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Opinion
Barry Ritholtz

We Forget That the Financial Crisis Had a Trial Run

The collapse of hedge fund Long-Term Capital Management had the same ingredients: lots of leverage, huge risk and a surplus of arrogance.

Leverage can do this, too.

Leverage can do this, too.

Source: TASS/Getty Images
Corrected

September saw a spasm of retrospectives on the 10-year anniversary of the financial crisis. Lost in all of the hoopla was the 20-year anniversary of another collapse — that of hedge fund Long-Term Capital Management in September 1998. In many ways, that episode was a precursor to the next crisis.

This privately held investment firm believed — incorrectly, we later learned — that it had come up with a new and more profitable way to invest capital. And for a while, it did: Returns soared, with annualized gains after fees of 21, 43 and 41 percent in its first three years. The team had the appearance, according to journalist Roger Lowenstein, of being a “$100 billion money-making juggernaut.”