Essay Sample on The 1998 LTCM Hedge Fund Crisis and the 2008 Global Financial Crisis

Introduction

There was a serious financial crisis of LTCM, which had a total asset of $126 billion. In the year 1998, it almost collapsed. According to financial analysts, if the long-term capital management could have collapsed, the global financial crisis could have occurred. Therefore, the task will compare the hedge fund crisis of LTCM and the 2008 financial crisis.

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The investors who were willing to invest in LTCM were paying 10 million dollars so as to get into the fund. After joining, they were not allowed to withdraw any amount of money for a period of three years. Also, they were not expected to question the LTCM investments. Despite all these restrictions, a large number of investors still wanted to invest at LTCM.

In the years 1995 and 1996, the LTCM spectacular annual returns were boosted up to 40%. This happened immediately after LTCM management removed the 27% top fees (Lyngstadaas, Hakim and Terje, 73). Due to this reason, the LTCM was able to deal with most of the risks, starting with the Asian currency crisis, which occurred in 1997. In response to this, it gave a return of 17.1% to its investors that particular year (Ullah et al., 97).

In September 1998, the risky trades almost led the company close to bankruptcy. The company was too large to fail, and this forced the federal government to protect it from collapsing. The leading cause of the LTCM crisis was based on the company's investment strategies. The company had a predictable range rate of foreign bonds and currencies. The country of Russia suggested that LTCM was devaluing its currency, that was, in August the same year. In addition to this, Russians stated that LTCM had evaded their bonds because the estimation of LTCM was beyond the normal Russian range. On 31st, there was a drop of Dow Jones Industrial average by 13%. Most of the investors shift6ed to the treasury bonds, and this leads to a fall of interest rate on a long-term basis.

Due to these issues, the high investment of the company started to decrease. At the end of the month of August, there was a loss of investment capital value by 50% (Lyngstadaas, Hakim, and Terje, 89). Most of the banks, as well as pension funds, had highly invested in the LTCM company. When this issue occurred, it threatened almost everyone as these institutions were near bankruptcy.

Stearns played a significant role in preventing the collapse of LTCM. In the month of September, all the LTCM derivatives and bonds were settled by investment banks, which took over in the management of the company. Although Bear Stearns still feared that the investment bank would make losses, a payment of $500 million was made as a form of investing. Thus, it highly helps the company from collapsing.

The 2008 Financial Crisis

On the other hand, the 2008 financial crisis was the worst disaster of economic as compared to the LTCM since the great depression, which occurred in the year 1929. The crisis occurred and profoundly affected the whole world despite being prevented by the treasury department and federal reserve. A great recession occurred whereby the prices of housing highly dropped at a higher rate as compared to the level at which it dropped during the great depression of 1929 (Poole, Adam and Shumaila, 145). After the end of the recession, the rate of unemployment was still high, and this made most of the people who were looking for a job to give up.There are various causes of the 2008 crisis, and in 2006 is when one of the signs occurred when the prices of housing started falling. Most of the experts thought that the issue would only occur for a short period and return to its normal level. However, they had no idea that most of the people had become homeowners as a result of taking mortgage loans (LaBerge, 108). Many banks provided loans to people at a rate of 100 % so that they acquire new homes. Most of the people started blaming the act of community reinvestment, which allowed the bank to make such investments, but in reality, this was not the cause.

Additional signs of the 2008 crisis appeared in the year 2007. The bank's management started panicking when they realized losses might occur and preventing this; the bank stopped lending loans to the other banks (Poole, Adam and Shumaila, 134). Then, the federal reserve started helping the banking systems by pumping the liquidity, but it did not help. Thus, this leads to the 2008 financial crisis when most of the investors started selling their investment bank shares because the bank had a lot of toxic assets.

Conclusion

In conclusion, the recent financial crisis highly swept most of the financial markets, and the others were left in a risky position of collapsing. Although there is nothing the experts can do to prevent any other financial crisis from occurring, investors are required to predicate where there is a higher degree of uncertainty or certainty before investing. From what investors have learned in the recent crisis, no one would wish to make such a mistake again.

Work Cited

LaBerge, David A. "Recession in Retrospect: Financial Regulation & Consumer Protection Ten Years Since the 2008 Financial Crisis." Minn. L. Rev. 103 (2018): 2423.

Lyngstadaas, Hakim, and Terje Berg. "Working capital management: evidence from Norway." International Journal of Managerial Finance (2016).

Poole, Adam, and Shumaila Yousafzai. "The financial service industry and the 2008 financial crisis: How to restore lost trust." (2020).

Ullah, G. M., et al. "Working Capital Management and SME Profitability: Empirical Evidence from Bangladesh." Global Journal of Management and Business 5.2 (2018): 094-099.