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When Genius Failed: The Rise and Fall of Long-Term Capital Management, by Roger Lowenstein
Ebook When Genius Failed: The Rise and Fall of Long-Term Capital Management, by Roger Lowenstein
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Review
“A riveting account that reaches beyond the market landscape to say something universal about risk and triumph, about hubris and failure.”—The New York Times“[Roger] Lowenstein has written a squalid and fascinating tale of world-class greed and, above all, hubris.”—Business Week“Compelling . . . The fund was long cloaked in secrecy, making the story of its rise . . . and its ultimate destruction that much more fascinating.”—The Washington Post “Story-telling journalism at its best.”—The Economist
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From the Inside Flap
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 ofwhat 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.
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Product details
Paperback: 304 pages
Publisher: Random House Trade Paperbacks; Reprint edition (October 9, 2001)
Language: English
ISBN-10: 9780375758256
ISBN-13: 978-0375758256
ASIN: 0375758259
Product Dimensions:
5.2 x 0.7 x 8 inches
Shipping Weight: 7.2 ounces (View shipping rates and policies)
Average Customer Review:
4.6 out of 5 stars
406 customer reviews
Amazon Best Sellers Rank:
#17,941 in Books (See Top 100 in Books)
It's now six years after the story, and still a lot of people, probably most people, don't understand LTCM. If anything, the memory is fading. I bought a copy of 'Genius' for my business collection, because it is now a classic. Andrew Tobias' and 'Adam Smith's' tails of speculation in the '60s/70s saved me from the internet bubble, and for that reason, it's important to have a copy of this book and read it. Because, have no doubt, we will go through this whole thing again. In your lifetime, probably sooner than later.Genius does fail, pretty regularly, especially in the investment arena. Index funds still out-perform most of the managed funds. And yet this week the managed funds were once again reporting net inflows. I see and hear lots of praise for Black-Scholes. Surf the web and you'll find it loaded with training courses on how to use it. Never do they come with any examination of it's potential problems.Our Caveat Emptor society comes with an obligation to be educated on this stuff. Read Genius Failed, read Random Walk, read Popular Delusions, read Liar's Poker, read The Money Game, read, read, read. Otherwise, well, Wall Street's an expensive place to get an education, and with the coming problems in Medicare, and Social Security, we're all going to be faced with managing our retirements. The uneducated will be as lambs led to slaughter.January 2008 update - Do you suppose Lowenstein is already at work on one on the mortgage bond mess. I did read a funny quote from the CEO of Wells Fargo to the effect that he saw no reason for the creation of new ways of destroying investment value when the old ones were already working so well. Funny, but at the same time I'm glad I'm broadly asset allocated and not concentrated in financials.November 2008 update - These guys have really run this idea into the ground. LTCM as a PRELIMINARY proof of concept of how to crater an economic system. It's no longer a slaughter of lambs. I do hope that Lowenstein is keeping notes, and am confident of a sequel.April 2010 update -He finally published his account on the mortgage bond mess. The usual quality though now he competes with Michael Lewis (yet another market moving to efficiency).April 2012 update - More than ever, people need to read this book. It was interesting, it was history, it was profound, and now the lack of comprehension on the part of the people of the U.S. is having a profound impact on its future. It's all here: Nothing was learned from LTCM, other than how to replicate the disaster. Muppets... Vampire Squids...
Roger Lowenstein’s book contains an extraordinary amount of detail. There’s nothing wrong with that.The gist of the story is that no amount of financial modelling can overcome a “black swan†event, even though the term “black swan†was not a known term at the time of these events.Fast forward from 1998 to 2008 and the term “black swan†has become a key piece of “financial lexicon†when considering what unforseen uncertainty might do to the value of financial assets and liabilities.With the benefit of hindsight, some of the geniuses at Long Term Capital Management might have considered financial modelling for a “black swan†event.The story is also one for detailing the shortcoming and weakness of human character. For example:• Hubris v humility;• Arrogance v meekness• Over confidence v modesty;• Pride v humility;• Condescension v respect;• Disdain v respect;• Contempt v admirationand so it goes on.A reader is somewhat reminded by the verse “as you shall sow, then so shall you reapâ€. Such an apt phrase seemingly applies throughout the book, but the one stand out is when management decides to fully redeem the capital of the outside investors, with a view to increasing management’s share of the pie, only to find that the geniuses at Long-Term Capital Management had failed to realise that by shafting these investors, they had (in the end) shafted themselves.
When Genius Failed was a great read. Lowenstein did a terrific job of introducing the reader to the quirky personalities at Long Term Capital and their interactions with Wall Street, European and Asian investment banks and the Fed. The real genius of the book was that Lowenstein nailed WHY genius failed. The same lessons the professors and traders at Long Term Capital failed to learn are the ones that all traders need to know. Trading in the financial markets is art as well as science. Knowing what quantitative models can and cannot do, and knowing when a model’s underlying assumptions are violated are key to successful trading. And finally, having the humility to accept that no matter how smart you are (or think you are) the financial markets can and will periodically make you look like an idiot.
This is a dramatic tale of one of the most impressive companies and hedge fund in history, Long Term Capital Management (LTCM) of Greenwich, Connecticut. A group of academics that used mathematical models of the past to predict future but failed because, “They had forgotten the human factor.â€This is a chilling harbinger as the crisis that would impact Wall Street ten years later. Roger Lowenstein provides a complex read, well organized, story of finance gone are due to hubris. In this narrative he reviews and defines many investment terms for the novice. Items as hedge fund, derivatives, efficient market hypothesis, repo-financing, IO’s & PO’s, swap and much about probabilities using dice as an illustrative example are put forth.Most striking is the view the reader obtains from a perch that Lowenstein provides into the New York Fed, Wall Street Banks and particularly the characters and relationships of Jon Corzine and Warren Buffet. This all happening and cloaked while the Clinton Lewinsky scandal was unraveling. The drama almost bought down the world markets.Arrogance and hubris strikes again, shades of Enron
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