Long-Term Capital Management (A), Rise and Fall

In 1993, John Meriwether, former head of arbitrage and bond trading at Salomon Brothers, put together the smartest group of bond arbitrage experts ever assembled. The group included a number of professors, two of whom were future Nobel laureates in Economics. The group raised a private hedge fund (Long Term Capital Management) of more than $1 billion. By mid-1998, the fund had more than $100 billion in assets. Then, in five weeks, it collapsed. The partners lost their entire investments, and some went into personal debt. Case A describes the fund’s rise and fall, with an emphasis on decision making and interpersonal dynamics within the firm. Case B describes the negotiations leading to the rescue of the fund by a consortium of banks. The case is based on Roger Lowenstein’s book “When Genius Failed,” and was developed with his permission.