Few of the general public know that 10 years before the financial crisis in 2008, there already was a major event that potentially could have led to a collapse of Wall Street….
Long-Term Capital Management L.P. was a hedge fund founded in 1994 by John Meriwether, Myron S. Scholes, and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences for a “new method to determine the value of derivatives”.
It had off-balance sheet derivative positions with a notional value of approximately $1.25 trillion. Initially successful in 1998, it lost $4.6 billion in less than four months. It collapsed, and agreed on September 23, 1998, with 14 heavily involved US and European megabanks for a $3.6 billion recapitalization under the supervision of the Federal Reserve, to avoid a wider collapse in the financial markets.
It would have triggered a global financial crisis due to the massive write-offs its creditors would have had to make. The fund was liquidated and dissolved in early 2000.
It was a revelation, a shock to me, that a very small group of [admittedly] brilliant and “seasoned” individuals were potentially able to implode the global financial system. For the first time, I realized how fragile – and dangerous – this financial system had become.