Nice summary. Thanks for injecting some reality into the discussion.
When I was hired four years ago, the head of risk management at my company gave a talk to the my associate class. I remember he said, “LTCM didn’t make the wrong bets — they made the right bets, but they didn’t have the liquidity to hold on long enough.” Excluding the whole “Russia won’t default on its own currency” part.
I can't excuse LTCM on the grounds that, if they'd been able to stay in their trades, they'd have prospered ultimately. Why can't I? Because of the well-known remark of Maynard Keynes, which has been true forever, to wit:
''Markets can remain irrational longer than you can stay solvent.''
I'm no fan of Keynes, but when one is right, one is right. LTCM, figuratively speaking, stuck their own dicks in the fan, and had no reason to expect, ultimately, any other result than what did occur.
And, btw, ''going directional'' on Russia in 1998, with VKOs offering NINETY per cent annual return, could have been nothing but utter madness.
LTCM got in the game at the right time; Euroconvergence was clearly going to occur, and they made a huge pile on convergence trades. However, when the convergences stopped paying off, they were sitting on a huge pile of capital, couldn't find a profitable home for it (Euroconvergence comes along, what?, once a century or so?), and were firm believers in their own infallibility.
That's a recipe for disaster that even Emeril could appreciate.
FReegards! ;^)