Which 1998 hedge fund collapse threatened wider financial stability and led to a Federal Reserve-arranged rescue?

The 1998 hedge fund collapse that threatened wider financial stability was Long-Term Capital Management.

Long-Term Capital Management, or LTCM, was founded in 1994 and employed prominent financial experts, including Nobel Prize-winning economists Robert Merton and Myron Scholes. Its trading models assumed that price relationships would return toward historical norms. The Russian financial crisis in August 1998 disrupted those assumptions, causing large losses across its highly leveraged positions.

The Federal Reserve Bank of New York organized a private-sector rescue in September 1998, in which major financial institutions provided capital and took control of the fund’s portfolio. The Federal Reserve did not directly fund the bailout, but it facilitated negotiations because an uncontrolled liquidation might have destabilized markets. LTCM is a classic warning about leverage, model risk, and the danger of crowded trades.