In part, this also reflected an underappreciation of the volume and nature of the risks LTCM had undertaken and its relative size in the overall market. By failing to make those determinations, its fellow market participants failed to put an adequate brake on LTCM’s use of leverage.
To be sure, sometimes decisions are based on judgements about the soundness of borrowers that are accepted from third parties or, possibly in this case, that are founded on the impressive qualifications of LTCM’s principals.