The hedge fund founded by John Meriwether (and including Nobel laureates Merton and Scholes) that generated extraordinary returns through leveraged arbitrage before losing $4.6B and requiring a Fed-orchestrated bailout in 1998.
LTCM as the definitive case of model risk and leverage: the fund's strategy (convergence trades on mispriced bonds, mathematically validated by the Black-Scholes framework) worked until it didn't. The Russia default (1998) caused correlations to break in ways the models didn't anticipate — all trades went wrong simultaneously. At peak leverage, LTCM controlled $125B in assets with $5B in capital (25:1 leverage). The Fed's orchestration of a private bailout (not taxpayer money, but Fed-pressured Wall Street firms) established the 'too big to fail / too interconnected to fail' precedent that shaped the 2008 response.
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