The Black Swan: The Impact of the Highly Improbable · chapter 8 · id the-black-swan-c8-02-long-term-capital-management-l
“Long-Term Capital Management (LTCM), run by two Nobel laureates (Scholes and Merton) and using Black-Scholes models, lost $4.6 billion in weeks and nearly collapsed the global financial system in 1998. This proves that Gaussian-based financial models are catastrophically dangerous.”
TRUE, BUTconfidence: high⚠ extracted by pipeline, re-audit pending
Receipts
LTCM Wikipedia (cross-referenced with primary sources)source alive
LTCM lost $4.6 billion in less than four months; the Federal Reserve organized a $3.625 billion bailout on September 23, 1998.
Columbia Law School Blue Sky Blog: LTCM Retrospective (2018)source alive
LTCM's models used only 5 years of data, missing the 1987 crash. Their Value-at-Risk models treated a 10-sigma event as effectively impossible -- yet it happened.
PRMIA Risk Management Report on LTCMsource alive
LTCM's failure was caused by excessive leverage (25:1), concentration risk, and liquidity assumptions -- not solely by Gaussian models. The models were one failure among several.
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