Customer Reviews for

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

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  • Anonymous

    Posted October 13, 2000

    Stalled Thinking by Geniuses Leads to Staggering Losses!

    There's an old saying to the effect that every army prepares to fight the last war, rather than the next one. In financial circles, the equivalent is to create models that optimize decisions in light of the history of financial markets. That is great, as long as the future is like the past. As soon as the future becomes different, this 'rear-view mirror' vision of the future can create terrible crashes. That's what happened with Long Term Capital Management (LTCM). The cost was almost a meltdown in the financial markets around the world. This cautionary tale should stand as a warning to regulators, investors, academicians, and traders about avoiding the same mistakes in the future. One particular reason to be so concerned is that John Meriwether and his crew of geniuses were back in business as of 1999, as reported by the book (apparently with some of the same investors as in LTCM). You may recall that Mr. Meriwether appeared in the book, Liar's Poker, by challenging John Gutfreund, CEO of Salomon Brothers, to one hand of liar's poker for ten million dollars. Mr. Gutfreund correctly declined, but lost face. Mr. Meriwether later had to leave Salomon Brothers after the firm was found to have failed to notify the Federal Reserve promptly after discovering that it had been violating rules on bidding for government securities. In this book, you will learn more about Mr. Meriwether and his love of brilliant people, betting on everything in sight, and taking outside bets when the odds seemed to be in his favor. This approach can work well when the odds can be known, but that is not the case in the financial markets. Mr. Meriwether did not make himself available to the author. Roger Lowenstein is our most talented financial writer (you may remember him from his days at The Wall Street Journal and for his wonderful biography on Warren Buffett), and he has produced an outstanding work that will be a cautionary tale for future generations about the financial myopia of the 1990s. Long Term Capital Management was built around consensus in the financial markets. The firm attracted the thinkers in the financial markets with the greatest reputations (including future Nobel Prize laureates, Robert Merton and Myron Scholes -- of Black-Scholes option pricing fame, and the top talent from the arbitrage area at Salomon Brothers), a top regulator (the vice-chairman of the Federal Reserve Board), famous investors from the top investment banks and consulting firms, and lines of credit from every major financial institution in these markets. The firm planned to invest by finding small mispricings of one security versus another (such as the interest rate on one bond maturity versus another compared to history, an option versus the underlying stock for the time remaining on the option, a bond yield in a foreign currency versus the currency futures, and the price of a stock versus a hostile takeover bid price for the company). Here, it hoped to proverbally make lots of nickels by borrowing lots of money to make these trades. Although other firms took similar risks (and many also took enormous losses in 1998), LTCM stood out for two things: It had no independent evaluation of its risk to control what it was doing (the traders monitored themselves -- a little like letting the fox guard the hen house) and it took on vastly more debt than others did compared to its equity base. At the firm's peak, it had borrowed over $100 billion against a base of $4 billion in equity and had derivative (option) positions for an exposure of another $1 trillion. This enormous finanical leverage magnified the size of any gains or losses it took. Part of what had been deceptive is that the firm had been regularly and spectacularly profitably for most of its initial four years. What the firm had neglected was to consider what might happen to historical price differentials in a market crisis (particularly a 'stress-loss liquidation'). In 1998, an unprece

    1 out of 1 people found this review helpful.

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  • Anonymous

    Posted September 18, 2000

    A Must Read For All Investors

    Lowenstein has captured the factors that led to the failure of a major brain trust. More importantly, he provides a lucid guide to classic models in psychology, logic, and risk management that can be applied to our own investing activities. All that - and a great read, too.

    1 out of 1 people found this review helpful.

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  • Posted October 4, 2011

    Good read and story about Wall St mistakes

    This is more a great story than an insightful education on how mutual funds and derivatives work. Only a very small percentage of us, probably less than 1%, will ever trade equity risk or margin spreads on bonded debt, but thats what LTCM did.

    Its a great story of hubris - the smartest guys on wall st - imploding to great degree. The book gives good insight into how reckless traders can get and how unregulated the trading system is with Hedge Funds and other private investing groups.

    The bottom line is - they lost $5 billion but mostly only hurt the banks. After losing it all they still were able to raise another $250-million and start another fund.

    I think it was a mirror image of what happened 10 years after with the 2008 crash. The Fed stepped in and saved the banks. The book definitely does not paint a decent portrait of the established investment houses; they come off and nothing short of greedy and sadistically cruel to their companions who are falling apart - but thats wall st.

    Would recommend more for the story line than actual learning about hedge investments and how they all blew up . . .but you'll get the basics.

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  • Posted November 25, 2009

    more from this reviewer

    I Also Recommend:

    When Genius Failed to Write

    I'll start this review by saying that I picked this book up at the train station as a fill-in because I had accidentally left the book "House of Cards" on the train and I figured it would be a short read. It was.

    Lowenstein provides us with about as much detail as can possibly be gathered due to the high level of secrecy that the partners kept surrounding the firm. Which is to say not much. A reader gets a cursory introspective into the captain of the ship, John Meriwether, and the various partners but really not enough to become fully engaged or to have their characters fully fleshed out. Further, there is a great amount of repetition and for someone who at least has an MBA the granular detail of arbitrage and how those work really do not contribute to the story and actually make it more of a difficult read then it should be. Before you realize it you've flipped the last page and feel that you've just scrapped the surface of what could have been a very good read...


    The book does provide a nice alternative view because of the intersection in the story-line between this and the book I had lost "House of Cards" wherein Bear Stearns played a role and seeing how the two authors described that role was interesting. Somewhat like between the two lies some semblance of what actually happened during the event.

    What we do get is the same theme as that of "House of Cards" & "Den of Thieves.. success fools smart people that they can't fail.

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  • Anonymous

    Posted October 18, 2007

    Excellent

    Must read book on modern finance - especially in times of subprime turbulence and talk of Fed 'bailout'. Works for non-finance types as a cautionary tale on hubris as well. Great stuff.

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  • Anonymous

    Posted December 26, 2000

    Its a must read title on finance literature

    The history of LTCM teach a lesson of how far can any fund manager can go between the no risk arbitrage and the plain one directionally bets without any hedge.

    0 out of 1 people found this review helpful.

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    Posted December 9, 2009

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