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When Genius Failed: The Rise and Fall of Long-Term Capital Management Paperback – Oct 9 2001

4.2 out of 5 stars 119 customer reviews

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Product Details

  • Paperback: 304 pages
  • Publisher: Random House Trade Paperbacks; Reprint edition (Oct. 9 2001)
  • Language: English
  • ISBN-10: 0375758259
  • ISBN-13: 978-0375758256
  • Product Dimensions: 13.2 x 1.7 x 20.3 cm
  • Shipping Weight: 181 g
  • Average Customer Review: 4.2 out of 5 stars 119 customer reviews
  • Amazon Bestsellers Rank: #16,735 in Books (See Top 100 in Books)
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Product Description

From Amazon

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 --This text refers to an alternate Paperback edition.

From Publishers Weekly

In late September 1998, the New York Federal Reserve Bank invited a number of major Wall Street investment banks to enter a consortium to fund the multibillion-dollar bailout of a troubled hedge fund. No sooner was the $3.6-billion plan announced than questions arose about why usually independent banks would band together to save a single privately held fund. The short answer is that the banks feared that the fund's collapse could destabilize the entire stock market. The long answer, which Lowenstein (Buffett) provides in undigested detail, may panic those who shudder at the thought of bouncing a $200 check. Long-Term Capital Management opened for business in February 1994 with $1.25 billion in funds. Armed with the cachet of its founders' stellar credentials (Robert Merton and Myron Scholes, 1997 Nobel Prize laureates in economics, were among the partners), it quickly parlayed expertise at reading computer models of financial markets and seemingly limitless access to financing into stunning results. By the end of 1995, it had tripled its equity capital and total assets had grown to $102 billion. Lowenstein argues that this kind of success served to enhance the fund's golden legend and sent the partners' self-confidence off the charts. As he itemizes the complex mix of investments and heavy borrowing that made 1994-1997 profitable years, Lowenstein also charts the subtle drift toward riskier (and ultimately disastrous) ventures as the fund's traditional profit centers dried up. What should have been a gripping story, however, has been poorly handled by Lowenstein, who obscures his narrative with masses of data and overwritten prose. Agent, Melanie Jackson. Author tour. (Sept.)
Copyright 2000 Reed Business Information, Inc. --This text refers to an alternate Paperback edition.

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Customer Reviews

Top Customer Reviews

Format: Paperback
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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Format: Paperback
A couple of years ago I read Nick Dunbar's account of the LTCM collapse "Inventing Money", and a friend recently lent me this book. They make an interesting comparison.
Dunbar - a physicist by trade - is more interested in the theoretical economics that went into the risk arbitrage fund in the first place and how this came unstuck. He gives a long description of the Black-Scholes model, what it says, and how it was used to pull off the risk "free" trades which made Long Term so much money for three or four years.
Lowenstein, by contrast, barely mentions either the Black-Scholes model (he barely touches on option pricing at all, as a matter of fact) or the Italian convergence trades which eventually blew the gaffe on the fund, but instead tells the human story, exposes the inevitable egos, and indulges in more than a little smuggery (this book is long on wisdom after the fact) in dissecting the naivety of the LTCM hedging and trading strategy and the people who ran it.
As long as he sticks to the egos and the posturing, When Genius Failed is a dandy read: the negotiations amongst the Wall Street top brass as the fund is going under rate with anything served up in Barbarians at the Gate, and as this is a large part of the book, it rips along quite nicely.
But the schadenfreude grates: One of the lessons of the whole fiasco was that the smart money is with the guy who can predict the future: any old mug can be a genius with hindsight. Lowenstein spends a lot of his time wisely pointing out what the traders should have done.
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Format: Hardcover
This book gives a good overall feel for the disaster that was waiting to happen, but is shoddy in the details (e.g. the author describes that LTCM was short equity volatility and needed to cover their position. He states they went to other dealers to get them to buy volatility. In reality the other dealers would need to sell volatility to LTCM, but I suspect most readers won't be too interested in these details). Also he can't be expected to give more than cursory explanations as to why various risks turned out to be non-hedgable or disasters waiting to happen. Since hissource for the story seems to be the big IB's like Merrill, and Goldman, he misses the fact that some of these firms and in particular their managementput their firms at supreme risk. e.g. Merrill announced that they had enough collateral at the time of the rescue to cover the liabilities that LTCM had to it. But an internal study showed that if LTCM had defaulted and the subsequent estimates of liquidity and spreads were accounted for the loss to Merrill could easily be larger than $3 billion. (This would be in addition to about $1billion of losses Merrill did incur during the same period). Most of the senior Management that made decisions to enter these trades are still around today - one went on to be risk manager of the firm. I am fairly sure that most of the dealers had similar experience. The arrogance of LTCM seems remarkable but in fact was equally represented in the firmsit did business with. It would be interesting to see a sequal that delved into the flip side of the problem which existed in the IB's themselves.
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Format: Paperback
As an I-Banker working in the fixed income markets that were drastically effected by the LTCM collapse, I wish I had read this book sooner as it does an excellent job describing how and why the collapse occurs. If nothing else, this book will show you the "inside" money game played on a very large scale that is virtually unknown to mainstream America.
Lowenstein does an exceptional job tracing the history of the principals from Salomon and how their unique culture grew into a monster where the traders felt they could do nothing wrong. And that's always the reason rational money managers eventually take large losses as the market can surprise even the pros.
Having left Salomon under a cloud of disgrace, Meriwether desperately wanted back in the game. While this book does an excellent job describing the complex arbitrage trades LTCM was running, readers should be aware it is a complex subject that you may not understand. The author shows the transition from complex trades that generate small profits to a borrowing machine intent on making this small profit on ever larger leveraged money. And that's a recipe for disaster IF the markets remain irrational for an extended length of time. And that's exactly what happened, the "perfect storm" of financial disasters.
But that storm was helped by two factors. First, by being so cocky in their dealings with their bankers, when they needed the help from a friendly hand, there was none as everyone silently rooted for the failure of the 800 pound gorilla. In addition, as their problem became larger and they entered negotiations with various parties for a bailout, these parties were able to unload their own holdings of these unprofitable positions in front of LTCM compounding the loss until final capitulation.
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