Which 1998 hedge fund collapse threatened global markets and prompted a Federal Reserve-arranged rescue?

The 1998 hedge fund collapse that threatened global markets was Long-Term Capital Management, commonly abbreviated LTCM.

LTCM used highly leveraged trading strategies involving bonds, derivatives, and relative-value positions. After Russia defaulted on domestic debt in August 1998, markets became unusually volatile and correlations between supposedly related assets broke down. LTCM suffered large losses and faced the possibility of disorderly failure.

The Federal Reserve Bank of New York organized meetings among major financial institutions, and a consortium of banks ultimately recapitalized the fund in September 1998. The Federal Reserve did not provide the rescue money itself, but it helped coordinate the private-sector solution.

The episode became a landmark example of systemic risk: a firm need not be the largest bank to threaten markets if its positions are enormous, interconnected, and difficult to unwind during a panic.