their equity base of 2.2 billion would be gone in a blink of an eye. The partners found themselves in uncharted territory. In markets where behaving in a way that they weren't prepared to handle, according to their models, losing 45% in one month wouldn't happen even one time over the entire life of the universe. But it ended up happening within just four years of their existence. After Meriwether's letter to investors for August got out to Wall Street, more selling pressure came to the positions that long-term held as they assumed that an avalanche of selling was going to take place as a result of them being forced liquidated. Long-term felt that they just couldn't catch a break as day after day in September, they saw all their positions go against them. Long-term had met with Solomon Brothers and other banks and part of their last digit efforts to raise more capital.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“When you're down by half, people figure you can go down all the way. They're going to push the market against you. They're not going to roll or refinance your trades. You're finished. Not long after Matone's visit, Meriwether and McInty went for a drink at a local inn favored by Meriwether and other transplanted Wall Street readers. Sipping his trademark, Gin and Tonic, Meriwether looked at his pal and said in a voice that was completely flat, you are right, I should have listened to you. The partners were working tirelessly to try and keep the fund alive, but it of course just wasn't enough. They weren't able to raise the additional $500 million that Soros required. And one thing that was unique about this time period was that there was no depression happening on Main Street. For the most part, the panic was just on Wall Street, where there was too much optimism and leverage that had suddenly become undone. In August, long term would lose a whopping.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“$7 billion back to investors that they did in the previous years, which could have served as a lifeline when disaster struck. Hillibrand was at one point worth $500 million, and in a matter of weeks, he was having to use his wife's checking account for expenses related to his extravagant new mansion. Near the end of August, Meriwether called an old friend Vinny Matone, who had been the fund's first contact at Bear Stearns. Unlike Meriweather's partners, Matone saw markets as exquisitely human institutions, inherently volatile, ever fallible. I wanted to read this interaction directly from the book here. I quote, Where are you? Matone asked bluntly. We're down by half, Merryweather said. You're finished, Matone replied, as if this conclusion needed zero explanation. For the first time, Merriweather sounded worried. What are you talking about? We still have $2 billion, we have half, and we have Soros. Matone smiled sadly.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Forward and even offered to charge him half of the fees they charge the other investors. And Buffett, of course, thought the fees in the first place were already far too high, and even after they cut the fees are far too high. So he had little interest in investing in the fund. That day, the fund lost another $277 million, and their asset base was down to $2.2 billion. Meanwhile, the fund's holding company owed a total of $165 million to a group of banks, money that they certainly didn't have. Part of the problem was that their parades were oftentimes with different banks, so more margin was required than necessary relative to them simply having the same pair trade at the same bank. So they tried to consolidate all these pair trades with the appropriate bank, which sounds simple, but it was actually quite overwhelming as they had a mind-boggling 60,000 positions. The partners were now deeply regretting their decision to return the 2.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“This causes prices to get to extreme levels that would typically be deemed impossible if you're looking at it through the lens of a bell curve or a normal distribution. Loenstein shares the example of yields on news corporation bonds. They had recently traded 110 basis points above U.S. treasuries, and they soared to 180 basis points over. Even though the company's prospects had not changed at all. In the long run, such spreads might seem absurd. But long-term thinking is a luxury not always available to the highly leveraged, as they may not be able to survive that long. Hillibrand arranged another meeting with Buffett as they were desperate to raise more money. That week, the Wall Street Journal referred to what was happening as the global margin call. As markets were plummeting and commodity prices had hit a 20-year low. Hillibrand was calm with Buffett and transparent about the losses on their books. He pitched Buffett on the high prospective returns going.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“into and they had a portfolio with them and Buffett really wasn't up to speed on merger arbitrage at the time so he just wasn't interested the next day Rosenfeld met with George Soros and Stan Druckenmiller Soros agreed to invest $500 million at the end of the month given that they could raise another $500 million from other investors but markets continued to go against them and due to the high levels of leverage they were losing money faster than they could raise it Long term knew that they needed to reduce their positions, but they simply couldn't as there was zero liquidity in the markets. And there never is when everyone wants out at the same time. These types of situations destroy the academic idea of efficient markets, bell curves, random walks, and continuous price movements. When liquidity dries up, prices can become quite irrational, causing leveraged investors to be forced to sell their position at the worst possible time.