This isn’t Greek. You can understand it.

From Wikipedia, here is a description of some of the activities surrounding the collapse of LTCM (Long-Term Capital Management in 1998:

At the beginning of 1998, the firm had equity of $4.7 billion and had borrowed over $124.5 billion with assets of around $129 billion, for a debt-to-equity ratio of over 25 to 1.[17] It had off-balance sheet derivative positions with a notional value of approximately $1.25 trillion, most of which were in interest rate derivatives such as interest rate swaps. The fund also invested in other derivatives such as equity options.

John Quiggin’s book Zombie Economics (2010) states, “These derivatives, such as interest rate swaps, were developed with the supposed goal of allowing firms to manage risk on exchange rates and interest rate movements. Instead, they allowed speculation on an unparalleled scale.”[18]

Secret and opaque operations[edit]

LTCM was open about its overall strategy, but very secretive about its specific operations, including scattering trades among banks. And in perhaps a disconcerting note, “since Long-Term was flourishing, no one needed to know exactly what they were doing. All they knew was that the profits were coming in as promised,” or at least perhaps what should have been a disconcerting note when looked at in hindsight.[19]

Opaqueness may have made even more of a difference and investors may have had even a harder time judging the risk involved when LTCM moved from bond arbitrage into arbitrage involving common stocks and corporate mergers.[19]

My point is that LTCM was collapsing and being saved by all the major investment houses because they were launching an exaggerated version of the LTCM scheme. As long as the money keeps flowing, nobody is asking any questions. But when it stops, the finger-pointing and ankle-biting will commence.

Please also note that when the notional value of LTCM paper had reached $1.25 Trillion, everyone thought that was an exotic number. Where are those people now that the “shadow banking market” has topped $1.4 Quadrillion — more than one thousand times the size of the LTCM catastrophe and more than 15 times the value of all legally recognized currency (fiat) in the world?

And finally, let me remind you of the predictions of Abraham Briloff in the book “Unaccountable Accounting,” published in the 1960’s. The notion of “off-balance sheet” numbers and figures was idiotic and remains so — yet it has perniciously crept into the lexicon as though it is a fine thing. I think it is eating away at the bottom of our economic tub. Nothing happens until the bottom falls out.

Just as LTCM was having its meteoric rise and flame out, a company called Mortgage Electronic Registration Systems, later MERSCORP, and now known as MERS (despite three corporate iterations) was being formed, and the Intaernational Commercial Exchange (formed in YSK (2000) was taking shape to literally — not virtually — control most finance, law, and government worldwide.

The absurd trading in “derivatives” in the 1990s was not over. That was the trial run — just as the Madoff scam was a trial run for Wall Street. One example: UBS (Union Bank of Switzerland) was a big backer of LTCM. And it made substantial $300 million) commitments to bail out the “situation.” As derivatives pivoted to the long-term and short-term lending marketplace, Lehman Brothers was one of the key players that used the same quantitative models. When Lehman collapsed, guess where many of the people went? Answer: UBS.

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