Large Bank Examination Workshop February 2026

LTCM • LTCM controlled risk by setting a target ceiling risk level equal to the volatility of an unleveraged position in US equities.

• In effect, positions were chosen by optimization subject to a constraint on the volatility of the fund.

• In August 1998, Russia announced a default on its domestic debt and a moratorium on foreign debt payments, as well as a significant devaluation of the rouble. This triggered a wider global crisis in emerging market sovereign debt.

139

LTCM • Sovereign and other credit spreads widened substantially and became more volatile, and correlations between previously closely related positions fell dramatically.

• These market movements created large losses for LTCM. Why?

• As losses in its portfolio accumulated, LTCM’s high leverage and use of derivatives forced it to liquidate positions. Why?

• In September, the New York Federal Reserve organized a $3.6 billion bailout of LTCM, but this failed to save the firm, which ultimately had to return capital to investors.

140

70

© Global Financial Markets Institute Inc.