Which hedge fund’s 1998 collapse prompted a Federal Reserve-arranged private-sector rescue?

Long-Term Capital Management’s 1998 collapse prompted a Federal Reserve-arranged private-sector 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 Robert Merton and Myron Scholes.

The fund suffered enormous losses after Russia’s 1998 default and the resulting global flight from risky assets. Its trading models assumed that price relationships would converge, but market conditions became far more extreme than historical data suggested. LTCM’s leverage made its positions important to many major financial institutions.

On September 23, 1998, the Federal Reserve Bank of New York helped arrange a consortium in which fourteen private financial institutions supplied $3.625 billion and took control of the fund. The Federal Reserve did not provide the rescue money, although it facilitated the agreement to reduce risks to the wider financial system.