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on June 16, 2004
Lowenstein is one of the finest financial journalists around, and his work in this book is no exception. More than anything, Long-Term Capital's collapse is the story of hubris and arrogance. The men who ran LTCM were brilliant financial minds and legendary traders, and their investment strategies would worked (or at least not failed on such a massive scale) if they had stayed within their realm of competence (fixed-income arbitrage). But Lowenstein chronicles their ill-fated forays into merger arbitrage, emerging markets and other areas that the gurus of LTCM didn't really understand as well as they thought they did.
The ultimate irony of the story is thatmany involved still don't think they were wrong in their investment strategy, viewing Russia's default (the exogenous event that directly led to the firm's liquidation) as a one-time, unforeseeable event.
With the meticulousness of a great journalist, Lowenstein brilliantly renders a story of arrogance run amok. As a derivatives trader, I think this book is must-reading for any trader or investment professional, since it teaches us all a couple crucial trading lessons: (1) The market is bigger than any one participant, and (2) Check your ego at the door.
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on February 7, 2004
Any fool knows that playing the futures game is a risk. But here we have a situation where John Meriwether, having left Salomon Brothers under a cloud, is trusted with lots of investment money to start an arbitrage group - which in hindsight was a half step away from financial insanity. This "arbitrage group" is a fancy way of saying a group of people that gambled on futures using derivatives. Not hog futures but large international financial instruments.
The financial swings and risks were enormous. You might have trouble at the bank getting a car loan but these guys got billions from banks and investors to essentially play the futures markets. The group included academics, market veterans, and financial analysts. The academics were so sure of themselves that they did not even blink at the thought of betting billions. They played for high stakes and won at first. But eventually they lost their stake like some giant crap shoot. Again where were the regulators? Where were the regulators when junk bonds were king and where were the regulators when Enron had their fake trading floor? They did not arrive until the building was on fire and burned down.
The losses were so great that only the Federal Reserve could fix the situation by applying pressure to "encourage" the New York banks to bail out the arbitrage group.
A very interesting read. One has to remind oneself that it is not fiction, but that it all actually happened.
Four stars.
Jack in Toronto
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on January 7, 2004
The geniuses who ran Long-Term Capital Management thought they could do no wrong. They believed they had developed a can't fail system of playing small margins in bond and equity spreads. They even projected that only a unique set of circumstances could ever fall into place and spoil the niche they thought they had found in the market. And the odds of that happening were determined to be so infinitesimal that they never were concerned about it.
Naturally, that unique set of circumstances fell into place and brought them down at the same time very nearly ignited a financial crisis that required the intervention of the Federal Reserve to prevent a potential meltdown of the markets. It reads like fiction by the likes of Michael Crichton, but it is all the more frightening that it is true.
This is a true cautionary tale, one that will probably go unheeded by future "geniuses" on the Street. It is well researched and well-told. This book is must reading for anyone interested in the stock and bond markets. It should be required reading for all of the self-proclaimed financial geniuses who keep appearing on Wall Street and who all seem to manage to flame out when they learn that the markets are unpredictable and answer to no one.
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on December 2, 2002
I think the story of LTCM is fascinating. While this book isn't nearly as funny or witty as "Liar's Poker", it wasn't ever intended to be. This is solid and intelligent reporting (such as the limitations of reporting are). Here is the story of how a company almost no one outside its very specialized community knew nearly sank the global economy. How can this not be fascinating?
The problem is that the financial instruments they were dealing in are not commonly understood and are not easy to grasp without some training or careful study. Most of the simplistic explanations in the papers and on (worse) TV seem to add more heat than light.
All I can tell you is that Mr. Lowenstein has done a pretty good job at making this rather abstruse subject as accessible as can be while still trying to really tell the story rather than waving his arms and making extravagant and pejorative claims.
Just two of the things you will see raised in this book that differ from what you will read in the popular press are: 1) Greenspan was more or less co-opted into bailing out LTCM and had very different views and considerations about letting the company fail than has been popularly reported, and, 2) there is some evidence that the debacle of LTCM's failure was made worse by their being the victim of front-running. That is, someone who knew what they had to sell got in front of those sales to undermine their position.
I'll let you read the book and make up your own mind rather than my making arguments for what are really only my impressions from reading this book. It is only 236 pages, but what a read! (Four stars because it is so specialized, but it is a VERY GOOD book.)
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on November 23, 2002
"When Genius Failed" chronicles the late-1990's ascent and implosion of Long-Term Capital Management (LTCM), for a brief time the hottest and most powerful hedge fund in the world. The author does a great job of helping the reader understand the personalities involved, and the danger to world financial markets posed by this amazingly small number of individuals.
Although the LTCM debacle was noteworthy due to the sheer size of the positions that the firm took and the Nobel pedigrees of the people involved, it is ultimately a new presentation of an old story. It is the old story of inflated egos and hubris being punished by the markets.
I found the story fascinating, both as an important recent event and as a study in people and markets. At the end of the story, I think the reader will come away with an appreciation of financial markets as living entities made up of people, not just numbers on a trader's display.
Don't miss the scene with the late, great Vinny Mattone of Bear Stearns, a terrific judge of markets and human nature.
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on September 2, 2002
This is a gripping look at the personalities and mechanics of Long-Term Capital Management, a small bond trading firm that managed to create what might have become a world-wide meltdown of the financial markets.

