What went wrong at Long-Term Capital Management

Tell me what you know about the rise and collapse of the hedge fund Long-Term Capital Management.

A highly levered convergence-arbitrage fund that failed in 1998. LTCM, founded by John Meriwether with Nobel laureates Merton and Scholes, bet that spreads (e.g. on-the-run vs off-the-run Treasuries, swap spreads, European convergence trades) would narrow, using leverage of roughly 25:1 on balance sheet and far more via derivatives. Russia's 1998 default triggered a flight to liquidity that widened spreads everywhere at once; correlations jumped, losses mounted and the New York Fed brokered a roughly 3.6 billion dollar bank-funded recapitalisation. Lessons: leverage, liquidity and model risk.