Long-Term Capital Management's near-collapse

Long-Term Capital Management, founded in 1994 by former Salomon Brothers trader John Meriwether with two Nobel Prize-winning economists among its partners, ran a 'market-neutral' strategy that earned steady 20-40% annual returns by betting on small pricing anomalies across bond markets worldwide. Because each of those bets earned only thin margins, the fund borrowed heavily to scale them up: by early 1998 it held about $5 billion in capital against more than $125 billion in borrowed positions, a leverage ratio near 30 to 1. Russia's default on its domestic debt and devaluation of the ruble in August 1998 triggered a broader flight from risk that hit LTCM's positions simultaneously, and the fund lost 44% of its capital that month alone. Fearing that a disorderly unwind of LTCM's vast, interconnected trades could set off a broader fire sale, the Federal Reserve Bank of New York convened 14 Wall Street banks and brokerages, which injected $3.6 billion to take over the fund and liquidate it in an orderly fashion, without any Fed money changing hands.