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

When Genius Failed: The Rise and Fall of Long-Term Capital Management | Roger Lowenstein | A must read for all market participants

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When Genius Failed...

	When Genius Failed: The Rise and Fall of Long-Term Capital Management Roger Lowenstein Random House Trade Paperbacks, 2001 - 288 pages average customer review:based on 209 reviews view larger image
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highly recommended

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.

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

An excellent read & indeed very relevant in today's' times when we see fiascos in the financial markets repeated almost every day. I expect another book from Roger Lowenstein soon on Bear Stearns, Lehman, Merrill Lynch & the state of financial markets (today). God Bless Wall Street & God Bless America! Hail Lowenstein!

A must read for all market participants

One of the best stories about modern finance...this book must be read by everyone committing serious money into the markets. Written approximately 10 years ago, 10 years before the bankrupcy declaration by Lehman Brothers, "When Genius Failed" presents some timely lessons that should have been learned a decade ago...but weren't for some odd reason.

#1 The issue of swaps: It is interesting that David Swenson of Yale is described here as inventing the first modern financial derivative--the swap. How ironic is it that Swenson makes no mention of investing in this toxic coolaid himself (in his books)? How ironic is it that losses in swaps were the #1 thing that brought down Long Term Capital...and all of Wall Street's titans were around to see it 10 years ago...and yet what are the financial derivatives bringing down companies like AIG today--the swap...You would have thought people would have learned! Avoid this crap!

#2 Shame on John Reed from Citibank (he was Mr. Conservative, right?)and Alan Greenspan for opposing rules that would have required regulation and disclosure related to derivatives. In retrospect, this is absolutely nuts. Certainly, Citigroup is paying the price for its participation in these same markets now---how ironic that it would likely have really benefited by regulation it opposed.

#3 It is of immense interest that Bear Sterns' Jim Cayne refused to participate with the LTCM bail out...leading other Wall Street firms to promise revenge...Well...look what happened 10 years later when Bear needed help...it was nowhere to be found.

#4 It is shocking that Wall Street never learned the lesson of LTCM's failure: leverage + deritvatives equals big trouble. That is why we are experiencing this same pain today--ten years later. LTCM should have been allowed to go bankrupt 10 years ago...bringing the banks with it...nothing else would have forced upon them a good, conservative nature. Now, unfortunately, surgery is needed to cure the patient...or it may be too late....

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One of the best books I've read

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.

Brilliant

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

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Fun for everyone...

This is a fascinating book about the collapse of one of the largest and most sophisticated hedge funds of all time. The book gives great insight to the hedge fund world, as run by Nobel prize winners and other mathematical geniuses, without being technical. Anyone with a passing interest in the world of finance is likely to enjoy this book.

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