LTCM Explained: The 1998 Hedge Fund Collapse

Two Nobel Prize winners. A former Vice Chairman of the Federal Reserve. The most feared bond traders on Wall Street. Together they built a hedge fund with $125 billion in assets and $1.25 trillion in derivatives — at 250-to-1 leverage. In September 1998, they lost $4.6 billion in five weeks. This is the story of Long-Term Capital Management (LTCM): how the smartest math in finance failed, and why the same risk model still quietly runs your brokerage account today. In this episode: → How Myron Scholes and Robert Merton built the most credentialed hedge fund in history → What Value-at-Risk (VaR) actually measures — and what it misses → Why the Russian default in August 1998 broke a model that said it couldn't break → How the Federal Reserve locked 16 bank CEOs in a room to organize a private bailout → Why every margin account today still runs the math LTCM used — and what that means for you ⏱ Chapters 0:00 The team that couldn't lose 2:14 The strategy: convergence trades and 250:1 leverage 3:20 August 1998 — the model breaks 4:51 Inside the Fed's private rescue 5:22 What Value-at-Risk actually does 8:26 Why VaR still runs your broker today 9:45 The retail transfer: what to actually check 📚 Sources → Roger Lowenstein, "When Genius Failed" (Random House, 2000) → President's Working Group on Financial Markets, "Hedge Funds, Leverage, and the Lessons of LTCM" (1999) → Federal Reserve Bank of New York, archived statements on the LTCM rescue → BIS Working Paper No. 100, "The Lessons from LTCM" 🎬 Full series — When Finance Breaks: 1️⃣ LTCM (this video) 2️⃣ Lehman Brothers vs FTX — coming next 3️⃣ Archegos — the invisible whale 4️⃣ The UK Gilt Crisis 5️⃣ Credit Suisse AT1 wipeout 🦉 ProfitOwl — Real institutional knowledge, without the panic. I'm Philipp — 20+ years in banking (10 at State Street, then over a decade advising banks on strategy). New videos every Tuesday. 🔗 Free tools: profit-owl.com 📸 Instagram: @profitowl_official 🎬 TikTok: @profitowl ⚖️ Educatio

Added 26 May 2026