(WARNING) I'm revealing a dirty secret about trading..

Quote from AK100:

LTCM didn't blow up so to speak, they got blown up.

Goldmans and others were their prime brokers so knew their positions. When vol started to rise due to the Asian crisis the street smelled blood with LTCM via their positions (remember, they knew what they were).

So Goldmans, as nice people do, put the squeeze on, it's as simple as that, and the rest is history.
More...

When did goldman hold a gun to meriweather et al. and force them to lever up a bunch of convergence trades that would all correlate during a crisis?

They had plenty of early opportunities to scale it back, what any decent trader will do when things get dicey. With all the geniuses involved you'd think they'd take the predatory and irrational behavior of the market into consideration. I guess if it doesn't fit in the model...

Did traders take advantage of the death spiral? Ya, that's the market. Also, most of the big firms had sizable stakes in LTCM and a desire not to see the financial world implode so it's not as black-and-white as you make it seem.

...It is nice to know that OP has figured out the math though, I think meriweather was/is starting up a new fund (?), maybe shoot him an email?
 
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