LTCM was founded on a theory in Economics that won Robert Merton and Myron Scholes a Nobel Prize. The theory itself is fascinating, and it is strangely unfathomable how its application equated to the ability to quantitatively 'trade risk'. Lowenstein has a fine knack of translating the numbers and financial machinery into real-world concepts so that the financial markets actually begin to make sense.

Although he appears to conclude that flaws in the scientific theory were the ultimate cause of its collapse, it is my opinion that this is not strictly speaking true. It is well-known in science (and more so in the empirical ones) that every theory has its domain of applicability outside of which it cannot be simply assumed to be equally accurate.

What I believe caused LTCM to collapse was the failure by those who applied the theory to test carefully to what extent it could be stretched before a more sophisticated refined version was needed to complement it. The sheer greed inspired by the theory's early success caused LTCM's managers to wilfully ignore warnings from underlings and throw all caution to the wind, as they expanded into ever and ever riskier trades.

The unheard-of use of borrowing exacerbated what might otherwise have been a manageable business failure. LTCM was able to obtain astronomical amounts of money by leveraging off the greed of its lenders. Lowenstein also hints that the moral hazard of the Fed acting as an 'insurer of last resort' allows traders to take wild risks with our economy.

All in all, a very interesting, exciting, and readable account of hubris.
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on July 2, 2002
Roger Lowenstein has written a very interesting and insightful account of the rise and fall of LTCM. His style is very conversational, flowing, and easy to read. His writing is chock full of anecdotes and quotes, and his insight in to the people involved rather than merely the fund itself make his book a valuable read, as you learn as much about the industry as you do about the type of personal characteristics that will make or break you in it. His book is well researched and includes lots of information that would not be available to the general public. Its changing tone helps the reader run the gamut of emotions felt by the people involved in the collapse, everything from hope, confidence, and cockiness to denial, doubt, and dispair.
One caveat: it requires a certain degree of understanding of equity and debt markets, as well as the role of major players like investment banks and the government in them. An interesting read for anyone with a basic understanding of finance.
A 4 because its a good book, but not an essential read.
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on November 11, 2001
"When Genius Failed" is the amazing story of Long Term Capital Fund, a huge hedge fund (over $5 billion in equity capital) managed by people who were suppose to be brilliant (two partners won the Nobel Prize in Economics, three were former Harvard professors and several had advanced degrees from MIT and Harvard), which recorded astonishing growth in its first four years ($1 invested in May 1994 was worth $4.11 in April 1998) and then suddenly crashed ($5 billion lost in five months) during a time when the stock market was booming (mid- to late-1998).

