between different bonds. For example, it would sell U.S. Treasury securities and buy Italian bond futures. The concept was that because Italian bond futures had a less liquid market, in the short term Italian bond futures would have a higher return than U.S. bonds, but in the long term, the prices would converge. Because the difference was small, a large amount of money had to be borrowed to make the buying and selling profitable. The downfall in this system began on August 17, 1998, when Russia defaulted on its ruble debt and domestic dollar debt. Because global markets were already nervous due to the 1997 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 realised by the banks that bailed LTCM out. See also Types of financial arbitrage Arbitrage betting Covered interest arbitrage Fixed income arbitrage Political arbitrage Options arbitrage Risk arbitrage Statistical arbitrage Triangular arbitrage Uncovered interest arbitrage Volatility arbitrage Related concepts Airline booking ploys Algorithmic trading Arbitrage pricing theory Coherence (philosophical gambling strategy), analogous concept in Bayesian probability Cointelation Drop shipping Efficient-market hypothesis Immunization (finance) Interest rate parity Intermediation No free lunch with vanishing risk TANSTAAFL Value investing Notes References Greider, William (1997). One World, Ready or Not. Penguin Press. . Special Situation Investing: Hedging, Arbitrage, and Liquidation, Brian J. Stark, Dow-Jones Publishers. New York, NY 1983. ; External links What is Regulatory Arbitrage. Regulatory Arbitrage after the Basel ii framework and the 8th Company Law Directive of the European Union. What is