This Planet Money episode recounts the rise and spectacular fall of Long-Term Capital Management (LTCM), a hedge fund employing sophisticated mathematical models for investment. The podcast details LTCM's initially successful strategy of identifying and exploiting price discrepancies in financial markets through leverage, achieving exceptionally high returns. However, the episode highlights how unforeseen events (the Asian financial crisis and the Russian debt default), coupled with increased competition and market panic, led to massive losses and the fund's near collapse. The Federal Reserve's intervention prevented a wider financial crisis, but the episode concludes by arguing that this intervention prevented a crucial lesson about the limitations of mathematical models in predicting market behavior and the dangers of excessive leverage.
