Page "Arbitrage" Paragraph 70

The downfall in this system began on August 17, 1998, when Russia defaulted on its ruble debt and domestic dollar debt.

Because the markets were already nervous due to the Asian financial crisis, investors began selling non-U. S. treasury debt and buying U. S. treasuries, which were considered a safe investment.

As a result the price on US treasuries began to increase and the return began decreasing because there were many buyers, and the return ( yield ) on other bonds began to increase because there were many sellers ( i. e. the price of those bonds fell ).

This caused the difference between the prices of U. S. treasuries and other bonds to increase, rather than to decrease as LTCM was expecting.

Eventually this caused LTCM to fold, and their creditors had to arrange a bail-out.

More controversially, officials of the Federal Reserve assisted in the negotiations that led to this bail-out, on the grounds that so many companies and deals were intertwined with LTCM that if LTCM actually failed, they would as well, causing a collapse in confidence in the economic system.

Thus LTCM failed as a fixed income arbitrage fund, although it is unclear what sort of profit was realized by the banks that bailed LTCM out.