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

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. ...