With traders scrambling to pay back debts, Neal Soss, an economist at Credit Suisse First Boston, explained to the Journal, You don't sell what you should. You sell what you can. By leveraging one security, investors had potentially given up control of all of their others. This verity is well worth remembering: the securities may be unrelated, but the same investors owned them, implicitly linking them in times of stress. And when armies of financial soldiers were involved in the same securities, borders shrank. The very concept of safety through diversification - the basis of Long-Term's own security - would merit rethinking.
As traders struggled to repay debts, economist Neal Soss highlighted the challenge of selling assets during a crisis. He pointed out that in tough times, investors often sell available assets instead of what they should, leading to unintended consequences. By leveraging a single security, they relinquished control over their entire portfolio, creating a situation where unrelated securities became interconnected through the same investors.
This interconnectedness meant that when a large number of financial players focused on similar investments, the idea of diversification as a safety net was undermined. In the context of Long-Term Capital Management, this reality prompted a reevaluation of the traditional belief that diversifying one's portfolio ensures protection against market volatility.
