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The Journal of Wealth Management

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Primary Article

Enron, LTCM, and Failure

The Common Thread

Victor A. Canto
The Journal of Wealth Management Summer 2002, 5 (1) 59-61; DOI: https://doi.org/10.3905/jwm.2002.320435
Victor A. Canto
CEO and founder of La Jolla Economics, an economic consulting firm based in La Jolla, CA.
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  • For correspondence: vcanto@lajollaeconomics.com
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Abstract

Are there universal circumstances that lead to failures such as Enron and Long-Term Capital Management? This author argues that two conditions are almost always present: something akin to a sure bet, where a value proposition or trade appears virtually irresistible, and a critical error of judgment as to a firm's market impact, that error of judgement often leads managers to overestimate the degree of portfolio insurance they thought they had. In short, they failed to appreciate their own impact on market liquidity, should they need to square their books. Without denying that "bad investments" are necessary pre-conditions to a crisis, the author suggests that the public focus on bad investments or questionable accounting is only part of the problem. The other is a failure to understand the dynamics of a trade, throughout the full spectrum of possible outcomes.

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The Journal of Wealth Management
Vol. 5, Issue 1
Summer 2002
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Enron, LTCM, and Failure
Victor A. Canto
The Journal of Wealth Management Apr 2002, 5 (1) 59-61; DOI: 10.3905/jwm.2002.320435

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Enron, LTCM, and Failure
Victor A. Canto
The Journal of Wealth Management Apr 2002, 5 (1) 59-61; DOI: 10.3905/jwm.2002.320435
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