Counterparties had financial incentive to mark LTCM positions at unfavorable prices

Evidence

“When it became apparent they [LTCM] were having difficulties, we thought that if they are going to default, we’re going to be short a hell of a lot of volatility. So we’d rather be short at 40 [at an implied volatility of 40 percent per annum] than 30, right? So it was clearly in our interest to mark at as high a volatility as possible. That’s why everybody pushed the volatility against them, which contributed to their demise in the end.” — Donald MacKenzie, An Engine, Not a Camera, 1068

Categorization

• XREF: Shows how model prices (implied vol marks) are not neutral observations but strategic weapons; ties to the performativity thesis that models shape rather than just describe markets. — connects to: Counterparties stood to profit financially from the collapse of their own trading partner. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1066