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Quote of the Day
“The idea is easily extended to margin trading. We assume that it is a wise and profitable venture to buy 100 shares of United Fido at ten, paying $1000 for it. Ergo, wouldn’t it be even better to buy 200 shares for $1,000? And even better make it three or four hundred if we can find a sufficiently kindly broker to do us this favor?
The answer is no. But I only know one way of proving it to you conclusively. Go try it.”
Fred Schwed Jr in his book, Where are the Customers’ Yachts
On this day in 1998, Long Term Capital Management – at the time one of the most successful hedge funds of all time, was heavily invested in Russian bonds on margin. As we will see in today’s “This Day in Stock Market History” below their massive trades on margin would come back to bite them, resulting in one of the most spectacular failures in the stock market’s history.
August 21st – This Day in Stock Market History
August 21st, 1996 – As the tech bubble inflates and the internet becomes more popular, internet browsers are the talk of Wall Street.
On this day Netscape releases the third version of its internet browser, Netscape 3.0. At its peak, Netscape would have 60% of the internet browser market share. The release would coincide with a sharp 20% rise in Netscape stock over the remainder of 1996.
However, Netscape’s stock would never surpass its 1995 peak shortly after its August 9th, 1995 IPO:
August 21st, 1998 – As the Russian debt crisis unfolds, one hedge fund in particular is feeling the pain. On this day alone, Long Term Capital Management loses $553 million dollars.
The fund was levered 25:1, heavily invested in Russian bonds that had defaulted a few days before.
The fund’s equity has fallen from $4.67 billion at the beginning of the month to $2.9 billion in late August 1998.
The hedge fund would be bankrupt in a month.
Source: When Genius Failed
U.S. stock markets fell as much as 3.25% on this day in 1998, but recovered to close down just 0.9%.
The Russian crisis would lead to a 20% decline in U.S. markets between July and August 1998:
U.S. Bank stocks were hit the worst from the crisis, an index of U.S. banks was down 13% over the previous 2 weeks.
Russia’s stock market finished the week down, for a total weekly decline of more than 28%! The nation’s stock market would lose more than 40% of its value in the month of August alone, and 85% from its 1997 peak:
Best August 21st in Dow Jones Industrial Average History
1991 – Up 3.02%, 88.10 points.
Worst August 21st in Dow Jones Industrial Average History
1915 – Down 3.22%, 2.55 points.
Read of the Day
- Roger Lowenstein’s book When Genius Failed details the rise and fall of Long Term Capital Management. It is easily one of my favorite Wall Street history books.
- The collapse of Long Term Capital Management nearly brought down the U.S. financial system, as many institutions had lent Long Term Capital billions of dollars. It’s rescue on September 24th, 1998 needed the cooperation of the Federal Reserve and the largest banks in the world. After study, Congress and the Federal Reserve released a study on Long Term Capital Management called Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management
Just how much was Long Term Capital leveraged in August 1998? Per the Federal Reserve’s report, with about $4.6 billion in equity at the start of the month the company had:
“At the end of August, 1998, the gross notional amounts of the Fund’s contracts on futures exchanges exceeded $500 billion, swaps contracts more than $750 billion, and options and other OTC derivatives over $150 billion.”
<– Go To Previous Day: August 20th, 1982: The most powerful bull market in history begins.
Go To Next Day: August 22nd, 1720: South Sea Company has its fourth share offering at 1,000 pounds. Shares sell out in hours.–>
