LTCM wasn't caused by anything like mortgage-backed securites.
LTCM was doing ultra-leveraged short-term trades of various kinds. When they started these were arbitrages of various kinds so they had low risk and a solid edge but as more capital flowed into their fund, the capacity of those trades was exhausted and they put money into riskier other trades. Some of their counterparties were big banks who parked overnight funds in LTCM and then when they got spooked by some losses and yanked those funds, LTCM lost a staggering amount of money very quickly as a result and went bust. If you want an excellent book about LTCM, "When Genius Failed" is one of the best books ever written about the history of financial markets.
The origins of the subprime mortgage crisis were a lot more complicated than most people give credit for and in particular I really wouldn't take "the big short" as any kind of reliable guide. For a good critical view of the crisis written by someone who actually knows what they are talking about I would recommend "Fools Gold" by Gillian Tett.
Financial crises and crashes have happened since the dawn of human history and will probably continue to happen. Suffice to say that the 2008 crisis had nothing to do with thing things that caused LTCM to fail, and neither of them have anything to do with the insight behind the Black/Scholes/Merton model other than the fact that Scholes and Merton were I think on the board of LTCM.[1]
[1] Fun fact, the other one of the three, Fischer Black was a quant at Goldman Sachs. So there's your 2008 crisis connection[2]
LTCM was doing ultra-leveraged short-term trades of various kinds. When they started these were arbitrages of various kinds so they had low risk and a solid edge but as more capital flowed into their fund, the capacity of those trades was exhausted and they put money into riskier other trades. Some of their counterparties were big banks who parked overnight funds in LTCM and then when they got spooked by some losses and yanked those funds, LTCM lost a staggering amount of money very quickly as a result and went bust. If you want an excellent book about LTCM, "When Genius Failed" is one of the best books ever written about the history of financial markets.
The origins of the subprime mortgage crisis were a lot more complicated than most people give credit for and in particular I really wouldn't take "the big short" as any kind of reliable guide. For a good critical view of the crisis written by someone who actually knows what they are talking about I would recommend "Fools Gold" by Gillian Tett.
Financial crises and crashes have happened since the dawn of human history and will probably continue to happen. Suffice to say that the 2008 crisis had nothing to do with thing things that caused LTCM to fail, and neither of them have anything to do with the insight behind the Black/Scholes/Merton model other than the fact that Scholes and Merton were I think on the board of LTCM.[1]
[1] Fun fact, the other one of the three, Fischer Black was a quant at Goldman Sachs. So there's your 2008 crisis connection[2]
[2] Or not. Fischer Black died in 1995.