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Now, long term was an extremely precarious situation. For one, if their positions continued to move against them, then they were simply going to go bust. There was no way around that. And since their positions were so massive, they wouldn't be able to offload them without drastically moving the market. There simply wasn't buyers for the positions that they held because of this sudden flight to safety. Now, Meriwether's entire career was built on the premise that spreads always normalize. So his initial reaction was just raise more capital to give them a cushion to weather through the storm. That night, Eric Rosenfeld called Warren Buffett to see if he would be willing to purchase long-term merger arbitrage portfolio. Now, the credit spreads was long-term's bread and butter for generating returns. This is separate than the merger arbitrage portfolio. And the merger arbitrage was just another field they ventured.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Current prices. And investors continue to cascade into the safest assets. Minute by minute, long-term capital was losing millions of dollars. Meanwhile, many of long-term partners were on vacation. Their office was largely deserted. Victor was in Italy, Eric was in Ireland.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Term was in trouble as they've reached out to Lehman to raise more capital. But long term certainly didn't anticipate what lied ahead in the very near future. At this point, the fund managed $3.6 billion, $1.4 billion of which was the partner's capital, and it would take just five weeks for them to lose it all. On August 17th, Russia announced a debt moratorium. They decided that they would rather use their rubles to pay Russian workers than Western bondholders. This moratorium applied to $13 billion of ruble debt, denominated in rubles, which was rapidly being devalued. This sent a shock to markets globally. Investors like those at long term assume that a country like Russia would never default. If anything, the IMF would bail them out to ensure that they were able to make good on their debt. Firms like Barclays decided that they wanted to offload any risk exposure, regardless of the”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“During the second wing of August in'98, Russia's markets snapped. Dollars were fleeing the country, reserves were dwindling, its budget was overtapped, and the price of oil, its chief commodity was down 33%, while the government imposed controls on the ruble. Russia's stock market was down 75% on the year, and short-term interest rates skyrocketed to 200%. Investors continued to flock to U.S. treasuries in 30-year yields in the U.S. reached a new low of 5.5%. Long-term was now experiencing their third losing month in the last four months. To help stop the pain, long-term offered to buy Solomon's entire arbitrage position they were underwinding, which was worth $2 billion. When times were good, long-term set the rules and was able to secure favorable terms. And in August of 1998, Solomon, J.P. Morgan, Bear Stearns, and Lehman, they sensed that long”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“IMF was working through the situation in Russia, and they encouraged Solomon to back Moscow, but executives that travelers, the parent company of Solomon, didn't trust Russia and the potential risks they presented. Long-term, on the other hand, believed that Russia simply wouldn't let their currency fail. Again, long-term was playing with fire trying to model what was happening in Russia given the corruption that was taking place. Russia at the time was less than a decade removed from communism and struggling to become a democratic society.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“The arbitrage business in a memo that was leaked to the Wall Street Journal stated, Opportunity for Arbitrage profits has lessened over time while the risks and volatility have grown. At the time, Solomon was the second largest player in the industry. Naturally, other traders started to unload their arbitrage trades to prevent being on the wrong end of a potential leverage unwind. Yet, Meriwether and his crew were unphased, despite all of their positions going against them in the most recent month. Furthermore, they looked forward to adding to their positions that were now more favorably priced. They were confident that the future would look like the past. It was the natural thing to do given that that approach was so successful for so many years. In addition to the crisis happening in Asia, there was also a currency crisis happening in Russia as well. Short-term yields in Russia had skyrocketed to more than 120%.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Forced liquidations, which led to long term having their worst month ever at a minus 6.7% return. In June, spreads continued to widen, and to make matters worse, they were widening in every single market long-term was active, which reflected the market's overall trend of credit contracting and investors taking risk off the table. As markets were in chaos in Asia, investors globally were fleeing to U.S. treasuries for safety, and about the only firm that was going short U.S. treasuries at the time was long-term, leading them to lose 10% on the month. Solomon had become increasingly wary of their arbitrage division, and they ultimately decided to close it down. That meant that they would be liquidating many of the positions that directly aligned with long-term, which, as Lowenstein writes, would arguably trigger the fund's downhill spiral. In July, Word had gotten out that Solomon was ex-”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Of Wall Street had concluded that the market's appetite for risk had gone too far, and that it was time to take some risk off the table. John Suko, who ran the equity derivatives desk at Lehman Brothers, had publicly stated that Wall Street was playing with fire with the level of unseen leverage that was being used in the form of derivatives. Shortly after, Sukka was forced to resign from Lehman. And Traveler's insurance had discovered that their fixed income arbitragers within their newly acquired subsidiary, Solomon Brothers, were pulling in year-end bonuses of 10 million or more. Additionally, they weren't penalized for the losses they incurred, which encouraged them to bet as much of the company's money as they could. This brought to question, were the arbitragers simply partaking in a dressed up form of gambling? In May of 98, arbitrage spreads began to widen, which set off a hard-to-break cycle of selling as firms encountered”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Short term forecast on something like volatility, especially doing it with leverage, is just