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When Brilliant Minds Went Broke: The Lesson of LTCM’s Fall
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In this eye-opening segment of This Week in Wall Street History, host Todd M. Schoenberger examines the dramatic rise and collapse of Long-Term Capital Management (LTCM) in 1998—a hedge fund founded by world-class financiers, including Nobel Laureates Robert Merton and Myron Scholes. Despite delivering spectacular returns of 20–40% annually, LTCM’s overreliance on extreme leverage—borrowed in excess of 25-to-1—left it wildly exposed when the Russian debt crisis hit, erasing billions in value in just a few months.
Their blind trust in mathematical models and illiquidity surfaced as catastrophic flaws when markets turned. As LTCM imploded, the ripple effects threatened global financial markets, triggering a rare, Fed-orchestrated bailout of $3.6 billion supported by 14 major financial institutions to prevent broader systemic collapse.
Why it matters today:
This cautionary tale still echoes across modern markets—where asymmetric risk models, hidden leverage, and underappreciated liquidity risk can destabilize even the most advanced trading strategies. Amid surging AI, crypto innovations, and complex derivatives, investors should remain vigilant, humble, and disciplined.
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