From LTCM To Lehman: Ex-Treasury Sec. Reflects On Crises

Sep 18 2008 | 8:34am ET

As the problems on Wall Street continue and grow, the 10th anniversary of another major collapse is just around the corner.

The demise of Long Term Capital Management shook the financial system in 1998, much as the collapses of Bear Stearns and Lehman Brothers have rattled the economy in 2008. Former Treasury Secretary Lawrence Summers had a front-row seat to the LTCM debacle, and this week shared his thoughts at a hedge fund conference in Greenwich, Conn., on how the government handled the LTCM situation then, and their intervention, or lack thereof, in current crises.

During LTCM’s collapse, Summers said that using taxpayer money to bail out the hedge fund was never an option.

“I can honestly say that there was never any thought given in any way, shape or form, to the infusion of taxpayers’ money into LTCM, or the infusion of taxpayers’ money to any institution for the purpose of buying LTCM,” he says. “We did have a sense that there was a tremendous coordination problem, and if everyone found a way to stand down and not rip all the assets out of LTCM, more or less everybody would be better off.”

In the end, Summers says history will record Wall Street’s collaborative decision to rescue LTCM as the right one.

Regarding the current malaise in the financial sector, Summers, who served as president of Harvard University after leaving the Treasury and is now a managing director at D.E. Shaw Group, in which Lehman Brothers owns a minority stake, says “every crisis is different and I imagine every team operates differently.”

Although he claims no insight into the current crises, he did offer that “a number of differences between the Lehman situation and Bear Stearns situation have been noticed and the degree to which it was shot out of the blue.”

The important thing for the troubleshooters will be to talk to different parties involved to try to understand the problem and lay out a number of possible policy options, according to Summers, and then select the policies that minimize the risks. Summers’ says his approach to solving a crises was to always hope for the best and prepare for the worst.

And as an outsider looking in, the former Cabinet member cautioned the audience to maintain a considerable sense of humility with respect to what judgments they would make based on all of the actual constraints.

“Until March 2008, there had been no contingency plan for the unwinding of a major broker-dealer,” he said. “The strategy of doing what was necessary to put Bear in secure hands was a very reasonable strategy. Details of the price that JPMorgan paid are questions we can argue about for a long time, but, as I like to say during the international crises, ‘battlefield judgment is never perfect.’”

As to his new part-time gig at D.E. Shaw, Summers says he spends a couple of days a week working with the various investment groups at the firm, particularly the ones involved in macro, emerging market and quantitative trading. He also continues to teach at Harvard, and is a consultant to Sen. Barack Obama’s presidential campaign.

Summers says he’s been impressed with Obama’s curiosity about economic and financial policies and his desire to “figure out what the right thing is rather than the politically correct thing.”


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