a fool's errand. But I know that these guys are likely way, way smarter than I am. To make matters worse, since long dated options weren't traded on exchanges, long term had put together private options contracts sold by the big banks, which required them to settle up their position every day. So if one day no one was selling the options they were short, the prices might get bid up and long term would be on the hook to put up a substantial amount of additional capital. So they weren't just betting on the ultimate realized volatility, they were also betting on the day-to-day inferred volatility. According to the firm's models, the chance of them losing a significant amount of their money, say 40% of their capital in a month, was unthinkably low. So far, the worst month they've had was minus 2.9%, so very impressive. In 1998,”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Is a key assumption in the model. The more volatile a stock is, the more that option is worth. So for example, if we're looking at a call option on Tesla stock, it's going to be more expensive than a call option on, say, AT&T, all else SQL, because with higher volatility, there's higher probability of a big payout on the Tesla call relative to AT&T. So the investor would have to pay a higher price to compensate for that higher reward. In order to determine the implied volatility that is priced in the market, Quants could simply look at the options market and how it's priced and then back their way into what level of volatility investors expect going forward. Since the implied volatility was 20% and the historical volatility was 15%, long-term bet the firm that volatility would revert back to the mean as it historically had done. In my view, making a”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Original investors from 94 had gotten back $1.82 for every dollar they put in, and they still had their original dollar still in the fund. Hillibrand was estimated to be worth half a billion dollars and Meriwether was worth a couple hundred million dollars. This brings us to the section of the book on The Downfall. Loanstein opens this section with a quote from John Maynard Keynes. Markets can remain irrational, longer than you can remain solvent. Early in 1998, long-term began to short a large amount of equity volatility, which led the fund on a road to disaster. The stock market tends to vary around 15 to 20 percent per year. Sometimes the market is more volatile, but eventually that volatility has historically always reverted back to its historical norm. For those of you who are familiar with the Black Shoals pricing model, which is a method of pricing options, you'd know that volatile”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Potential flaws in the strategy. Shoals, for example, has a deep academic background, and he recognized that long-term was going a bit outside of their wheelhouse of expertise. So he didn't view the strategy as bulletproof like some of the others did. Merton did not like the top-heavy compensation structure for two of the other partners, which created moral hazard and incentivized them to shoot for the moon with the bets that they were making. Brandy Hiller, who had been a part of the group at Solomon, he believed that long-term was an accident waiting to happen. But for the most part, the hunger to make as much money as possible was alive and well, even as they scaled up to astronomical heights, in the partners were financially independent many times over. They returned $2.7 billion to investors at the end of 97 and earned a 17% return net of fees, which was again a remarkable achievement given the market conditions. To put this into perspective,”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Listeners today. In October of 97, Merton and Schultz won the Nobel Memorial Prize in Economic Science. Academics praised the two for their contributions to finance, and one economist called the Black Scholes Model, one of the most elegant and precise models that any of them had ever seen. While these two were being praised for their ability to price risk, Asian currencies and stock markets continued to implode. One day, the epicenter was Thailand, the next it was Malaysia, and then Indonesia. Long-term seemed to have managed to dodge a bullet as the fund broke even in October and November, and given the volatility of markets in Asia, they were going searching for opportunities in the area. Throughout the book, Loenstein touches on a number of the partners and how they sort of viewed long-term. Some partners were all in, others were hedging their bets and saw”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Expected. The MCI merger was renegotiated at a lower price, so MCI's stock price collapsed and long-term lost $150 million overnight, which was offset by $300 million in gains that they earned in Japan. Luckily for their investors, they started to return part of their investors' money simply because they couldn't find opportunities to deploy it, which they absolutely hated given that they were just making so much money at that point. The partners weren't interested in taking their money off the table though, and to the best of my knowledge, most of them had most, if not all, of their net worth writing in this fund. They even took on a pyramid of debt. So not only was the fund itself leveraged, but the management company that owned the fund was also leveraged. And the partners used their stake and long term to take on even personal debt as well to invest more. It almost hurts for me to read this and share it with our”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“And a lot of these banks they assumed that they were the biggest lender to long term, but some of them might have been number 10 on the list, not realizing just how much risk and exposure and leverage that long-term was getting. During 1997, they were beginning to find fewer opportunities to deploy capital. The firm's leverage ratio, not including derivatives, declined from 30 to 1 to 20 to 1 as a result of finding less opportunities, and in the first half of 97, they only earned 13% before fees. July of 1997 was the beginning of what was known as the Asian financial crisis. A wave of defaults swept through Thailand, which led to their currency falling by 20%. In this cascaded to other