Which 1998 hedge fund collapse required a Federal Reserve-brokered rescue after Russia’s debt default?

Long-Term Capital Management was the hedge fund whose 1998 collapse prompted a Federal Reserve-brokered private-sector rescue.

LTCM was founded in 1994 by John Meriwether and included prominent academics and financial experts, including Nobel Prize-winning economists Robert Merton and Myron Scholes. The fund used highly leveraged trading strategies that expected price relationships in global markets to converge.

Russia’s August 1998 default and devaluation disrupted those assumptions. Investors fled risky assets, correlations changed, and LTCM’s positions produced heavy losses. Because the fund had extensive dealings with major banks, regulators feared that an uncontrolled failure could destabilize financial markets.

The Federal Reserve Bank of New York organized negotiations, and fourteen financial institutions supplied a private rescue package worth about $3.6 billion in exchange for control. The Federal Reserve did not directly bail out LTCM with taxpayer money. The episode became a major warning about leverage, interconnected counterparties, and risks outside the regulated banking system.