The 1998 U.S. hedge-fund crisis involving Long-Term Capital Management was known as the LTCM crisis.
Long-Term Capital Management was a highly leveraged hedge fund founded in 1994. Its partners included prominent traders and Nobel Prize-winning economists, and it used mathematical models to exploit small price differences among securities. The strategy appeared successful until market turmoil caused those relationships to diverge.
Russia’s August 1998 debt default intensified a global flight to safety. Investors sold risky assets and bought highly liquid government bonds, producing losses for LTCM. Because the fund had extensive positions with major financial institutions, the Federal Reserve Bank of New York helped arrange a private-sector recapitalization in September 1998.
The Federal Reserve did not use public money to bail out LTCM or directly manage the fund. A consortium of fourteen banks and brokerage firms supplied the capital and took control of the portfolio. The episode became a major example of how leverage and interconnected derivatives could create systemic risk.