When Genius Failed: The Rise and Fall of Long Term Capital Management [Paperback]

Roger Lowenstein (Author)

Book Description

Publication Date: January 2002

Picking up where Liar's Poker left off (literally, in the bond dealer's desks of Salomon Brothers) the story of Long-Term Capital Management is of a group of elite investors who believed they could beat the market and, like alchemists, create limitless wealth for themselves and their partners. Founded by John Meriweather, a notoriously confident bond dealer, along with two Nobel prize winners and a floor of Wall Street's brightest and best, Long-Term Captial Management was from the beginning hailed as a new gold standard in investing. It was to be the hedge fund to end all other hedge funds: a discreet private investment club limited to those rich enough to pony up millions. It became the banks' own favourite fund and from its inception achieved a run of dizzyingly spectacular returns. New investors barged each other aside to get their investment money into LTCM's hands. But as competitors began to mimic Meriweather's fund, he altered strategy to maintain the fund's performance, leveraging capital with credit on a scale not fully understood and never seen before. When the markets in Indonesia, South America and Russia crashed in 1998 LCTM's investments crashed with them and mountainous debts accumulated. The fund was in melt-down, and threatening to bring down into its trillion-dollar black hole a host of financial instiutions from New York to Switzerland. It's a tale of vivid characters, overwheening ambition, and perilous drama told, in Roger Lowenstein's hands, with brilliant style and panache.

Editorial Reviews

Review

'A must-read thriller for anyone who works, or invests in markets. It is a story of how arrogance can drive greed and fear to extremes.' Scotsman 'Richly textured and lucid!A riveting account that reaches beyond the market landscape to say something universal about risk and triumph, about hubris and failure.' New York Times 'Lowenstein has written a squalid and fascinating tale of world-class greed and, above all, hubris.' Business Week 'This book is story-telling journalism at its best' The Economist

About the Author

Roger Lowenstein has reported for the Wall Street Journal for more than a decade and is a frequent contributor to the New York Times and The New Republic. He is the author of Buffet: the Making of an American Capitalist.

Product Details

• Paperback: 275 pages
• Publisher: Fourth Estate (January 2002)
• Language: English
• ISBN-10: 1841155047
• ISBN-13: 978-1841155043
• Product Dimensions: 7.6 x 5 x 0.9 inches
• Shipping Weight: 5 ounces
• Average Customer Review: 4.7 out of 5 stars  See all reviews (9 customer reviews)
• Amazon Best Sellers Rank: #628,577 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

6 of 6 people found the following review helpful:

5.0 out of 5 stars Short Term Capital Irrationality, April 22, 2007

By 

Stephen M. St Onge "Stephen M. St. Onge" (Mpls, MN USA) - See all my reviews
(VINE VOICE)    (REAL NAME)   

This review is from: When Genius Failed: The Rise and Fall of Long Term Capital Management (Paperback)

Roger Lowenstein details how the partners of "Long Term Capital Management" let greed and ego overwhelm them.

LTCM was a hedge fund that was supposed to use arbitage to make money at low risk. It worked for a while, but then lots of people started getting in on the act. The rational thing to do, under the circumstances, would have been to cut back, and look for a new fields of endevour. Instead, the partners of LTCM decided to screw their investors. They returned most of the investor's capital, and then made even bigger bets with oodles of borrowed money, so they could hog all the profits for themselves.

And then, something happened, as it always does. Suddenly, all LTCM's positions were losing money. Being 'geniuses,' they doubled down, and lost it all. In a page out of Greek tragedy, they would have rode out the storm fine, if they hadn't forced their former investors to take back all their capital. As it was, the former investors profited greatly, while the geniuses lost almost everything and nearly destroyed Wall Street.

If ever you hear someone talking about how markets are "efficient," give them this, which shows how the emotional human animal REALLY behaves in the financial world.

10 of 12 people found the following review helpful:

4.0 out of 5 stars Quite a good book but there are better ones on that topic, May 11, 2006

By 

Mr. M. L. Denjean (London, UK) - See all my reviews
(REAL NAME)   

This review is from: When Genius Failed: The Rise and Fall of Long Term Capital Management (Paperback)

This is quite an entertaining book on the failure of LTCM. It is well documented but I think it will be much more appreciated by the outsiders to the realm of Finance.

It disappointed me on two accounts:

First, it is another one of those typical American business storytelling books where you have to read through bios of the lives of all characters before you ever get to the meat of the subject (e.g. Barbarians at the Gate)

Second, the book "Inventing Money" by N. Dunbar is in my view a much better account of the LTCM downfall if you have been studying economics and finance as it describes the mechanics a lot more.

Nevertheless, the book tells the story quite well and I would highly recommend, by the same author, "Buffett : The Making of an American Capitalist".

3 of 3 people found the following review helpful:

4.0 out of 5 stars A story of mathematical calculation vs. human unpredictability, August 19, 2007

By 

Winston Kotzan (Chicago) - See all my reviews

This review is from: When Genius Failed: The Rise and Fall of Long Term Capital Management (Paperback)

This classic Wall Street story is another must-read for anyone with an interest in money management. When Genius Failed chronicles the failure of the hedge fund Long Term Capital Management (LTCM), a pioneer in quantitative investment strategies. With roots from the renowned Salomon investment bank, LTCM gathered some of the world's top financial gurus to design mathematical arbitrage strategies so well planned, they were widely regarded as having virtually no risk. Among the mathematical wizards was Myron Scholes, co-creator of the Black-Scholes model.

After several years of handsome returns, this formula turned out too good to be true. After convincing investment banks and clients to pour billions of dollars into this near-"riskless" fund, tragedy struck in 1998. A credit crisis in Asia prompted a chain reaction of panic that the fund's mathematical models could not anticipate. The story of this fund's collapse proves that markets are not efficient. It is a lesson that precision calculations in the world of finance, no matter how correct or ingenious, are no match for human irrationality when panic strikes.

Amplifying the unforeseen risk of the fund were human errors made by the principals. The firm's superior performance depended on incredible leverage (borrowed money), but that leverage also led to LTCM's demise when the margin calls hit. The principals also deviated from their core investment strategy when arbitrage opportunities started to dry up; they began making directional bets and speculating, something for which mathematical models are just inadequate for quantifying the risk.

One disadvantage of this book is that it focuses so much on the people involved that it sacrifices explanation of the market forces behind the Asian currency crisis. I felt that some chapters contained too many dry details on the interaction between the LTCM principals and the banks.

The advantage of its focus on people is that the reader can see many of today's Wall Street icons in action. Almost a continuation of Liar's Poker, many of the same Salomon traders including John Meriwether are pivotal to LTCM. Warren Buffett and George Soros play a role, allowing readers to see their investment acumen at work. Many Wall Street characters and investment banks still prevalent in today's news were plugged into the LTCM fiasco.

Because of the high-profile characters and Wall Street firms involved with LTCM, this is a great read for students aspiring for a career on the Street. It also provides good insight into trading strategies and the hedge fund world. I would recommend When Genius Failed to anyone with an interest in investing.