Stat Arb Explanation in NYT -- What Happened 2nd Part

Let’s be honest here. You hear the words “quant fund meltdown,” and one firm comes to mind: Long-Term Capital Management.
Back in 1998, that now infamous quant fund really did melt down, not only liquidating, but shaking the entire global financial system. Long-Term used complex computer models that failed to anticipate some severe once-in-a-lifetime market events, and it was shockingly leveraged — it was using $100 of borrowed money for every dollar of its own capital — which magnified its losses. It was also run by some of the smartest people on Wall Street. “When Geniuses Fail” was the apt title to Roger Lowenstein’s fine book about that fiasco.
Ever since, whenever quant funds stumble, it’s “When Geniuses Fail Redux.” Wall Street wags begin to wonder if those losses will lead to something truly cataclysmic, while newspaper reporters take a certain undisguised glee in reporting on really smart people losing money. Even now, there’s enough Luddite schadenfreude in the air that rumors continue to circulate that AQR is continuing to absorb substantial losses — which is the exact opposite of the truth, Mr. Asness says.
What is scary in this case is not that the quant funds were the initial source of a ripple effect on the rest of the market; they weren’t. The quant funds were the recipients of a ripple that began in a corner of the market that they had little to do with —namely, the subprime mortgage crisis. It’s the way the subprime contagion shook the quants, whose subsequent downturn then added to the ripple effect, that’s what is nervous-making.