LTCM Crisis of 1998 There were two causes of the LTCM crisis.

The first happened during the months of May and June of 1998, where there was a downturn in the mortgage-backed securities market. This led to LTCM having reduced returns from the fund and the company¶s capital decreased by $461 million. This situation was further deteriorated in August 1998 when there was a financial crisis in Russia. This financial crisis caused the Russian government to devalue its currency and default on its government b onds. This resulted in panicked investors selling off their bonds and LTCM sustained massive losses. The company was in danger of defaulting on its loans as LTCM had borrowed massive amounts of money to finance its leveraged trades. By September 25, LTCM was left with only $400 million in capital, and its debt-to-equity ratio was more than 250 to 1.

Wall Street feared that LTCM's failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system. As many banks and pension funds were invested in LTCM, its problem threatened to push most of them to near bankruptcy. Seeing no options left, the Federal Reserve Bank of New York organized a bailout of $3.625 billion, by convincing 14 banks to remain invested in LTCM. Under the terms of the deal, the banks would get 90 percent of the firm¶s equity. LTCM¶s partners got about $400 million, though all of this money was consumed by their debt. This agreement managed to avert disaster, though the company still had total losses of $4.6 billion. After the bailout, LTCM continued operations. By early 2000, the company had been liquidated, and the 14 banks that financed the bailout had been paid back.

The graph shows the gross value of 1dollar invested in LTCM. As you can see, in 1998, the gross value dropped drastically from about 4 dollars to almost 0 dollars.