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1998: LTCM collapses
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December 8, 1998: 10:50 a.m. ET
$100 billion hedge fund disaster was 10th-biggest business story of the year
From Correspondent Peter Viles
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NEW YORK (CNNfn) - Any listing of the 10 biggest business stories of 1998 has to include the collapse of Long-Term Capital Management, a hedge fund many had never heard of until its huge bets went disastrously wrong.
The fund was the brainchild of one of Wall Street's best and brightest, former Salomon Brothers Vice-Chairman John Merriwether.
His strategy, cooked up by Nobel Prize-winning economists, was supposed to be foolproof. If he found investments that he believed couldn't possibly go wrong, and bet on them with borrowed money. He was assured the Holy Grail of investing -- gain without risk.
The one problem was that the world in 1998 didn't behave the way Merriwether assumed it would.
"Whether their bets were right or wrong, they weren't right soon enough," said Stan Jones at global futures broker FIMAT USA. "And when you're leveraged, you have to make margin calls. So it's not enough to be right. You have to be right at the right time."
The potential losses at LTCM were staggering, with estimates running into the hundreds of billions.
The Federal Reserve, fearing for the big banks that had lent to the fund, persuaded Wall Street's biggest firms -- led by Merrill Lynch and Goldman Sachs -- to buy control over the fund for $3.6 billion.
"Human beings make mistakes," Fed Chairman Alan Greenspan noted at the time. "I know of no supervisory action we can take that will prevent that. I know of no legislation to help us prevent them from making dumb mistakes."
At one point in LTCM's high-flying days, Warren Buffett toyed with buying the fund, but changed his mind.
Instead, he put its supposedly sophisticated strategy into simple terms that everyone can understand, saying "you never know who's swimming naked until the tide goes out." 
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