When Genius Failed: The Rise and Fall of Long-Term Capital Management | 
|  | | | Title: | When Genius Failed: The Rise and Fall of Long-Term Capital Management | | Author: | Roger Lowenstein | | Publisher: | Random House Trade Paperbacks | | Type: | Book / Paperback | | Publication Date: | 09 October, 2001 | | ISBN / ISBN-13: | 0375758259 / 9780375758256 | | List Price: | $14.95 | | You Save: | $4.78 | | Amazon Price: | $10.17 | |
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Product Description
John Meriwether, a famously successful Wall Street trader, spent the 1980s as a partner at Salomon Brothers, establishing the best--and the brainiest--bond arbitrage group in the world. A mysterious and shy midwesterner, he knitted together a group of Ph.D.-certified arbitrageurs who rewarded him with filial devotion and fabulous profits. Then, in 1991, in the wake of a scandal involving one of his traders, Meriwether abruptly resigned. For two years, his fiercely loyal team--convinced that the chief had been unfairly victimized--plotted their boss's return. Then, in 1993, Meriwether made a historic offer. He gathered together his former disciples and a handful of supereconomists from academia and proposed that they become partners in a new hedge fund different from any Wall Street had ever seen. And so Long-Term Capital Management was born.
In a decade that had seen the longest and most rewarding bull market in history, hedge funds were the ne plus ultra of investments: discreet, private clubs limited to those rich enough to pony up millions. They promised that the investors' money would be placed in a variety of trades simultaneously--a "hedging" strategy designed to minimize the possibility of loss. At Long-Term, Meriwether & Co. truly believed that their finely tuned computer models had tamed the genie of risk, and would allow them to bet on the future with near mathematical certainty. And thanks to their cast--which included a pair of future Nobel Prize winners--investors believed them.
From the moment Long-Term opened their offices in posh Greenwich, Connecticut, miles from the pandemonium of Wall Street, it was clear that this would be a hedge fund apart from all others. Though they viewed the big Wall Street investment banks with disdain, so great was Long-Term's aura that these very banks lined up to provide the firm with financing, and on the very sweetest of terms. So self-certain were Long-Term's traders that they borrowed with little concern about the leverage. At first, Long-Term's models stayed on script, and this new gold standard in hedge funds boasted such incredible returns that private investors and even central banks clamored to invest more money. It seemed the geniuses in Greenwich couldn't lose.
Four years later, when a default in Russia set off a global storm that Long-Term's models hadn't anticipated, its supposedly safe portfolios imploded. In five weeks, the professors went from mega-rich geniuses to discredited failures. With the firm about to go under, its staggering $100 billion balance sheet threatened to drag down markets around the world. At the eleventh hour, fearing that the financial system of the world was in peril, the Federal Reserve Bank hastily summoned Wall Street's leading banks to underwrite a bailout.
Roger Lowenstein, the bestselling author of Buffett, captures Long-Term's roller-coaster ride in gripping detail. Drawing on confidential internal memos and interviews with dozens of key players, Lowenstein crafts a story that reads like a first-rate thriller from beginning to end. He explains not just how the fund made and lost its money, but what it was about the personalities of Long-Term's partners, the arrogance of their mathematical certainties, and the late-nineties culture of Wall Street that made it all possible.
When Genius Failed is the cautionary financial tale of our time, the gripping saga of what happened when an elite group of investors believed they could actually deconstruct risk and use virtually limitless leverage to create limitless wealth. In Roger Lowenstein's hands, it is a brilliant tale peppered with fast money, vivid characters, and high drama.
Amazon.com
On September 23, 1998, the boardroom of the New York Fed was a tense place. Around the table sat the heads of every major Wall Street bank, the chairman of the New York Stock Exchange, and representatives from numerous European banks, each of whom had been summoned to discuss a highly unusual prospect: rescuing what had, until then, been the envy of them all, the extraordinarily successful bond-trading firm of Long-Term Capital Management. Roger Lowenstein's When Genius Failed is the gripping story of the Fed's unprecedented move, the incredible heights reached by LTCM, and the firm's eventual dramatic demise. Lowenstein, a financial journalist and author of Buffett: The Making of an American Capitalist, examines the personalities, academic experts, and professional relationships at LTCM and uncovers the layers of numbers behind its roller-coaster ride with the precision of a skilled surgeon. The fund's enigmatic founder, John Meriwether, spent almost 20 years at Salomon Brothers, where he formed its renowned Arbitrage Group by hiring academia's top financial economists. Though Meriwether left Salomon under a cloud of the SEC's wrath, he leapt into his next venture with ease and enticed most of his former Salomon hires--and eventually even David Mullins, the former vice chairman of the U.S. Federal Reserve--to join him in starting a hedge fund that would beat all hedge funds. LTCM began trading in 1994, after completing a road show that, despite the Ph.D.-touting partners' lack of social skills and their disdainful condescension of potential investors who couldn't rise to their intellectual level, netted a whopping $1.25 billion. The fund would seek to earn a tiny spread on thousands of trades, "as if it were vacuuming nickels that others couldn't see," in the words of one of its Nobel laureate partners, Myron Scholes. And nickels it found. In its first two years, LTCM earned $1.6 billion, profits that exceeded 40 percent even after the partners' hefty cuts. By the spring of 1996, it was holding $140 billion in assets. But the end was soon in sight, and Lowenstein's detailed account of each successively worse month of 1998, culminating in a disastrous August and the partners' subsequent panicked moves, is riveting. The arbitrageur's world is a complicated one, and it might have served Lowenstein well to slow down and explain in greater detail the complex terms of the more exotic species of investment flora that cram the book's pages. However, much of the intrigue of the Long-Term story lies in its dizzying pace (not to mention the dizzying amounts of money won and lost in the fund's short lifespan). Lowenstein's smooth, conversational but equally urgent tone carries it along well. The book is a compelling read for those who've always wondered what lay behind the Fed's controversial involvement with the LTCM hedge-fund debacle. --S. Ketchum
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Customer Reviews:
• Good Read 14 May, 2008
This is a great book detailing the failed Long term capital management (LTCM). Do not need a lot of time to read, and serves a great cautionary story for investors. Good buy.
