

Déjà Vu, Anyone Remembers the 1998 Russian Financial Crisis? - elmar
http://en.wikipedia.org/wiki/1998_Russian_financial_crisis

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elmar
Another little bit of history

LONG-TERM CAPITAL MANAGEMENT, 1998

The collapse of hedge fund Long-Term Capital Market (LTCM) occurred during the
final stage of the world financial crisis that began in Asia in 1997 and
spread to Russia and Brazil in 1998.

LTCM was a hedge fund set up by Nobel Prize winners Myron Scholes and Robert
Merton to trade bonds. The professors believed that in the long run, the
interest rates on different government bonds would converge, and the hedge
fund traded on the small differences in the rates.

John Merryweather, head of LTCM John Meriwether, a Wall Street trader, headed
LTCM But when Russia defaulted on its government bonds in August 1998,
investors fled from other government paper to the safe haven of US Treasury
bonds, and interest rate differences between bonds increased sharply.

LTCM, which had borrowed a lot of money from other companies, stood to lose
billions of dollars - and in order to liquidate its positions it would have to
sell Treasury bonds, plunging the US credit markets into turmoil and forcing
up interest rates.

So the Fed decided that a rescue was needed. It called together the leading US
banks, many of whom had invested in LTCM, and persuaded them to put in $3.65bn
to save the firm from imminent collapse.

The Fed itself made an emergency rate cut in October 1998 and markets soon
returned to stability. LTCM itself was liquidated in 2000.

