LTCM’s failure had shown the craziness of insuring the whole world against volatility without holding capital in reserve; but over the next decade, the giant insurer AIG repeated the same error. LTCM’s failure had exposed the fallacy that diversification could reduce risk to virtually zero; but over the next decade investors repeated this miscalculation by buying bundles of supposedly diversified mortgage securities. Most fundamental, LTCM’s failure had provided an object lesson in the dangers of leveraged finance. And yet the world’s response was not only to let leveraged trading continue. It
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