Ten Sigma

What actually happened

LTCM's convergence trades were individually tiny edges, leveraged roughly 25-to-1 (far higher including derivatives) into billions. The models assumed markets stay liquid and panics stay local; Russia's default in August 1998 made every 'uncorrelated' position correlate at once, because the common factor was LTCM-style leverage itself.

The fund lost $4.6 billion in weeks. The New York Fed brokered a $3.6 billion private recapitalization: not a bailout with public money, but an admission that one hedge fund's book had become systemic. Merton and Scholes had won the Nobel for the option-pricing mathematics the year before.

Ferguson's framing, kept in the episode: the models weren't wrong about the past. They were only wrong about how much past there was.

The longer arc

LTCM was founded in 1994 by John Meriwether, who had run Salomon Brothers's bond arbitrage desk until a trading scandal forced him out in 1991, and he recruited Myron Scholes, Robert Merton, and a roster of former regulators and PhD traders whose collective pedigree let the fund raise $1.25 billion at launch and demand terms most investors would never accept from an unproven manager. Merton and Scholes won the Nobel Memorial Prize in Economic Sciences in 1997, a year before the fund's collapse, for the options-pricing work their own firm's models leaned on.

The $3.6 billion rescue arranged by the New York Fed in September 1998 was private-sector money, not a government bailout, and it worked well enough that the consortium banks were eventually repaid with a modest profit as markets normalized. Meriwether started over anyway, launching JWM Partners in 1999; it grew to roughly $3 billion before the 2008 financial crisis, then lost 44 percent in the ensuing panic and Meriwether closed it for good in July 2009, repeating, on a smaller scale, the same leverage-meets-liquidity-crunch failure LTCM had suffered a decade earlier.