The Crisis That Shook Wall Street
In September 1998, the leaders of the biggest banks on Wall Street were called to the Federal Reserve Bank of New York for an urgent meeting. The problem was not a recession, a war, or a major commercial bank. It was a hedge fund called Long-Term Capital Management, or LTCM, a firm few ordinary people had heard of but that was tied to nearly every major financial institution in the world.
LTCM had borrowed enormous sums and built a vast web of trades through bonds, swaps, and other derivatives. On paper, its partners believed they had spread their risk across many markets. In reality, many of those bets depended on the same calm conditions staying in place. Once fear took over, those positions all began to fail together.
The Fed was not trying to save a few wealthy investors from pain. Officials feared that if LTCM collapsed suddenly, its lenders would all rush to protect themselves at once. That could force a chain reaction of selling, freeze trading in important markets, and spread panic far beyond one fund. The men in the room did not like LTCM, but they could not ignore how dangerous its failure had become.
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