(I began publishing my monthly newsletter The Bob Livingston Letter™ in 1969. The following is an excerpt from the November 1998 issue in which I alerted readers of The Letter about the derivatives scam that was then still new but was coming to light via the failure of Long Term Capital Management. I warned at the time that such a scam could crash the world economy. LTCM, started in 1993 by disgraced Salomon Brothers executive John W. Meriwether, took in more than $1 billion from celebrities, business owners, individuals connected to the finance industry and the Italian central bank, and by the beginning of 1998 had returned $2.7 billion to investors even though its net worth was only about $1.7 billion. But the Asian financial crisis of 1997 began to take its toll on the asset markets and by summer LTCM had lost $461 million and was hemorrhaging money. Unable to secure financing, and rejecting an offer from Goldman Sachs, AIG and Berkshire Hathaway as too low, LTCM was headed for collapse. The Federal Reserve stepped in in September and organized a bailout to the tune of $3.625 billion. The bailout contributions came from Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P. Morgan, Morgan Stanley, Salomon Smith Barney, UBS, Société Générale, Paribas and Credit Agricole. Ironically, Bear Stearns and Lehman Brothers declined to participate. Many believed at the time, myself included, that the bailout would only encourage large financial institutions (that later became known as “too-big-to-fail” banks) to assume more risk with the confidence that the Fed would bail them out as well. Turns out that it did. In 2008, Lehman Brothers’ collapse initiated the financial crisis that resulted in the Great Recession under which we continue to languish. Lehman’s collapse was related to its use of derivatives, and the Fed stepped in and bailed out all the big banksters – except Lehman — that Lehman’s failure almost took down. I’ve often wondered why the Fed let Lehman fail while bailing out all the other banksters and AIG. Was it payback for Lehman’s not participating in the bailout of LTCM? There was some speculation at the time that it was indeed payback.)
By now nearly everyone in the financial world has heard of Long Term Capital Management (LTCM). This is a story that could easily directly affect every one of us. This is not for entertainment only, as it along with 5,500 other derivative funds can collapse the world economy.
Why do we think the Federal Reserve got involved so quickly?
This LTCM was run by hotshots and they had the credibility to suck in many large banks around the world.
LTCM had two Nobel economists. There was also involved a former vice chairman of the Federal Reserve as part of the LTCM brain trust. Wouldn’t you trust these people with your money?
The point is that the U.S. banking and financial system permits heavy investment in these highly secretive hedge funds. Ditto for banks around the world.
Initial investigation has shown that the investor banks as well as others were ignorant of what was happening to their money. In fact many admitted that they didn’t even understand what a derivative is.
A derivative is another word for leverage. They take one billion and leverage it to trillions. In other words they bet the financial system’s very existence. And it appears that the LTCM bet wrong. Apparently nobody figured that these whiz kids would bet wrong.
This derivative situation is a kind term for world panic that could easily become an electronic panic.
If we recognize the times now, we need to be alert. Exchange controls are sure to come for U.S. citizens. If we do have an economic collapse, the government will want to know where every penny you have is. A tiny infraction can become a criminal offense. Your fellow Anglo-Saxons are as capable of confiscating your assets as was Adolph Hitler. Stop dreaming about a democracy.
If we err on the side of safety and we have a soft landing, don’t be disappointed. At best the financial situation is going to take years to unwind. We will live in uncertainty as we watch events unfold. Keep the fire escape open.
Have some gold coins. The gold standard will return after the collapse. Gold will be the only game in town. Have some paper dollars. Have some food storage. If you don’t know what I mean, watch the squirrels and bears get ready for winter. Get some money out of the country before exchange controls.
None of this action should interfere with your happiness and joy in living. It will guarantee it.