Members of LTCM's board of directors included Myron Scholes and Robert C. Merton, who three years later in 1997 shared the Nobel Prize in Economics for having developed the Black–Scholes model of financial dynamics.

[4] The master hedge fund, Long-Term Capital Portfolio L.P., collapsed soon thereafter, leading to an agreement on September 23, 1998, among 14 financial institutions for a $3.65 billion recapitalization under the supervision of the Federal Reserve.

[6] According to Chi-fu Huang, later a Principal at LTCM, the bond arbitrage group was responsible for 80–100% of Salomon's global total earnings from the late 1980s until the early 1990s.

[7] In 1993 Meriwether created Long-Term Capital as a hedge fund and recruited several Salomon bond traders; Larry Hilibrand and Victor Haghani in particular would wield substantial clout[8] and two future winners of the Nobel Memorial Prize, Myron Scholes and Robert C.

[9][10] Other principals included Eric Rosenfeld, Greg Hawkins, William Krasker, Dick Leahy, James McEntee, Robert Shustak, and David W. Mullins Jr.

The fund's operation was designed to have extremely low overhead; trades were conducted through a partnership with Bear Stearns and client relations were handled by Merrill Lynch.

[13] With the help of Merrill Lynch, LTCM also secured hundreds of millions of dollars from high-net-worth individual including business owners and celebrities, as well as private university endowments and later the Italian central bank.

[16] Fixed income securities pay a set of coupons at specified dates in the future, and make a defined redemption payment at maturity.

This exposure to the shape of the yield curve could be managed at a portfolio level, and hedged out by entering a smaller steepener in other similar securities.

Because the magnitude of discrepancies in valuations in this kind of trade is small (for the benchmark Treasury convergence trade, typically a few basis points), in order to earn significant returns for investors, LTCM used leverage to create a portfolio that was a significant multiple (varying over time depending on their portfolio composition) of investors' equity in the fund.

It did so by engaging in a transaction with UBS (Union Bank of Switzerland) that would defer foreign interest income for seven years, thereby being able to earn the more favorable capital gains treatment.

Under the terms of the deal, UBS agreed to reinvest the $300 million premium directly back into LTCM for a minimum of three years.

LTCM attempted to create a splinter fund in 1996 called LTCM-X that would invest in even higher risk trades and focus on Latin American markets.

LTCM had become a major supplier of S&P 500 vega, which had been in demand by companies seeking to essentially insure equities against future declines.

Investor Seth Klarman believed it was reckless to have the combination of high leverage and not accounting for rare or outlying scenarios.

[19] Software designer Mitch Kapor, who had sold a statistical program with LTCM partner Eric Rosenfeld, saw quantitative finance as a faith, rather than science.

[1] Although 1997 had been a very profitable year for LTCM (17%), the lingering effects of the 1997 Asian crisis continued to shape developments in asset markets into 1998.

[24] Although periods of distress have often created tremendous opportunities for relative value strategies, this did not prove to be the case on this occasion, and the seeds of LTCM's demise were sown before the Russian default of 17 August 1998.

[25] This came as a surprise to many investors because according to traditional economic thinking of the time, a sovereign issuer should never need to default given access to the printing press.

Although LTCM was diversified, the nature of its strategy implied an exposure to a latent factor risk of the price of liquidity across markets.

[27] LTCM was essentially betting that the share prices of Royal Dutch and Shell would converge because in their belief the present value of the future cashflows of the two securities should be similar.

Lowenstein reports that the premium of Royal Dutch had increased to about 22%, which implies that LTCM incurred a large loss on this arbitrage strategy.

[30] Seeing no options left, the Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets.

The losses in the major investment categories were (ordered by magnitude):[26] Long-Term Capital was audited by Price Waterhouse LLP.

After the bailout by the other investors, the panic abated, and the positions formerly held by LTCM were eventually liquidated at a small profit to the rescuers.

Although termed a bailout, the transaction effectively amounted to an orderly liquidation of the positions held by LTCM with creditor involvement and supervision by the Federal Reserve Bank.

No public money was injected or directly at risk, and the companies involved in providing support to LTCM were also those that stood to lose from its failure.

[42] With the credit crisis of 2008, JWM Partners LLC was hit with a 44% loss from September 2007 to February 2009 in its Relative Value Opportunity II fund.

"[19] Historian Niall Ferguson proposed that LTCM's collapse stemmed in part from their use of only five years of financial data to prepare their mathematical models, thus drastically under-estimating the risks of a profound economic crisis: The firm's value at risk (VaR) models had implied that the loss Long Term suffered in August was so unlikely that it ought never to have happened in the entire life of the universe.

To put it bluntly, the Nobel prize winners had known plenty of mathematics, but not enough history.These ideas were expanded in a 2016 CFA article written by Ron Rimkusk, which pointed out that the VaR model, one of the major quantitative analysis tool by LTCM, had several flaws in it.