Assignment

Questions

1. In the context of Long Term Capital Management's portfolio and investment strategies, briefly describe the conditions and circumstances that led to LTCM's demise. More specifically, how did LTCM's strategies and management expose the firms, as well as the broader financial system, to unforeseen risks?

2. Why did the Federal Reserve Bank of New York believe it was necessary to intervene after it became aware of LTCM's problems?

3. Compare the LTCM collapse in 1998 with the collapse, a decade later, of Bear Stearns. In what ways are they similar? In what ways are the different?

4. Compare and contrast the Fed's response to the LTCM blowup vis-à-vis the Bear Stearns collapse. [Note that this is different from Question 3 above].

5. What is Section 13 (3) of the Federal Reserve Act and how does it pertain to the cases of LTCM, Bear Stearns and Lehman Brothers?

6. Unlike Bear Stearns and LTCM, Lehman was allowed to fail. Why do you think that Lehman was treated different than LTCM?

7. In your opinion, should Lehman have been bailed out? Why or Why not? [Note: as part of the answer to this question, you should explore Ben Bernanke's rationale for allowing Lehman to fail].

8. In your opinion, would any of the additional regulatory mechanisms provided by Dodd-Frank have prevented the LTCM debacle?

Other notes:

In question 1, include convergence and relative value strategies as well as the other trades (include in the case). Also include what is stated in supplement C (do not only talk about Russia)

In question 3, talk about the way the firms blew up and why was it similar. The whole first paragraph talks about bear stearns instead of answering what the question is asking. Reduce that and expand on similarities and differences based on the previous statement.

In question 4, talk about the responses on how the Fed reacted to this, there are similarities and differences as well. Talk about what the Fed learned from the LTCM case.

In question 7, use Ben Bernanke's rationale for allowing Lehman to fail. You should take information from Bernanke's lectures 3 and 4.

I am not planning to submit the paper with the questions written, therefore, please make sure the answers only take the 8 pages

I also noticed that the WSJ article "LTCM: its a short-term memory" was not used because I do not see this in the references, and it should be part of it.