LTCM: When Genius Failed

What you'll learn

• ✓Explain convergence trades
• ✓Show how leverage amplifies losses
• ✓Describe why correlations rise in crises

Lessons

1. 🎓
   The Smartest Room on Wall Street

   Nobel prizes, Salomon traders, and a rocket launch
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2. The Trade

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3. The Lever

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4. August 1998: Everything Diverges

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5. The Rescue

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6. Final Boss: What Genius Teaches

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Sources

All content is drawn from the sources below. We deliberately avoid unverified material.

• Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management (April 1999)
  President's Working Group on Financial Markets, US Department of the Treasury · institutional
  The official US post-mortem. Primary source for the capital (about 4.7 billion), balance sheet (over 125 billion), derivatives notional (over 1 trillion), the end-1997 return of 2.7 billion to investors, and the rescue structure, used in lessons 1, 3, and 5.
  https://home.treasury.gov/system/files/236/hedgfund.pdf
• When Genius Failed: The Rise and Fall of Long-Term Capital Management (2000)
  Roger Lowenstein, Random House · book
  The standard narrative account. Source for the founding story, the fee structure and returns, the Buffett bid of September 23, Bear Stearns declining to join the consortium, the loss timeline, and the wind-down by early 2000, used across all lessons.
• Hedge Funds and the Collapse of Long-Term Capital Management (Journal of Economic Perspectives, 1999)
  Franklin R. Edwards, American Economic Association · academic
  Peer-reviewed account of the fund's strategies, returns, leverage, and the systemic risk rationale for the rescue, used in lessons 2, 3, and 4.
  https://www.aeaweb.org/articles?id=10.1257/jep.13.2.189
• Risk Management Lessons from Long-Term Capital Management (case study)
  Philippe Jorion (as taught in university finance courses) · academic
  Source for the August 1998 loss of about 1.85 billion (roughly 45 percent of capital) and the model-failure analysis (many-sigma event framing), used in lesson 4.
  https://www.bauer.uh.edu/rsusmel/7386/ltcm-2.htm
• Russia's 1998 currency crisis: what lessons for today?
  Economics Observatory · article
  Source for the August 17, 1998 Russian default and devaluation and its role in triggering the LTCM collapse, used in lesson 4.
  https://www.economicsobservatory.com/russias-1998-currency-crisis-what-lessons-for-today
• Statement by William J. McDonough before the House Committee on Banking and Financial Services (October 1, 1998)
  Federal Reserve Bank of New York · institutional
  The New York Fed president's own account of why the Fed convened the consortium and confirmation that no public money was used, used in lesson 5.
• FOMC Statements, 1998
  Board of Governors of the Federal Reserve System · institutional
  Primary source for the three rate cuts of fall 1998 (September 29, October 15 intermeeting, November 17), used in lesson 5.
  https://www.federalreserve.gov/monetarypolicy/fomc_historical_year.htm