The Epic Story Of How A ‘Genius’ Hedge Fund Almost Caused A Global Financial Meltdown

Twenty years ago, one bond-trading hedge fund grew from launch to over $100 billion in assets in less than three years. It saw yearly returns of over 40 percent. It was run by finance veterans, PhDs, professors, and two Nobel Prize winners. Everyone on Wall Street wanted a piece of their profits.

But by 1998, that firm was primed to expose America’s largest banks to more than $1 trillion in default risks. The demise of the firm, Long-Term Capital Management (LTCM), was swift and sudden. In less than one year, LTCM had lost $4.4 billion of its $4.7 billion in capital.

The entire story is recounted in Roger Lowenstein’s book, When Genius Failed‘, with details on the specific strategies and financial theories employed by Long-Term. It’s an absolute must-read for anyone working on Wall Street, so we’ve summarized the basics for you in ten slides.

This story has all the players — the Federal Reserve, which finally stepped in and organized a bailout, and all the major banks that did the heavy lifting: Bear Stearns, Salomon Smith Barney, Bankers Trust, J.P. Morgan, Lehman Brothers, Chase Manhattan, Merrill Lynch, Morgan Stanley, and Goldman Sachs.

In desperate need of a $4 billion bailout, the crumbling firm was at the mercy of the banks it had once snubbed and manipulated.

Consider this a history lesson.

Read more: http://www.businessinsider.com/the-fall-of-long-term-capital-management-2014-7

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