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.
In some cases, such truncated risk appraisals may be accurate, but they are not a substitute for a rigorous analysis by the lender of the borrower’s overall credit worthiness and risk profile. Third, in this regard what lessons are there for bank regulators? Domestic commercial bank exposure to LTCM included both direct lending and acting as counterparties to the firm in derivatives contracts.