{"id":"asset_9b35b9c99cfe","source_id":"c124fd8b-5812-4cff-a0ae-56f8156bd735","origin":"dropbox","type":"text/markdown","category":"text","name":"02-ltcm-1998.md","path":"/02-ltcm-1998.md","size_bytes":3546,"title":"02 ltcm 1998","description":"This document examines the 1998 Federal Reserve-coordinated rescue of Long-Term Capital Management, analyzing what the intervention accomplished and what precedent it established. It contains specific details about LTCM's capital losses, leverage ratios, notional position values, the coordination mechanism used, and the intellectual assumptions embedded in risk models, alongside argument about whether the rescue's moral hazard costs outweighed its crisis-prevention benefits.","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":{"dropbox_file_id":"id:1EL26tM-qg4AAAAAAAAACg"},"usable_for":["research reference","content source","writing style reference","fact extraction"],"price_sats":{"card":0,"full":1100},"content_available":true,"available":true,"addedAt":1787789249072}