On the Run Summary and Analysis

In 1994, the Fed raised interest rates and bond prices fell more than they should have. The thirty year Treasury bond dropped sixteen percent, which raised its yield. There was panic in the markets and investors trying to sell widened the spread further. Michael Steindardt was one of the traders that was caught. "The real culprit in 1994 was leverage. If you aren't in debt, you can't go broke and can't be made to sell, in which case 'liquidity' is irrelevant. But a leveraged firm may be forced to sell, lest fast-accumulating losses put it out of business. Leverage always gives rise to this same brutal dynamic, and its dangers cannot be stressed too often" (Chap. 3, pp. 42-43).

With their style of trading, Long-Term was in a better position than most other firms. It made good trades so the...