Which hedge fund’s 1998 collapse prompted a Federal Reserve-arranged rescue because of fears of wider market contagion?

Long-Term Capital Management’s 1998 collapse prompted a Federal Reserve-arranged rescue because of fears of wider market contagion.

Long-Term Capital Management, or LTCM, was a highly leveraged hedge fund founded in 1994. Its partners included prominent financiers and Nobel Prize-winning economists. The fund used complex strategies that depended on relatively small price differences converging.

The Russian default in August 1998 and the resulting flight from risky assets caused major losses. Because LTCM had extensive positions and relationships with large financial institutions, the Federal Reserve Bank of New York organized meetings that led to a private-sector recapitalization in September 1998.

The Federal Reserve did not directly bail out the fund with taxpayer money. Fourteen banks and investment firms supplied the rescue capital and took control of the portfolio. The episode became a major example in debates about leverage, derivatives, and systemic risk.