- 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: 4.6 out of 5 stars See all reviews (409 customer reviews)
- Amazon Best Sellers Rank: #11,562 in Books (See Top 100 in Books)
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When Genius Failed: The Rise and Fall of Long-Term Capital Management Paperback – October 9, 2001
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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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Top Customer Reviews
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.
I bought it for two reasons. My original read was from a library copy, and the book is so good I wanted a personal copy.
Second, I've recently read a good bit about the 2007-2008 craziness. So I wanted to see how the two incidents compared and how Lowenstein's book compares with the many about 2007-2008.
I'll share my conclusion about this book. From my perspective, one of the best pieces around concerning capital markets history. Lowenstein is a great story teller. Reading this book is motivating me to read some of his others.
This is a chilling harbinger as the crisis that would impact Wall Street ten years later. Roger Lowenstein provides a complex read, well organized, story of finance gone aerie due to hubris. In this narrative he reviews and defines many investment terms for the novice. Items as hedge fund, derivatives, efficient market hypothesis, repo financing, IO’s & PO’s, swap and much about probabilities using dice as an illustrative example are put forth.
Most striking is the view the reader obtains from a perch that Lowenstein provides into the New York Fed, Wall Street Banks and particularly the characters and relationships of Jon Corzine and Warren Buffet. This all happening and cloaked while the Clinton Lewinsky scandal was unraveling. The drama almost bought down the world markets.
Arrogance and hubris strikes again, shades of Enron