- Reviewed by customer ID: A36L8Z5UTO6NKX
• One Of The Best Books I've Read 31 May, 2008
The book is a thorough account on what happened at LTCM. Absolutely fantastic writing skills. What I liked the most though is how Goldman came on top as usual :-) Interesting, hein? Goldman is amazing.
- Reviewed by customer ID: A1INBZRFBHKDEZ
• Brilliant 19 August, 2008
Does an excellent job of recounting the events and the people involved in the rise and fall of the hedge fund. The length of the novel is short enough to make it possible to read it in one go, the pace is fast enough, with none of the detours that authors are sometimes tempted to take (describing in excruciating and needless detail minutae that seem to serve no useful purpose other than that to fatten the book and make the tome appear more scholarly than it is). The author also does describe, in non technical terms, some of the financial instruments that were used by LCTM. These descriptions are by no means technical, and there is not a single formula in the entire book. Also, unlike some other authors, Lowenstein does not fall into the trap of describing the lifestyles of the protagonists in lurid detail. We do get a glimpse into how the main actors lived, ostentatious or not, but it never gets so involved so as to distract from the main purpose of the book, which is to describe the rise and fall of LCTM.
What is also clear is that the author has a soft corner for Merriwhether, the brain and the soul behind LCTM. The Nobel laureates at LCTM come off as having too much faith in the mathematical certainty of their formulae, while the experienced traders at LCTM as also having drunk the kool-aid. These people, like Hillibrand, Haghani, and others believed so much in their skills and the correctness and certitude of the formulae that they staked their personal wealth on LCTM's success. Markets and investors do not always behave with mathematical preciseness, nor can their behavior be modeled and predicted using past performance or normal distributions (bell curves). Events can cause highly improbable events to turn into self-fulfilling prophecies. Markets are interconnected, and when things go bad, the correlation turns to one. Leverage by itself is not bad, provided liquidity is not a concern. You can be illiquid, and you can be leveraged, but not at the same time. These are just some of the lessons the author draws our attention to.
One drawback listed by many reviewers of this book is that the book is not technical enough. Which is fair enough. However, it would be quite difficult to write a book that did justice to the twin objectives of recounting the events and history of LCTM as well providing enough technical details and background into the various theorems and intricacies of the financial instruments used by LCTM. Such a book would either run the risk of becomg very long, thus losing much of its intended audience, or become disjointed, with the narrative struggling to juggle between the characters, the plot, and the technical details. There are other highly rated books like 'Inventing Money' that are more technical in nature, and could be read in conjunction with 'When Genius Failed'.
Some other books suggested:
Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It
The Scam: Who Won, Who Lost, Who Got Away?
The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron
- Reviewed by customer ID: A2SYCKV9A2SE0F
• "it Was The Arrogance Of People... Who Really Believed That They Were More Intelligent Than Others." 17 March, 2008
Even supposedly smart people can get utterly carried away. Perhaps they weren't as smart as they believed. In any case, we should always remember to take information and advice from "the experts" with a grain of salt.
Incidentally, Bear Stearns was the firm that cleared LTCM's trades. And now, like LTCM, Bear Stearns is pretty much no longer.
- Reviewed by customer ID: A2G3WT4HC96PNR
• Markets Are Not Science 24 May, 2008
Not a light read, but a captivating one - in part reads like a horror story where you're dragged into a sequence of events both exciting in their nature and progression, and epic in their ultimate failure. I'm not a finance type, but Roger Lowenstein did a great job of explaining how the hedge fund operated, and the types of trades it was involved in. It certainly throws a bucket of cold water on Econometrics, and demonstrates that beyond a certain point, economics is as much of an art, as it is a science.
- Reviewed by customer ID: A2MGUNKW1ANLT5
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