Myron Scholes winner of the Nobel Prize in economics was one of the founding partners of Long Term Capital, the hedge fund that almost took down the world's financial system in 1998 due to the massive leverage of their fund. Ten + years later he was one of the participants in a Wall Street Journal sponsored forum on the Future Of Finance. Scholes was one of the main members of the working group on the future of credit markets. One of the five recommendations:
So the third point was about leverage.
MR. SCHOLES: Yes, the idea that the amount of leverage should be reduced or the amount of capital increased to match the risk of the enterprise, and the amount of capital required for the same level of risk be increased.
We believe that having more capital underlie the actual activities of the banks and other financial institutions is not that expensive
Roger Lowenstein's When Genius Failed, a classic of financial writing presents a great history of LTCM's demise.
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