currencies throughout the region, tens of billions of dollars had flowed into Asia in 96, and now that capital was rapidly fleeing. Meanwhile, one of long-term's merger arbitrage investments did not go as”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Managing to hold their cards close to their chest, and they aren't disclosing the positions that they hold, then they may be taking on too much leverage and putting these other counterparties at a significant risk as a result. In the early 90s, Alan Greenspan loosened regulations, backed by the belief that increased liquidity in the markets was a good thing. But Loenstein makes a great point here. He writes, A bit of liquidity greases the wheels of markets. What Greenspan overlooked is that with too much liquidity, the market is apt to skit off the tracks. Too much trading encourages speculation in no market no matter how liquid can accommodate all potential sellers when the day of reckoning comes." So with the system, a wash with liquidity, long-term was in a good position to get insane credit lines from all these banks”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“They had capital, they needed to get deployed. In most institutions, wouldn't have been able to legally buy stocks on 20-to-1 leverage, but long term worked around this regulation since they entered into derivatives contracts that essentially mimicked the behavior of the underlying shares. By 1997, Fed regulators had met with several large New York banks to discuss their relationships with hedge funds as they were concerned about the credit that banks were extending to hedge funds. Every time there was a shock to financial markets, some firms would manage to blow up due to derivatives exposure, so regulators wanted to ensure that no firm going under would significantly impact the entire financial system overall. I know there are a lot of people out there who believe that you should just let the free market play things out, but I think Wall Street has proven that some level of oversight and regulation is needed. If someone like long term is, you know,”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“On similar public listings that traded under different tickers. So, one example that listeners might be familiar with is Alphabet. They have multiple share classes. The only differences between the A share and the C share of alphabet is simply the voting rights. So the shares that have more voting rights tend to trade at a slight premium to the other share class. So for example, if the spread tends to be, say, 1% and all of a sudden that spread between the two share classes widens to 5%, then an arbitrager like long term, they'll come in, short the overvalued shares, buy the undervalued shares, and wait for that gap to close. But given that long-term was betting billions of dollars on these trades, they were taking enormous risk because these trades were illiquid relative to the size of their positions, which was a sign that the firm's hubris was starting to get the best of them. They were beginning to play games that they were by no means experts in, simply because they”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Although the results were extraordinary, Meriwether was aware of the impact of luck and chance and had stated that they would need at least six years of results to get a better idea if their formula was really working or not. Additionally, he noticed that the arbitrage business was getting more crowded at rival banks and competitor funds as a forced spreads tighter and tighter, which would make achieving the same results going forward much more difficult without taking on or leverage of course. As free market capitalism would have it, excess profits tend to get withered away and long term wasn't doing something that others weren't capable of doing themselves. In search of new places to deploy capital, they started to sift through the equity markets, which present, you know, its own set of challenges since valuing in equity tends to be slightly less mathematical and more qualitative than valuing a bond, for example. They did decide to experiment with pear trades.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Long term had then closed to new investors, and UBS was buying out old investors at a 10% premium. Long-term continued to march along in 1996, earning a 41% return net of fees thanks to leveraged spreads on Japanese convertibles, junk bonds, interest rate swaps, and again, Italian bonds. Their total profits in 96 were $2.1 billion. Loenstein writes, To put this into perspective, this small band of traders, analysts, and researchers unknown to the general public and employed in the most arcane and esoteric businesses earned more in one year than McDonald's did selling hamburgers all over the world, more than Merrill Lynch, Disney, Xerox, American Express, Sears, Nike, Lucent, or Gillette. Among the best run companies and best-known brands in American business, and they had done this with stunningly little volatility, end quote.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Grown to well over 100 employees, and the partner's profits were reinvested back into the fund. Their stake in the fund was worth $1.4 billion nine times their initial investment of $150 million. That's quite a fortune made from bond spreads. There were so many stories in the book that just highlight the level of greed that humans can have and how easily we can overlook taking on risks when things are going well. UBS is a bank based out of Switzerland, and they initially declined to invest in long-term. A couple of years in, they had dropped their conservative measure of not getting involved in leverage hedge funds and wanted to push for more growth as they were just overtaken by a nearby competitor. Overnight, long-term would become their biggest account. The head of fixed income at UBS had stated that not investing in long-term initially was the biggest mistake they had ever made.