Using complex economic models, the fund's managers had precisely calculated the risk of the fund losing twenty percent of its value to be an event that would occur no more often than once every fifty years and the risk of the fund crashing completely to be so statistically remote as to be nonexistent. So confident were the partners that they not only invested their own personal fortunes (some of the partners had net worths in the hundreds of millions), but also leveraged the funds assets to over $100 billion (a leverage ratio of 30 to 1) and exposed it to risks of over $1 trillion (through derivative investments).
Investors were eager to participate and nearly all of the major investment banks (Merrill Lynch, Chase Manhattan, Bear Sterns, Bankers Trust, JP Morgan, Lehman Brothers, Morgan Stanley Dean Whitter, and Salomon Smith Barney, to name just a few) had big stakes in it. So successful was LTCF that less than a year before its demise, it returned $2.7 billion in cash to investors, since it had simply run out of opportunities in which to invest.
The errors that brought LTCF down were in a sense quite basic. (1) It not only underestimated the human element of the markets, it ignored that factor altogether. People - and therefore markets - sometimes act irrationally, but the precise mathematical models LTCF was using to predict market behavior couldn't account for that. (2) It was both extremely leveraged and extremely illiquid, which in combination is a highly risky position (ask any real estate developer who's had to carry a project through slow times). And (3) while it foolishly thought it had diversified its investments, it really hadn't. Though it had numerous investments, which made it look diversified, they almost all mirrored each other. The same market condition that affected one investment necessarily affected nearly all of them.
LTCF's rise and fall is a fascinating story filled with great themes -money, greed, hubris, success, failure - topics that make for great literature. That its a true story makes it all the more incredible. As a former columnist for the Wall Street Journal, Roger Lowenstein is well qualified to tell the story and he does a commendable job. Readers unfamiliar with economics may occasionally need to re-read sections to understand some of the investment concepts, but this flaw is easy to overlook. WGF is an otherwise fast read and one that will appeal to a wide audience.
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on October 22, 2001
This book is about a defunct era, that of the 1990s, and it well-documents the rise and fall of Long-Term Capital Management.
As Robert Shiller's related text, Irrational Exuberance, shows, the 1990s, like most American boom times, were characterized by a faith in a basket of propositions including technology and "rationality."
Because of a faith in a rationality that was more a sign and less a fully-investigated phenomenon, banks and investors threw money at John Meriwether and his band of merry men. Their rationality consisted in a thoroughgoing application of Merton-Scholes trading models to finance, which replaced integer, discrete models with continuous models.
Unfortunately, a hidden presumption was 100% faith in Say's Law: that markets always clear, and any buyer will find his seller. As Lowenstein shows this presumption failed in Aug 1998, and, if any further refutation was needed, it failed again after Sep 11 when the closing of the exchange was a refutation of Say's Law.
Note that the "rationality" was a shaky edifice based on classical economics.
Meriwether would have done well to read Barbara Ehrenreich's Sullivans' Travels like book, NICKEL AND DIMED: On (not) getting by in America, for a technical reason.
This is because in the REAL world of the poor and middle class, Say's Law is a fantasy, and transaction costs, owing to the laws of small numbers, overwhelm an economic "rationality" which is based on a high and positive net worth. In the real world, people trained for jobs cannot get them (there is no buyer for the seller) and the ATM won't dispense under 20.00 even if you prefer it would (there is no seller for the buyer.)
Banks were chasing after Meriwether because they had millions of dollars to lend, and not once did they think about directing these funds to real needs including microlending. As a result, boys are dying in Peshawar because the only work available to them is digging for scraps of metal. For this reason alone, the tax law needs to be revised to return to steeply progressive levels (90 cents on the last dollar earned by the wealthy), and to prevent overly elaborate arbitrage in the future.
Unfortunately, Lowenstein instead recommends that we consider a mystified "human factor." In actuality, it is probable that Meriwether's software people could have predicted the anomalous developments of August 1999 and from Lowenstein's book it appears that they were neither asked, nor given information about the real prospects of the firm. This is not a human factor, it is the mathematical casting-in-concrete of the "laws" of people whom Keynes described as long-dead scribblers, resurrected by madmen in authority.
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on September 12, 2001
The problem with books about financial scandals is that they tend to devolve into hype and hate-mogering. A financial player is turned into a villain, who is persecuted throughout the book. This does not happen here. Lowenstein's WHEN GENIUS FAILED is objective and avoids sensationalism. It explains well the transactions and the trading strategies that Long Term Capital Management used, how it over-did it, and how so many of its counterparties got duped into thinking it was safer and better than it really was.
One of the fundamental lessons from the event, which the book illustrates well, is that the markets are comprised of people who learn. When a trading strategy works well, it will attract immitation and it will no longer be as profitable and as safe. The additional funds pursuing the same source of profits will dry it up. The additional players chasing those profits cause stampedes when they run for the exits, while a small group could avoid a crisis.
WHEN GENIOUS FAILED is more than a book about a financial accident; it illustrates the futile and never-ending nature of the chase of profitable financial innovations. Yesterday's innovation is today's standard operation procedure. The faster markets become, the faster do innovations become obsolete. The Nobel-prize-winners of LTCM never figured that out untill it bit them.
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