{"id":"asset_9b35b9c99cfe","type":"text/markdown","category":"text","name":"02-ltcm-1998.md","size_bytes":3546,"title":"02 ltcm 1998","description":"An analytical account of the 1998 Federal Reserve-coordinated rescue of a major hedge fund, examining what triggered the crisis, how the intervention worked, and what precedent it established for financial risk-taking and systemic stability.","extracted_text":"# The Rescue That Set the Precedent: Long-Term Capital Management, 1998\n\nIn September 1998 the Federal Reserve Bank of New York convened sixteen banks in\na room and did not let them leave until they had agreed to put $3.6 billion into\na hedge fund. Long-Term Capital Management had lost most of its $4.7 billion of\ncapital in five weeks. It held positions with a notional value above $1 trillion\nagainst a balance sheet of around $125 billion. Two of its partners had a Nobel\nPrize between them.\n\nThe strategy was convergence arbitrage: identify pairs of securities whose prices\nshould be near-identical, buy the cheap one, short the dear one, wait for the gap\nto close. The spreads were tiny, so the leverage had to be enormous — roughly\n25-to-1 before counting derivatives. This is a sound trade in normal conditions\nand a fatal one in a panic, because a panic is precisely the event in which\nsupposedly equivalent instruments stop being priced equivalently. When Russia\ndefaulted in August 1998, e","attributes":{},"usable_for":["understanding fed coordination mechanisms","moral hazard in financial rescues","convergence arbitrage strategy and failure","pre-2008 industry assumptions about risk"],"provenance":"original-work","provenance_note":"An original analytical essay by its author.","kind":"analytical essay","reliable_for":"The author's argument about financial rescue precedent and the evidence it cites.","describe_v":6,"price_sats":{"card":0,"full":200},"content_available":true,"available":true,"retained_offered":false,"embed_offered":false,"licences":{"single-task":{"sats":200,"grants":"use for one task, then let go"},"retained":null,"embed":null}}