Customer Reviews

Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It

5 star:		(20)
4 star:		(15)
3 star:		(3)
2 star:		(5)
1 star:		(3)

 

 

While Lowenstein's account of the Long-Term Capital Management debacle is more fascinating, Dunbar's book provides more "meat" for those interested in the backdrop of the historical event. Starting with a brief history of speculation and progressing to finance theory, "Inventing Money" places the Long-Term saga in a historical context. Indeed, almost half of the text has nothing to do with Long-Term directly, but Long-Term was not created in isolation. People from academia and "the Street" made its existence possible, and this book chronicles its development very well.

A bit more technical than "When Genius Failed," this book gives the reader lots of background material on the theory behind what Long-Term was supposed to do: namely, arbitrage. As a Ph.D. student of financial economics, I found Dunbar's explanations easy to understand, but I can also see that they will be quite obfuscating to non-specialists in this area. The second part, about Long-Term's dealings, is easier to understand for everyone. While his account of what transpired to Long-Term is not as vivid as Lowenstein's, I think Dunbar does a laudable job at keeping the story flowing. BTW, the paperback addition has a thoroughly updated last chapter, "Aftermath."

If you are interested in the Long-Term story, both books are worth keeping. If you have to choose, go with "Inventing Money" if you are also interested in the history of finance theory and financial engineering; if you prefer an "insider's view," "When Genius Failed" would be a better choice.

I was prompted into buying this book after seeing a truly hopeless Channel 4 documentary about the LTCM collapse which attempted - but failed entirely - to explain what LTCM was all about: What the Black/Scholes formula did, how Meriwether and cohorts used it to make money, and how they managed to singlehandedly bring western world as we know it to the brink of financial collapse with a formula which is supposed to completely eliminate risk.

Dunbar's very readable book scores on two fronts: firstly, it succeeds in explaining how these putatively "risk free" trades manage to make profit and be (to 'all' intents and purposes) perfectly hedged, when conventional wisdom would suggest that a perfectly hedged position must by definition be 'flat', and secondly, it serves as an excellent primer for anyone wanting to understand how the debt markets in general, and credit derivatives in particular, work. And all this in a little over 200 pages. Great going!

The subject matter isn't easy, but nor (at the level to which Dunbar takes it) is it rocket science, and to his immense credit Dunbar manages to resist the temptation to write it off as 'baffling rocket science by Harvard Graduates which is far too hard for the stupid reader to understand' (which is what said Channel 4 documentary did) or to insert unpenetrable graphs, equations and formulae to show just how clever he and the LTCM sort of person is.

Still, while the casual observer of the Stock Market (you know, the sort who watches the news each night to see if it went up or down) might find little in this book to light their candle, those in the industry and short on specific knowledge, or with aspirations of getting into it, could hardly find a better place to start.

Nicholas Dunbar has skillfully taken the lid off the can of worms which was the LTCM collapse with this story of the individuals and institutions involved in one of the most spectacular business failures of the past decade. His clinical yet gripping account is impartial and fair in dealing with the ethical aspects of the story and sympathetic to the human tragedy played out by the principal actors in this financial melodrama. Dunbar's account will last as a portrait of the world of derivatives, options and markets long after "Wall Street" and other attempts at putting flesh on the bones of the financial world have been consigned to the fantasy shelves, where they belong. In telling the story of LTCM's rise and fall, Nick Dunbar manages, very subtly, to initiate us into some of the more arcane mysteries of risk management in the world of options and derivatives. Like all the best instructors, he succeeds in enthusing us for his subject. From his opening sentence, Dunbar persuades us to be fascinated by the LTCM story and to want to understand it. Readers across all shades of the spectrum from professional to amateur will acquire valuable information from "Inventing Money"; as well as having a hugely enjoyable read.

Nick Dunbar's literate, compact volume takes the reader from the beginnings of the financial revolution marked by Black, Scholes and Merton's discovery of the heralded "Black-Scholes Options Pricing Forumula" through the heady days of John Merriwether's "Bond Arb" group and the treasury scandal that threatened to end his career, to the formation and ultimate demise of Long Term Capital Management, perhaps the most famous hedge fund in history. With minimal technical jargon, Nick Dunbar manages to tell the story with sufficient detail that the unititiated can appreciate the complexity of the financial instruments and models employed by Long Term Capital. These same details are often swept aside in journalistic accounts as generic "highly sophisticated financial instruments" and well-known "mind-bogglingly complex mathematical models". Details notwithstanding, Inventing Money never takes its eye off the human side of the story: money was made and lost, careers soared and plummeted, reputations were shattered and many questions were raised as a result of this important episode in the history of financial markets.

