What happened from August-October 1998 was as follows (and you can easily verify this from either the testimony at the Fed hearings or the two pretty good books written about this affair):
LTCM, famously a bond arb house, decied to ''go directional'' on Russia and in a couple of other areas -- that is, instead of arbing one security or bond against another, they decided to take a straight position, in this case that Russian debt wouldn't go tits up. They were wrong.
A number of their arb plays began to fail at the same time, most notably swap spreads and British/German curve spreads. Together, their losing positions in these trades threatened, by August 1998, to overwhelm their sliver of capital; they were by conscious design trading on some THOUSANDS of per cent of leverage.
The situation became so serious that none other than William McDonough, president of the New York Fed, convened (and, to some extent, dragooned) the major investment banks IN THE WORLD, Merrill, Goldman, Paribas, Barclay's, ING, you name 'em, they were there, in order to form a consortium for a bailout.
After a good deal of infighting, treachery, backstabbing and whatnot, AND after Goldman Sachs (read: Jon Corzine) unethically caused to be downloaded LTCM's positions from their own computers into Goldman's, a bailout group was finally established.
Roughly 22 months later, LTCM's positions were finally liquidated, with very nearly ZERO default on any of them (a couple of Euro and Danish bond positions were technically in default, but cleared off by a cash settlement).
Read up the history of this affair, laddiebuck -- it's very instructive. However, if you continue to crime ''the Feds'' for LTCM's bailout, you're 100% wrong, an historical revisionist wannabee, and just another ignorant sod adding nothing but volume and vitriol to the discussion.
Nice summary. Thanks for injecting some reality into the discussion.
When I was hired four years ago, the head of risk management at my company gave a talk to the my associate class. I remember he said, “LTCM didn’t make the wrong bets — they made the right bets, but they didn’t have the liquidity to hold on long enough.” Excluding the whole “Russia won’t default on its own currency” part.
I read an article that described it as similar to an informal bankruptcy settlement.