Long-Term Capital Management’s white paper explains how leveraged fixed income arbitrage unraveled during the 1998 Russian debt crisis, exposing hidden liquidity risks across global markets. The paper argues that sophisticated models and Nobel pedigree masked fragile assumptions, while extreme leverage turned market dislocations into threats.
LTCM Brochure
LTCM
Research
12 Pages
Key Takeaways
Leverage Amplified Losses: LTCM controlled more than $1 trillion in notional exposure with roughly $4.7 billion in equity before suffering catastrophic losses during 1998 market volatility.
Liquidity Assumptions Failed: The fund lost approximately $1.9 billion in August 1998 alone as spreads widened instead of converging during the Russian debt default.
Systemic Risk Emerged: A Federal Reserve coordinated rescue involved 14 banks contributing $3.6 billion to prevent broader instability across global financial markets.
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