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The collapse of Long-Term Capital Management (LTCM)

in 1998 was caused by several key factors.

First, LTCM employed an extremely high leverage ratio, borrowing over $124 billion against $4.72 billion of equity, creating a debt-to-equity ratio of more than 25:1.

Second, LTCM's trading strategy relied heavily on convergence trades

, based on the assumption that market prices would eventually converge to their theoretical values.

Third, the 1997 Asian financial crisis significantly impacted global markets, while its specific effects on LTCM's portfolio are less documented.

The 1998 Russian financial crisis

when Russia devalued the ruble and defaulted on its domestic debt caused massive volatility that particularly affected LTCM's positions in certain emerging markets.

Fourth, evidence suggests that major financial institutions became increasingly reluctant to provide additional funding as LTCM's positions deteriorated, though specific institutions' roles in this process remain subject to debate.

Finally, LTCM's over-reliance on mathematical models developed by Nobel Prize-winning economists Robert C. Merton

and Myron Scholes

Myron Scholes

Canadian-American economist, Nobel laureate in Economics (1997)

✓ Correct person ✗ Wrong person

failed to adequately account for liquidity risk and extreme market events.