Buffett on LTCM

According to Warren Buffet the ill-fated Long Term Capital Management had made the right bets but didn’t have the cash to stay solvent.  Buffet wanted to step in and buy the firm but a holiday intervened.  Thanks to Newmark’s Door for the pointer.

…Warren wished that he had been able to buy LTCM’s positions when the Fed forced
a resolution of the crisis that was crippling the government bond market.

The LTCM crisis was a ready-made example of Warren’s philosophy of buying
firms when the economics was right, yet fear ruled the markets.  He noted that
“off-the-run” (non-benchmark) government bonds were selling to yield 30 basis
points more than the “on-the-run” (benchmark) bonds that were maturing just six
months later.  He rightly claimed that this made no sense economically.

LTCM had taken a huge leveraged position in these bonds when the spreads were
much smaller, but didn’t have the collateral to hold on to it when the spread
widened.  Buffett quoted John Maynard Keynes, who wrote in 1931 that “The market
can stay irrational longer than you can stay solvent.” As the spread widened,
Keynes’ dictum became devastatingly relevant for LTCM.  But Berkshire, with its
huge cash hoard, could withstand the pressure of even more market irrationality
before the spread eventually returned to normal.

Unfortunately, Warren was never able to consummate the deal.  He had been
invited by Bill Gates to vacation in Alaska when the crisis broke and it was
hard to negotiate such a deal on a cell phone… “Bill Gates cost me about $3 billion,” he


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