Which hedge fund's collapse in 1998 prompted a Wall Street bailout?

The hedge fund whose 1998 collapse prompted a Wall Street rescue was Long-Term Capital Management, or LTCM.

Founded in 1994 by former Salomon Brothers trader John Meriwether, LTCM specialized in highly leveraged relative-value and convergence trades. Its partners included Nobel Prize-winning economists Myron Scholes and Robert C. Merton, which helped give the fund an aura of mathematical sophistication and safety.

The strategy depended on small pricing differences eventually narrowing. In 1998, however, the Asian and Russian financial crises caused markets to move in ways that overwhelmed the fund’s models and leverage. LTCM lost about $4.6 billion in less than four months and faced the prospect of rapidly liquidating enormous positions.

On September 23, 1998, the Federal Reserve Bank of New York organized a private recapitalization by 14 financial institutions, totaling roughly $3.6 billion. It was commonly called a bailout, although the Fed did not inject public money. LTCM continued operating briefly and was liquidated by early 2000.