The book blends an historical perspective of the developments in financial markets over the past 25 years that led to the opportunities as well as the risks presented to the partners of Long Term Capital with a well-researched account of the fund's operations and ultimate demise. Properly researching the rise and fall of LTCM could only have been a daunting task. In its heyday details of the funds operation were kept mainly private and could only have become more so as the proverbial sh-t hit the proverbial f-n.

Despite these obstacles, Dunbar does a fine job piecing together published accounts (some not likely to have been seen by the average reader, like statements by David Modest at the "Measurement and Management of Global Financial Risk" conference held at Wharton, April 29-30 1999, a conference I spoke at) and private interviews with key players to arrive at a book that is coherent and likely to provide something new for almost any reader.

I didn't know this book existed until Lowenstein's book on LTCM came out recently with lots of publicity. After reading both titles, I have to rate this one far better for its information content. Lowenstein's book has lots of stories on the human side of the LTCM debacle, except Meriwether, whose information is skimpy at best. Dunbar's book, on the other hand, tells you how the deals were done and why they went wrong. It does take more time to go through this book unless one knows things like "asset swap" already, but it is well worth the effort.

Lowenstein's book is like the Hollywood version of things, dramatic but superficial. Dunbar's book is more of a biography of modern finance, in which you can really learn a lot.

Inventing Money is a compelling read to everybody interested in the inner workings of wall street and the derivatives industry in general. It gives an excellent history of the development of the financial markets, with interesting examples, such as the role of the CBOT grain markets during the civil war. In great detail it covers the development of option theory, and the role that Black, Scholes and Merton had. Meriwether's rise at Soloman (see Liars Poker) and the events leading to his departure are also detailed. Finally the details of LTCM and their 'money making machines' are discussed, along with the events that finally brought about LTCM's downfall. In places the book gets very technical but in general Dunbar does an excellent job of explaining and simplifying some extremely complicated principles. I highly recommend this book. It now sits on my bookshelf next to some other great financial reads such as Liars Poker, Barbarians at the Gate, Market Wizards and Den of Thieves. Enjoy

This is an extraordinarily well-written book. However, if you're not well-versed in quantitative finance, you're probably going to have a hard time following some parts of the book. Be that as it may, I doubt you'll find a more accurate and more informed book on the subject. For those looking for a more fictionalized, but highly readable, version of events, pick up "When Genius Failed."

Written by derivatives journalist Nick Dunbar, Inventing Money is an entertaining and mostly accurate accounting of the people behind Long-Term Capital Management and the events that brought them, LTCM, and global financial markets to their knees in 1998. As Dunbar makes clear, the reinsuring of structured equity products sold in Europe (which are designed to provide the stock market's upside potential without its downside risk) was LTCM's second biggest losing bet. These products contain an embedded long-dated index call option, which requires hedging with automated trend-following trading rules-that is, buying as the market rises and selling as it falls. This "option replication" hedging is a form of positive feedback, like a household thermostat that's gone berserk--calling for more heat when the house is hot, and for more cooling when the house is cold. This positive feedback trading whips up market volatility, creating its own volatility storms, and causing markets to crash as investors flee in panic. This occurred most notably in October 1987, in the fall of 1997, and again in summer and fall of 1998.

Bruce I. Jacobs (cimr@jlem.com), Principal, Jacobs Levy Equity Management, and author of Capital Ideas and Market Realities: Option Replication, Investor Behavior, and Stock Market Crashes, Blackwell Publishers, 1999.

This book definitely chronicles what you are looking for from the beginnings of option pricing to the LTCM liquidity crisis in Aug/Sep 98. Also, the book gets better as you read on as Dunbar fills in the story quite well by linking events together and relating their significance. My only material criticism is that the book is dumbed down too much. I imagine this is so that the book will appeal to a broader audience than just Wall St types. But, for Wall St types, it drags at times as Dunbar explains basic option pricing, and portfolio and risk management theories. On the other hand, if you are not familiar with these concepts, you should not fear this book for not understanding those concepts - they are explained quite deftly.

All in all, certainly worth the read. A great story! I recommend it to anyone interested in LTCM.

This is a wonderful book. Not only is this book a detailed examination of the LTCM story, but as a bonus, it is a wonderful introduction to the instruments that were the tools of the LTCM economists. In a real sense, you cannot have an understanding of the seductiveness of the techniques or an inkling of how the trading/money machine worked and why it collapsed and why the collapse was so shocking to the quants without having the introduction. Insights into cleverness and inventiveness of the mechanisms are a real bonus -- after reading Dunbar you not only feel you have an understanding of the sorry saga, but also an useful badsic understanding of derivatives/swaps/arbitrage devices. Great stuff.