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When Genius Failed: The Rise and Fall of Long-Term Capital Management Paperback – October 9, 2001
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"Devoted" by Dean Koontz
For the first time in paperback, from Dean Koontz, the master of suspense, comes an epic thriller about a terrifying killer and the singular compassion it will take to defeat him. | Learn more
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“[Roger] Lowenstein has written a squalid and fascinating tale of world-class greed and, above all, hubris.”—Business Week
“Compelling . . . The fund was long cloaked in secrecy, making the story of its rise . . . and its ultimate destruction that much more fascinating.”—The Washington Post
“Story-telling journalism at its best.”—The Economist
From the Inside Flap
In a decade that had seen the longest and most rewarding bull market in history, hedge funds were the ne plus ultra of investments: discreet, private clubs limited to those rich enough to pony up millions. They promised that the investors' money would be placed in a variety of trades simultaneously--a "hedging" strategy designed to minimize the possibility of loss. At Long-Term, Meriwether & Co. truly believed that their finely tuned computer models had tamed the genie of risk, and would allow them to bet on the future with near mathematical certainty. And thanks to their cast--which included a pair of future Nobel Prize winners--investors believed them.
From the moment Long-Term opened their offices in posh Greenwich, Connecticut, miles from the pandemonium of Wall Street, it was clear that this would be a hedge fund apart from all others. Though they viewed the big Wall Street investment banks with disdain, so great was Long-Term's aura that these very banks lined up to provide the firm with financing, and on the very sweetest of terms. So self-certain were Long-Term's traders that they borrowed with little concern about the leverage. At first, Long-Term's models stayed on script, and this new gold standard in hedge funds boasted such incredible returns that private investors and even central banks clamored to invest more money. It seemed the geniuses in Greenwich couldn't lose.
Four years later, when a default in Russia set off a global storm that Long-Term's models hadn't anticipated, its supposedly safe portfolios imploded. In five weeks, the professors went from mega-rich geniuses to discredited failures. With the firm about to go under, its staggering $100 billion balance sheet threatened to drag down markets around the world. At the eleventh hour, fearing that the financial system of the world was in peril, the Federal Reserve Bank hastily summoned Wall Street's leading banks to underwrite a bailout.
Roger Lowenstein, the bestselling author of Buffett, captures Long-Term's roller-coaster ride in gripping detail. Drawing on confidential internal memos and interviews with dozens of key players, Lowenstein crafts a story that reads like a first-rate thriller from beginning to end. He explains not just how the fund made and lost its money, but what it was about the personalities of Long-Term's partners, the arrogance of their mathematical certainties, and the late-nineties culture of Wall Street that made it all possible.
When Genius Failed is the cautionary financial tale of our time, the gripping saga of what happened when an elite group of investors believed they could actually deconstruct risk and use virtually limitless leverage to create limitless wealth. In Roger Lowenstein's hands, it is a brilliant tale peppered with fast money, vivid characters, and high drama.
- Item Weight : 7.4 ounces
- Paperback : 304 pages
- ISBN-10 : 9780375758256
- ISBN-13 : 978-0375758256
- Product Dimensions : 5.17 x 0.65 x 8 inches
- Publisher : Random House Trade Paperbacks; Reprint Edition (October 9, 2001)
- Language: : English
- ASIN : 0375758259
- Best Sellers Rank: #40,560 in Books (See Top 100 in Books)
- Customer Reviews:
Top reviews from the United States
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The gist of the story is that no amount of financial modelling can overcome a “black swan” event, even though the term “black swan” was not a known term at the time of these events.
Fast forward from 1998 to 2008 and the term “black swan” has become a key piece of “financial lexicon” when considering what unforseen uncertainty might do to the value of financial assets and liabilities.
With the benefit of hindsight, some of the geniuses at Long Term Capital Management might have considered financial modelling for a “black swan” event.
The story is also one for detailing the shortcoming and weakness of human character. For example:
• Hubris v humility;
• Arrogance v meekness
• Over confidence v modesty;
• Pride v humility;
• Condescension v respect;
• Disdain v respect;
• Contempt v admiration
and so it goes on.
A reader is somewhat reminded by the verse “as you shall sow, then so shall you reap”. Such an apt phrase seemingly applies throughout the book, but the one stand out is when management decides to fully redeem the capital of the outside investors, with a view to increasing management’s share of the pie, only to find that the geniuses at Long-Term Capital Management had failed to realise that by shafting these investors, they had (in the end) shafted themselves.
Top reviews from other countries
The book starts off, first, talking about how the fund started and then the addition of the few 'head' traders/speculators. They made a huge number of bids in a boat load of financial instruments betting that price 'differences' will eventually converge to equilibrium. Their basis was the efficient market hypothesis, which postulates that markets will eventually converge to a steady state. With their money and self worth on the line, they borrowed an obscene amount of money to bet on the very small oppurtunities that exist (picking up pennies on the road behind a bulldozer). They made a lot of money in return and the banks never failed to lend them more getting a few pennies of their own.
The fall came when an event that is fairly common in global markets happen, crisises. In this case, the default of the Russian debt and hyper inflation. Since LTCM was so levered, and they bet markets would converge, when their bets diverged, they got destroyed. No one wanted to take on any risk and they were there to take all the beating.
A lovely read all the way and bit of foresight on what would happen to the new LTCM once the 2008 financial crash happened.