Long Term Capital Management
Long-Term Capital Management, a hedge fund that boasted two Nobel Prize-winning economists had a spectacular rise and striking collapse in 1998 that threatened to take down the entire financial system.
Long-Term Capital Management (LTCM) opened for business in 1994 by raising just over $1 billion in start-up capital. The well-regarded dream team of financial and mathematical brain power had much success early on. Some of the leaders included John Meriweather (of Liar's Poker fame) and Nobel Laureates Robert C. Merton and Myron S. Scholes. They developed sophisticated computer models to take advantage of arbitrage trading opportunities. The narrow spreads they sought required lots of capital to earn outsized returns. The fund employed massive leverage to bridge the gap -- at one point leveraging its $5 billion in assets to control $100 billion and participating in positions totaling over $1 trillion.
The market turmoil following the 1998 Russian credit default was the precipitating event that brought LTCM down. The Federal Reserve of New York coordinated a $3.625 billion bailout by its creditors -- including a who's who of Wall Street banks. Bear Stearns famously chose not to participate.