The Failure of LTCM and the Russian Crisis

The story of the hedge fund Long-Term Capital Management (LTCM) is the story of Icarus, a high-flyer who became one of the most spectacular failures financial markets have ever seen. The Russian Crisis is often referred to as the cause of LTCM's financial downfall. However, the Russian Crisis was merely a trigger and indirect factor for LTCM's collapse. The rise to liquidity across global fixed income markets arising from the Crisis paired with LTCM's excessive leverage, illiquid investment positions and management mistakes shortly before and during the Crisis, caused its breakdown which was finally only halted by a bail-out organized by the US Federal Reserve Bank. This paper analyzes the contributing factors and interrelations between the two events and concludes with some implications for financial market participants and policy-makers from the two cases and empirical research on financial crises.

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Seminar paper from the year 2009 in the subject Business economics - Miscellaneous, grade: A, University of Frankfurt (Main) (House of Finance), course: PhD Seminar "Financial Crises in Historical Perspective", language: English, abstract: The story of the hedge fund Long-Term Capital Management (LTCM) is the story of Icarus, a high-flyer who became one of the most spectacular failures financial markets have ever seen. The Russian Crisis is often referred to as the cause of LTCM's financial downfall. However, the Russian Crisis was merely a trigger and indirect factor for LTCM's collapse. The rise to liquidity across global fixed income markets arising from the Crisis paired with LTCM's excessive leverage, illiquid investment positions and management mistakes shortly before and during the Crisis, caused its breakdown which was finally only halted by a bail-out organized by the US Federal Reserve Bank. This paper analyzes the contributing factors and interrelations between the two events and concludes with some implications for financial market participants and policy-makers from the two cases and empirical research on financial crises.