Which 1998 hedge fund collapse threatened the global financial system and led to a major Federal Reserve-arranged rescue?

The 1998 collapse of Long-Term Capital Management threatened the global financial system and led to a Federal Reserve-arranged rescue.

Long-Term Capital Management, or LTCM, was a highly leveraged hedge fund founded in 1994. Its partners included prominent traders and economists, including Nobel Prize-winning economists Myron Scholes and Robert C. Merton. The fund relied on mathematical models and large positions designed to profit from small pricing differences.

The Russian government’s August 1998 debt default and the resulting market turmoil caused many of LTCM's trades to move against it. Because the fund had borrowed heavily and traded with numerous major banks, its disorderly failure could have produced wider losses and forced asset sales.

The Federal Reserve Bank of New York helped coordinate a private-sector recapitalization in September 1998. The central bank did not directly bail out LTCM with taxpayer funds. The episode became a lasting warning about leverage, interconnected counterparties, and risks outside traditional banks.