It’s The 25th Anniversary of the LTCM Crisis. The Impact Is Still Being Felt.

Long-time readers know I was the Chief Counsel of Long-Term Capital Management, and I was the lead negotiator of the $3.6 billion bailout by Wall Street banks that stabilized the fund and prevented a global meltdown that would have closed every exchange in the world at least for a while.

When we got the bailout done (after five days of no sleep), we saved the world of finance. I remember it vividly and wrote a chapter about it in my book The Road to Ruin. That remains the only first-person account by an insider, although there are several other books on the topic written by journalists.

Still, time passes on, and my career has gone through several stages since LTCM, including my work at the CIA and as an author and analyst. I just don’t think about LTCM that much except when I use it as an example of how to understand a financial crisis and how to spot the next one. I don’t mind talking about LTCM if someone asks, but it’s not a topic I bring up very often.

So, I was a bit taken aback when I saw the headline in this article. It said, “The Hedge Fund Meltdown That Rescued Your Stock Portfolio – Long-Term Capital Management’s collapse 25 years ago started a habit hard to break – the ‘Fed put’.”

Wow. I couldn’t believe it’s been 25 years since the rescue.

Of course, that’s exactly right. The rescue was September 28, 1998, and the article appeared in the Wall Street Journal on September 23, 2023, almost exactly 25 years to the day. Still, the article is more than a walk down memory lane. It points out that the Fed had to cut interest rates twice (once at an FOMC meeting scheduled for September 29, 1998, and again at an emergency meeting on October 15).

The first rate cut didn’t end the crisis, but the second one did. Stocks then went into bubble mode until early 2000. That was the notorious dot.com rally (remember Pets.com and the dog sock puppet?).

The lesson for investors was clear. Don’t worry about financial collapses, the Fed has your back. Don’t worry about meltdowns, the Fed will just cut rates and get the stock market moving again. This reflexive Fed rescue became known as the Fed put.

Of course, after the dot.com rally, the NASDAQ crashed 80% and took fifteen years to recover. It’s not a one-way street. But the Fed put is alive and well. And it all started with the rescue of Long-Term Capital Management a quarter-century ago.

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