Which hedge fund’s 1998 failure prompted a Federal Reserve-arranged rescue?

Long-Term Capital Management’s 1998 failure prompted 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 future Nobel Prize winners Robert Merton and Myron Scholes. The fund used complex relative-value strategies that depended on markets behaving in historically familiar ways.

The 1998 Russian financial crisis disrupted those assumptions. Investors fled risky assets, correlations changed, and LTCM suffered enormous losses. Because many major financial institutions were counterparties, 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 LTCM with public money or take ownership of it. Fourteen banks and investment firms supplied the rescue funds and received control of the fund’s remaining portfolio. The episode became a landmark example of how leverage and interconnected derivatives can threaten wider market stability.