The Nobel Winners Who Almost Crashed the Economy
Summary
Hosts Jacob Goldstein and Robert Smith explore 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. The episode details how the firm’s reliance on complex mathematical models and extreme leverage initially generated massive profits during the 1990s. However, the 1998 Russian debt default triggered a global market panic that their models failed to predict, leading to billions in losses. The story concludes with the Federal Reserve orchestrating a bailout to prevent LTCM’s collapse from des…
Topics discussed
Sponsorships and show introduction
Introduction to Long-Term Capital Management
John Meriwether's background at Salomon Brothers
Bringing academic finance to Wall Street
Defining arbitrage and Meriwether's departure
Founding LTCM and the Black-Scholes model
The End of History and raising capital
Sponsor breaks and ad segments
The Treasury arbitrage and the power of leverage
Italian bonds and behavioral economics
Nobel Prizes and the limits of strategy
Forcing redemptions and increasing leverage
Sponsor breaks and ad segments
Understanding bond spreads and global convergence
LTCM's global bets and the 1997 Asian crisis
The Russian default and the August 1998 crash
Vinnie Matone's visit and the death trade
The liquidity crisis and death spiral
The Fed-led bailout and resolution
Risk versus uncertainty and the final lesson
Listener mail, credits, and final sponsors
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