Brokerages/Wall Street

Return to Article

Lessons of the Fall: TSC Looks at LTCM's Fallout

Dan Colarusso

After a tumultuous late summer of 1998, the market cracked under the pressure from the failure of highly leveraged Long Term Capital Management. Prodded by the New York Federal Reserve and deep self-interest, 14 of Wall Street's major powers stepped in to bail out the fund to which they had lent so many billions and to wrest control of its operations.

Once hailed as the best collection of financial minds ever assembled, the firm now is synonymous with excess and mismanagement. Its supertraders such as John Meriwether and Nobel laureates like Myron Scholes had dug themselves a $3.5 billion hole by using unusually high amounts of borrowed money to establish their positions.

LTCM: Talk about it on TSC Message Boards.

Now, one year from the day the Fed stepped in to rescue the market -- or at least the 14 banks that extended credit to Long Term Capital -- TheStreet.com takes a look back and ahead at the lessons learned from the hedge fund's disaster.

Today, staff reporter Erin Arvedlund explores the LTCM time bomb and what other potential disasters could be lurking in the shadows of Wall Street. In addition, columnist James K. Galbraith probes where academia and the markets diverged to hasten LTCM's fall.

Friday, senior writers Beth Roy and Suzanne Kapner take their shots. Roy explains the way the hedge fund's folly impacted the way Wall Street thinks and measures leverage while Kapner brings us up to date on what LTCM and its creditors are working on these days.