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Borrowed from banks. In 1996, long-term had begun to worry about the reliance on Bear Stearns, while most banks bent the knee for long-term contractual demands in favorable terms, Bear Stearns wasn't so kind. They refused to clear long-term trades on the usual no-haircut basis, and long-term was well aware that without Bear Stearns to serve as the clearing broker, they were in trouble. Back in 1994, a hedge fund named Askin Capital had suffered extraordinary losses in the mortgage market, and they collapsed after receiving margin calls from Bear Stearns. Ever since, long-term was worried about the possibility of this somehow happening to them. At this point, long-term had”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Long term strategies became more diverse, they became more comfortable taking bigger positions believing that the positions would be uncorrelated in one position's total loss would likely be offset by the gains in another position. In long-term success continued. They were not only phenomenally profitable, but eerily consistent. I think if anyone were to see a hedge fund today continually putting up 30% plus returns with minimal drawdowns, they would assume that it was a fraud or a Ponzi scheme. By the spring of 1996, leverage expanded and their asset base reached 140 billion. The fund was two and a half times as big as the Magellan Fund at Fidelity. It was their largest mutual fund and they controlled more assets than Lehman Brothers in Morgan Stanley. And again, they hadn't actually raised that much capital from investors. The vast majority of it was simply a function of leverage and money they”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“In capital from investors, tripling their AUM to 3.6 billion. Now their equity capital was 3.6 billion, but their total assets were whopping. And that's the return that the firm would have earned had they not taken on any leverage. And Loewenstein makes the additional point that this asset figure did not include the exposure to derivatives, which likely would have brought their returns on assets below 1%. The exact figure is an important, but the point is that the big driver of their returns to date was simply a function of the high amount of leverage they had. Had they taken on much less leverage than their returns would have been substantially lower. Now, if we were to put ourselves in the shoes of the investors in long-term at the time, you look like a genius for investing in what looks like the best hedge fund out there run by the smartest investors on the planet. And if you had the chance, you probably would have given them more money. And these guys are telling you that they're likely not taking enough risk, given that they've only had one month of losses more than 1%. As time went on,”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Consider that sometimes humans get too far ahead in themselves and take on leverage and eventually become forced sellers at the worst possible moment. After you've had three bad coin flips in the market, the probability of fourth bad coin flip might be much greater than 50%. Jumping to 1995, long-term had another great year. Earning investors a 43% return after fees. In the first two years, they had earned $1.6 billion overall, $600 million of which came as profits to the firm and they rest as gains to investors. This was the most impressive start for any fund ever. In fact, the partners thought they weren't generating the returns they had the potential to get. In only one month did they have a return worse than minus 1%. So they thought that they could take on more risk to achieve higher returns over time. Meriwether had no issue raising another billion”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“In a normal distribution, an observation of five standard deviations from the mean or more would happen once every 7,000 years. But in reality, these observations occurred in the stock market once every three or four years. The Black Monday crash is a perfect example. In that one day, the market plunged by 23% on no apparent news. Based on the market's historical volatility, this type of move was statistically impossible. And yet, it still happened anyway. It's a good reminder that simply looking at the past can't prepare us for what can potentially happen in the future. Markets that were discontinuous and had these fat tails on the bell curve certainly made investing more risky for long term than they initially realized. The human aspect also can't be ignored. Sometimes trends will continue simply because people expect them to. In the efficient market hypothesis, does not”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“For insurance companies to adapt to new trends. The stock market is really a whole different beast. Sometimes markets change entirely, making past data sets not as useful. For example, the Great Depression would have changed everyone's models or the inflationary 1970s or the 1987 Black Monday crash. If we're just looking at IBM, they are operating in an ever-changing market perpetually confronting new problems, new competition, and ever-changing consumer trends. Unlike the deck of cards, what the future could look like for IBM or any ticker is never fully known. In other words, there could be a card in the deck that you didn't even know existed. Interestingly, Eugene Fama did some research in the 1960s on stock price movements of the Dow Jones Industrial Average and found that for every stock, there were many more days of extreme price movements than would occur in a normal distribution.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT
“Life is a trap for logicians because it is almost reasonable but not quite. It is usually sensible but occasionally otherwise, end quote. And then he shares a quote from Churston. It looks just a little more mathematical and regular than it is. Its exactitude is obvious, but its inexactitude is hidden. Its wildness lies in wait, end quote. In a deck of cards, say blackjack players could calculate the odds of hitting 21 if they know all of the cards that were played up to that point. The data set is known and it's fixed. I used to work in the world of insurance as an actuary, and actuaries are well known for meticulously analyzing data and determining insurance premiums based on that data. Although the approach isn't perfect and the world is always changing, this works well for insurance companies because the data set is so large in mortality rates change slow enough.”
2025-03-21 · We Study Billionaires · TIP707: The Collapse of Long-Term Capital Management w/ Clay Finck · IDENTIFIED FROM THE TRANSCRIPT