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When genius failed : the rise and fall of…

When genius failed : the rise and fall of Long-Term Capital Management (edition 2000)

by Roger Lowenstein

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Title:When genius failed : the rise and fall of Long-Term Capital Management
Authors:Roger Lowenstein
Info:New York : Random House, c2000.
Tags:lowenstein, Roger Lowenstein, ↑loC, , ♠♠♥♥♦♦♣♣•, ♥♥↑↑↑, ♥♥-X

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When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein

  1. 10
    The Big Short: Inside the Doomsday Machine by Michael Lewis (browner56)
    browner56: The hubris, greed and mismanagement behind two of the most devasting financial collapses of the last 75 years, brilliantly and carefully told.
  2. 00
    The Ascent of Money: A Financial History of the World by Niall Ferguson (mikeg2)
    mikeg2: Like this book, The Ascent of money covers the major financial disasters that have taken place including the LTCM debacle.

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Showing 1-5 of 20 (next | show all)
This book is about the four-year journey of one of the most infamous hedge funds in history. It outlines it's four-year lifecycle, from 1994 to 1998, starting with an monumental raise of $1.5 billion and concluding with a $3.6 bailout by sixteen financial institutions, organized by the Federal Reserve.

The sector in which their money was made is the world of bond arbitrage. Arbitrage is about making money not in the rise and fall of asset prices, but in profiting on the spread between similar or almost identical assets. Spreads, on bonds in particular, are infinitesimally small. The only way to consistently make significant sums money on them is if you work on a massive scale with massive leverage [in LTCM's case, 30:1].

The monumental failing of the mathematicians behind this fund was that they assumed the economy was a collection of totally random incidents. They thought it would be absolutely impossible for a trend to carry through the entire economy. Such an oversight is utterly bizarre, as obviously, the global economy experiences meta-trends all of the time.

The book is very well researched and is a good mix of facts along with a narrative surrounding the personalities of the people involved.

I would have liked to have heard a greater analysis of the systemic risks that led to the bailout, but it could be that this information just doesn't exist. Maybe the instabilities caused by LTCM were just totally unpredictable, and that's why they were assumed too much of a risk. ( )
  willszal | Jan 10, 2017 |
A fairly well written account of yet another collection of typically greedy Wall Street bankers. A good book to read if you want to learn the definition of hubris (and the OED entry is to short for you). It does need a bit of an update, to incorporate the latest instance of avarice nearly collapsing the world economy. ( )
  hhornblower | Aug 13, 2016 |
The sin of arbitrage isn't that it is impossible. It *is* possible to exploit market inefficiencies and make a profit. But those profits are usually very, very small. Which means that it requires an enormous investment to make any real money. You have to borrow to get enough cash to make the small percentage profit worthwhile. So the sin of arbitrage is leverage.

And even leverage can be handled. You can work with it. For a while. Like a cocaine habit. But since you are dealing with the real world, where new things come along now and again; and with people, whose reactions can be hard to predict, accounting for all the risks is, really, impossible. So even geniuses are faced with the possibility that their risk models aren't sufficient. That they will, quite suddenly, be on the line for massive margin calls (the collateral on all that money they borrowed to lay down their many, many small-profit bets) that they just can't meet. And even if this is only the result of a short-term market irrationality (YOU ARE, AFTER ALL, PLAYING THE GAME OF MARKET IRRATIONALITY) you must pay or, as LTCM--the genius-packed company that is the subject of this book--had to, go bankrupt. Lowenstein's book is a good basic telling of this story, but he unfortunately doesn't seem to really appreciate the richness of the irony when a company that runs on exploiting irrationality gets eaten by another aspect of that same human irrationality. And is outraged. ( )
  ehines | Feb 15, 2015 |
if you enjoyed the book "Inventing Money" consider this that books sister – not twin – whereas Inventing Money is very heavy on financial modelling, this book is very heavy on the personalities that invented convergence arbitrage. ( )
  peterclark | Dec 30, 2012 |
While a better title might be “When Hubris Failed,” Lowenstein still tells an engaging and comprehensible story of fools who thought they were too smart to go broke, and turned out to be too big to fail. Indeed, after crashing a multibillion-dollar fund, many though not all of the principals went back to merely gorging themselves like ticks on the body politic, earning outrageous Wall Street salaries and waiting once again for the government to come fix the problems their risk-taking caused. The basic problems were simple: LTCM thought that it could arbitrage irrationalities in the market, but as more and more people figured out those irrationalities, it was required to take more and more risk for less and less profit—aka supply and demand, except that when the demand is for risk and when you can leverage (borrow) to multiply your exposure then things can go very wrong indeed. Moreover, LTCM’s model assumed that markets would behave pretty much as they’d done during the period covered by its models, which they then didn’t; as Nassim Taleb and others have pointed out, the market can stay “irrational” longer than you can stay solvent—unless of course Uncle Sam rides to your rescue, which poses a pretty serious moral hazard problem of its own. The most awful thing is that this wasn’t the last act: LTCM’s implosion demonstrated how dangerous derivatives were and how deluded Wall Street had become, and yet neither the government nor the market participants—too enamored of their bonuses and their short-term greed—took action to avoid another disaster. It’s as if there was a second Titanic following the first that didn’t even bother to change course. ( )
  rivkat | Apr 16, 2012 |
Showing 1-5 of 20 (next | show all)
LTCM is a great story/fable populated with memorable characters. Lowenstein does a nice job in pacing the story and I recommend reading the book for these reasons alone. There is a certain pleasure reading about the demise of the haughty and rich (or least people characterized that way). The book fails, however, in communicating a convincing moral. Lowenstein views the LTCM failure as a warning about applying high-tech, financial models and theories of efficient capital markets to financial markets that "are not always reasonable."
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Amazon.com Amazon.com Review (ISBN 0375758259, Paperback)

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

(retrieved from Amazon Thu, 12 Mar 2015 18:01:58 -0400)

(see all 2 descriptions)

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." "When Genius Failed is the cautionary financial tale of our time, the 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.… (more)

(summary from another edition)

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