Long-Term had been too leveraged. It had overlooked the danger that its trades could implode spectacularly if other arbitrageurs were forced to dump copycat positions suddenly; it had misjudged the precision with which financial risk can be measured. But there was no reason to suppose that Long-Term’s errors were possible only at hedge funds. Indeed, Long-Term’s collapse had rattled the authorities because it had coincided with frightening losses at investment banks such as Lehman Brothers. In the wake of LTCM’s failure, Greenspan and his fellow regulators could see that the real challenge was
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