The Nobel Winners Who Almost Crashed the Economy | From Business History
Summary
This episode details the rise and catastrophic fall of Long-Term Capital Management, a hedge fund founded by John Meriwether and Nobel laureates Myron Scholes and Robert Merton. Leveraging complex mathematical models and massive debt, the firm achieved huge returns until the 1998 Russian financial crisis triggered a global market panic. Their strategies failed as bond spreads widened unexpectedly, leading to a liquidity crisis that threatened the broader economy. Ultimately, the Federal Reserve orchestrated a bailout by major Wall Street banks to prevent a systemic collapse.
Topics discussed
Introduction: The rise and fall of LTCM
John Meriwether and the culture of Solomon Brothers
Recruiting math PhDs and the concept of arbitrage
The scandal, founding LTCM, and recruiting Nobel laureates
Launch of LTCM and the 'End of History' optimism
Early success: Treasury bond arbitrage and leverage
Record profits, the Nobel Prize, and forced withdrawals
The Russian default and the collapse of models
The death spiral: Margin calls and liquidity crisis
The Federal Reserve bailout and resolution
Risk vs. Uncertainty: The lesson of LTCM
Listen ad-free on Castria