Long-Term Capital Management

In 1991, the Salomon Brothers' Treasury bond scandal occurred, involving illegal bids for U.S. treasury securities submitted by one of John Meriwether's subordinates, Paul Mozer. This scandal led to Meriwether's departure from Salomon Brothers and eventually paved the way for the founding of Long-Term Capital Management.

In 1992, the correlation between corporate bonds of different credit quality dropped to 75%, which was a crucial factor in the Long-Term Capital Management (LTCM) crisis. This drop in correlation was not considered in LTCM's risk management, leading to assumptions of higher leverage.

In 1993, John Meriwether, a former Salomon Brothers bond trader, established LTCM with the goal of creating a hedge fund. He gathered a team of top traders and academics to implement a strategy based on quantitative models and market judgment.

On February 24, 1994, LTCM began trading with over $1.01 billion in capital. The hedge fund was established to avoid financial regulations and utilized various trading strategies to exploit deviations from fair value in fixed income securities.

In 1995, Long-Term Capital Management (LTCM) reported impressive annual returns of 40%, attracting more investors despite strict restrictions on withdrawals and inquiries about investments.

In 1996, Long-Term Capital Management (LTCM) recorded a profit percentage of 40%. This marked a successful year for the hedge fund.

In June 1997, Long-Term Capital Management (LTCM) engaged in a transaction with UBS to defer foreign interest income for seven years, allowing them to benefit from the more favorable capital gains tax treatment.

In August 1997, LTCM continued its transaction with UBS, purchasing a call option on 1 million of their own shares for a premium paid to UBS of $300 million.

In October 1997, LTCM completed the transaction with UBS, where UBS agreed to reinvest the $300 million premium directly back into LTCM for a minimum of three years.

In August 1998, the Russian government defaulted on its domestic local currency bonds, triggering a financial crisis in the country. This event had severe repercussions on Long-Term Capital Management (LTCM), leading to significant capital losses and forced liquidation of positions, ultimately contributing to the fund's downfall.

On August 17, 1998, Russia declared the devaluation of its currency and defaulted on its bonds. This unexpected event was outside the range of volatility that Long-Term Capital Management (LTCM) had anticipated.

By August 31, 1998, the Dow Jones Industrial Average had plummeted by 13% due to the ripple effects of Russia's currency devaluation and bond default. This significant drop in the stock market had widespread repercussions.

On September 2nd, 1998, the Federal Reserve Bank of New York organized a bailout of Long-Term Capital Management (LTCM) as the hedge fund faced dire financial straits. The bailout involved major creditors contributing funds to stabilize LTCM and prevent its collapse, highlighting the interconnectedness of financial institutions during times of crisis.

LTCM officials reached out to Federal Reserve Bank of New York President William McDonough regarding their financial troubles. The Fed later visited LTCM and discovered the extent of their risky positions.

On September 20, 1998, Peter Fisher, executive vice president at the NY Fed, along with other officials and bankers, visited LTCM's offices in Greenwich, Connecticut. They discovered that LTCM had significant off-balance sheet leverage, which was not known to its major counterparties.

A core group of firms was invited to discuss the LTCM situation at the New York Fed. Three working groups were formed to explore solutions, including a consortium approach, but disagreements arose over contribution amounts for a rescue package.

After offers from Goldman Sachs, AIG, and Warren Buffett were rejected, a consortium of banks led by the Federal Reserve Bank of New York injected $3.5 billion into LTCM and took over its management to prevent a systemic meltdown.

Investors sought safety in Treasury bonds following the market turmoil caused by Russia's financial crisis. This led to a notable decrease in long-term interest rates by more than a full point by September 30, 1998.

Alan Greenspan defended the Long-Term Capital Management plan in his testimony before lawmakers, highlighting the threats present in the market during that time.

The failure of Long-Term Capital Management due to salesmanship and brainpower issues was highlighted in The Wall Street Journal.

President Clinton releases a study on the LTCM crisis, focusing on systemic risk in financial markets. The study is titled the President's Working Group on Financial Markets, emphasizing governance and risk control through regulatory guidelines.

The documentary 'Trillion Dollar Bet' aired on PBS, focusing on financial events like the Long-Term Capital Management crisis.

The United States General Accounting Office released a report titled 'Questions Concerning LTCM and Our Responses' on February 23, 2000, addressing issues related to Long-Term Capital Management (LTCM). The report provided insights and responses regarding LTCM's operations and impact.

Donald MacKenzie's work 'Long-Term Capital Management and the Sociology of Arbitrage' explores the social aspects of financial markets.

John Meriwether launched JM Advisors Management, his third hedge fund, in 2010, continuing the investment strategy from his time at LTCM and Salomon.

In 2016, a CFA article written by Ron Rimkus highlighted the flaws in the Value at Risk (VaR) model used by Long-Term Capital Management (LTCM). The article mentioned that the VaR model, a key quantitative analysis tool, had shortcomings such as excluding previous economic crises like the ones in 1987 and 1994 from its data sample, leading to an inability to interpret extreme events like financial crises accurately.

The Federal Reserve Bank of Cleveland shared insights and lessons learned from the rescue operation of Long-Term Capital Management on December 24, 2021.