Almost exactly 10 years ago, in September 1998, the global financial system was down on its knees after the collapse of Long Term Capital Management (LTCM), a hedge fund. Since then, the usual assumption has been that hedge funds are the biggest source of systemic risk. They were the raptors and locusts that would bring trouble to our world.
Curiously, the turmoil that has shaken the financial world over the past year has arisen from the disastrous bets made by blue-blood Wall Street banks such as Bear Stearns, Merrill Lynch and Lehman Brothers. And then there are the tattered portfolios of mortgage firms such as Fannie Mae and Freddie Mac, whose debt was implicitly guaranteed by the US government.
Notice: There have been no hedge fund blowouts amid all this trouble.
This raises a pertinent question: Have regulators and commentators tried to hunt down the wrong target? Or is it only a matter of time before we are hit by another LTCM-style wreckage?