The Cato Institute issued a briefing paper
at the time arguing against the rescue of LTCM, arguing that the failure was not inevitable. They were also concerned that the rescue would lead to greater regulation of the hedge fund market.
Maybe the rescue wasn't necessary, but its failure was assured by stubbornly following their model without looking at events in the market. Lowenstein said it would have left a trillion dollar hole in the banking industry.
While the Fed orchestrated the bailout, it was done with private money--unlike today. Had LTCM been able to last for another eight or nine months, the model would have proved correct and made money. Today LTCM's ex-manager is operating another fund using the same model. One of his team left to start his own fund--presumably using the same basic idea (Black-Scholes model).