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

4.5 out of 5 stars 392 customer reviews

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Editorial Reviews

Amazon.com Review

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 out of print or unavailable edition of this title.

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 out of print or unavailable edition of this title.

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Product Details

  • Paperback: 304 pages
  • Publisher: Random House Trade Paperbacks; Reprint edition (October 9, 2001)
  • Language: English
  • ISBN-10: 0375758259
  • ISBN-13: 978-0375758256
  • Product Dimensions: 5.2 x 0.6 x 8 inches
  • Shipping Weight: 6.4 ounces (View shipping rates and policies)
  • Average Customer Review: 4.5 out of 5 stars  See all reviews (392 customer reviews)
  • Amazon Best Sellers Rank: #10,839 in Books (See Top 100 in Books)

Customer Reviews

Top Customer Reviews

Format: Hardcover
A somewhat didactic narrative history of the hedge fund Long Term Capital Management. Nicholas Dunbar covers the same subject in his book "Inventing Money." Both books present a blizzard of details about who did what and when. Too much detail. The general reader would better served by a medium sized article. Nevertheless if you're a finance buff interested in the nitty-gritty then read both books. Dunbar has a physics background and his book is more technical, while Lowenstein comes from journalism and his narrative flows better.
LCTM began operating in 1994, set up by John Meriwether formally head of the bond-arbitrage group at Solomon Brothers. He put together a star-studded cast that included three (1997) Nobel prize winners in economics. Their basic strategy was something called convergence arbitrage. In essence this strategy says buy two bonds that you think will track one another. Go long on the cheap one and short on the other; you make money if the spread narrows. In theory you are protected from changing prices as long as the two vary in the same way. To make the big bucks LCTM was after they took a gigantic number of highly leveraged arbitrage positions all over the world. To get high leverage you borrow for the position, like buying a stock on margin. LCTM got really high leverage by avoiding something called the "haircut," which is an extra margin of collateral banks usually demand, but forgave LCTM. Why would banks they do such a thing? Because they were blinded by the glitter of the cast, and in some cases the banks themselves were investors in LCTM. By 1997 convergence arbitrage opportunities in bonds began to dry up, everyone was doing it. So LCTM applied their strategy to stocks.
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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
In 1994, bond arbitrage guru John Meriwether, late of Salomon Brothers, launched a hedge fund. Its partners included two soon-to-be Nobel laureates and an ex-vice chairman of the Federal Reserve. The fund was to exploit highly quantitative techniques to bet on (primarily) bond spreads throughout the world, using large amounts of leverage to magnify small returns from supposedly low-risk positions. By early 1998, each dollar invested in the fund had grown to $4.11. By early fall 1998, that $4.11 was down to 33 cents. The fund's potential bankruptcy so threatened the world economy that the U.S. Federal Reserve had to step in to broker a rescue.
The tale of the rise and fall of Long-Term capital was coming to its end as I was putting to press my own book on option-based trading strategies and their effects on market volatility (Capital Ideas and Market Realities). The whole adventure constituted a perfect capstone to my story, which goes back to the crash of 1929, showing how strategies that purport to eliminate the risk of investing can end up exploding in the face of their followers and investors generally.
Now Roger Lowenstein, formerly a journalist at the Wall Street Journal and author of a biography on Warren Buffett, has devoted a whole book to LTC. Drawing largely on contemporaneous reporting and on his own personal interviews with many of the principal and supporting players (although not, alas, Meriwether himself), Lowenstein manages to create a real page-turner out of the unfolding events, even for readers who already know the ultimate outcome.
Part of the tension, it seems to this reader, stems from the unresolved (and probably unresolvable) ambiguity about the real nature of the story.
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