The real explanation that should at this stage be demanded from the American financial supervisory authorities is therefore not why the Fed got involved in the rescue operation of LTCM, but rather why such excessive gearing was permitted by a financial institution that in the end turned out to hold a major systemic threat for the American banking system, and indeed for the emerging global financial system as a whole.
The moment that the Fed decided to support the rescue operation for LTCM, the whole ball game changed as far as the future role of hedge funds is concerned.