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When Genius Failed: The Rise and Fall of Long-Term Capital Management
by: Roger Lowenstein

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Binding: Paperback
Dewey Decimal Number: 332
EAN: 9780375758256
ISBN: 0375758259
Label: Random House Trade Paperbacks
Manufacturer: Random House Trade Paperbacks
Number Of Items: 1
Number Of Pages: 288
Publication Date: October 09, 2001
Publisher: Random House Trade Paperbacks
Release Date: October 09, 2001
Sales Rank: 975
Studio: Random House Trade Paperbacks

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Editorial Review:

Product Description:
John Meriwether, a famously successful Wall Street trader, spent the 1980s as a partner at Salomon Brothers, establishing the best--and the brainiest--bond arbitrage group in the world. A mysterious and shy midwesterner, he knitted together a group of Ph.D.-certified arbitrageurs who rewarded him with filial devotion and fabulous profits. Then, in 1991, in the wake of a scandal involving one of his traders, Meriwether abruptly resigned. For two years, his fiercely loyal team--convinced that the chief had been unfairly victimized--plotted their boss's return. Then, in 1993, Meriwether made a historic offer. He gathered together his former disciples and a handful of supereconomists from academia and proposed that they become partners in a new hedge fund different from any Wall Street had ever seen. And so Long-Term Capital Management was born.
        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.

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

Customer Reviews

Average Rating: out of 5 stars

Rating:

- Fun for everyone...
This is a fascinating book about the collapse of one of the largest and most sophisticated hedge funds of all time. The book gives great insight to the hedge fund world, as run by Nobel prize winners and other mathematical geniuses, without being technical. Anyone with a passing interest in the world of finance is likely to enjoy this book.

Rating:

- When Genius Failed: The Rise and Fall of Long-Term Capital Management
An excellent read & indeed very relevant in today's' times when we see fiascos in the financial markets repeated almost every day. I expect another book from Roger Lowenstein soon on Bear Stearns, Lehman, Merrill Lynch & the state of financial markets (today). God Bless Wall Street & God Bless America! Hail Lowenstein!

Rating:

- A must read for all market participants
One of the best stories about modern finance...this book must be read by everyone committing serious money into the markets. Written approximately 10 years ago, 10 years before the bankrupcy declaration by Lehman Brothers, "When Genius Failed" presents some timely lessons that should have been learned a decade ago...but weren't for some odd reason.

#1 The issue of swaps: It is interesting that David Swenson of Yale is described here as inventing the first modern financial derivative--the swap. How ironic is it that Swenson makes no mention of investing in this toxic coolaid himself (in his books)? How ironic is it that losses in swaps were the #1 thing that brought down Long Term Capital...and all of Wall Street's titans were around to see it 10 years ago...and yet what are the financial derivatives bringing down companies like AIG today--the swap...You would have thought people would have learned! ... Read More

Rating:

- Brilliant
Does an excellent job of recounting the events and the people involved in the rise and fall of the hedge fund. The length of the novel is short enough to make it possible to read it in one go, the pace is fast enough, with none of the detours that authors are sometimes tempted to take (describing in excruciating and needless detail minutae that seem to serve no useful purpose other than that to fatten the book and make the tome appear more scholarly than it is). The author also does describe, in non technical terms, some of the financial instruments that were used by LCTM. These descriptions are by no means technical, and there is not a single formula in the entire book. Also, unlike some other authors, Lowenstein does not fall into the trap of describing the lifestyles of the protagonists in lurid detail. We do get a glimpse into how the main actors lived, ostentatious or not, but it never gets so involved so as to ... Read More

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