How Wall Street's Smartest Minds Lost Billions Overnight

Benzinga

Long Term Capital Management (LTCM), once a prestigious hedge fund managing over $126 billion, collapsed in 1998 after its complex, highly leveraged strategies failed due to unexpected events like the Russian debt default. The firm lost nearly 90% of its capital in weeks, leading the Federal Reserve to organize a $3.6 billion bailout from major banks to prevent wider financial instability. This incident underscored the dangers of over-leveraging and the unpredictability of financial models.

Transcript

00:00What happens when the smartest people in the room make the wrong call?

00:03Long-term capital management went from Wall Street royalty to total collapse in a matter of days.

00:08In the 1990s, long-term capital management, or LTCM,

00:12was one of the most prestigious hedge funds on Wall Street.

00:14At its height, LTCM managed over $126 billion in assets with just $4.8 billion

00:20in initial investor capital thanks to highly leveraged positions and complex strategies.

00:24Using intricate mathematical models, LTCM bets on small price differences in global markets.

00:29In 1998, following unexpected events like the Russian debt default,

00:33LTCM's strategies backfired, leading to massive losses.

00:36In just weeks, the firm lost $4.6 billion, or nearly 90% of its capital.

00:41Fearing LTCM's collapse could destabilize global markets,

00:44the Federal Reserve organized a bailout worth $3.6 billion

00:47from major banks to avoid a larger financial crisis.

00:50The incident highlighted the dangers of overleveraging and the unpredictability of

00:54financial models, serving as a stark warning about the risks of unchecked confidence in finance.

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