When Genius Failed: The Rise and Fall of Long-Term Capital Management

by Roger Lowenstein

The damage in Long-Term’s markets was acute. Equity volatility broke above 30 percent. Yields on Treasurys dropped, widening credit spreads ever more. Spreads on investment-grade bonds exploded upward—on that one day—from 133 points to 162! In truth, such spreads had to be inferred, because almost nothing in bond markets traded that day. The bond market had effectively closed; no one could trade out of anything, or not without suffering horrendous losses. It was as if a bomb had hit; traders looked at their screens, and the screens stared blankly back. Buyers were simply nowhere to be found. “August thirty-first was a unique day,” said Curtis Shambaugh, the bond strategist at Credit Suisse First Boston. “So few issues traded, you had to guess where they were.” For a fund that had to lighten its load, the month had ended with the most nightmarish kind of bond market imaginable: no bond market at all.