Option Pricing

michael at ecst.csuchico.edu michael at ecst.csuchico.edu
Thu Oct 1 15:40:37 PDT 1998

Can someone explain to me the purpose of the bail out? Did the banks believe that they would profit from this? If Buffett was already willing to bail them out, why would the Fed need the brokerage houses to step in? Is the Mullins connection still important at the Fed?

> Interestingly enough it is by no means obvious that after the firm was
> recapitalized that
> as it liquidates its positions it won't be closed out as a profit.
> Evidently Warren Buffet was
> willing to recapitalize the firm along with Goldman Sachs so at least some
> very unnaive smart money thinks LTCM was doing something right.

Not really. I could buy out the bankrupted remains of a stupidly run company for very little, then having shed the company of its debts (via bankruptcy) make a profit.

By the way, I found it interesting that the week that Congress is passing a bankruptcy law for working class people, they bail out the rich.

-- Michael Perelman Economics Department California State University Chico, CA 95929

Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu

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