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

Roger Lowenstein
4.6 out of 5 stars  See all reviews (36 customer reviews)
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Book Description

2 Jan 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.


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When Genius Failed: The Rise and Fall of Long Term Capital Management + Liar's Poker (Hodder Great Reads) + The Big Short: Inside the Doomsday Machine
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Product details

  • Paperback: 288 pages
  • Publisher: Fourth Estate; New Ed edition (2 Jan 2002)
  • Language: English
  • ISBN-10: 1841155047
  • ISBN-13: 978-1841155043
  • Product Dimensions: 13 x 19.6 cm
  • Average Customer Review: 4.6 out of 5 stars  See all reviews (36 customer reviews)
  • Amazon Bestsellers Rank: 16,280 in Books (See Top 100 in Books)

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Product Description

Amazon 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 by the Fed to discuss the highly unusual prospect of 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 behind the Fed's unprecedented move, the incredible heights reached by LTCM, and its eventual dramatic demise.

Lowenstein, a financial journalist and author of Buffet: The Making of an American Capitalist, uncovers and examines the personalities, academic expertise, professional relationships, and layers of numbers behind LTCM's roller-coaster ride with the precision and knowledge 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 US Federal Reserve--to join him in starting a hedge fund that would beat all hedge funds.

LTCM began trading in February 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 dollars. 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 dollars, profits that exceeded forty 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 at the start 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), and 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.

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


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Customer Reviews

Most Helpful Customer Reviews
50 of 51 people found the following review helpful
By Donald Mitchell HALL OF FAME TOP 500 REVIEWER VINE VOICE
Format:Paperback
There's an old saying to the effect that every army prepares to fight the last war, rather than the next one. In financial circles, the equivalent is to create models that optimize decisions in light of the history of financial markets. That is great, as long as the future is like the past. As soon as the future becomes different, this 'rear-view mirror' vision of the future can create terrible crashes. That's what happened with Long Term Capital Management (LTCM). The cost was almost a meltdown in the financial markets around the world. This cautionary tale should stand as a warning to regulators, investors, academicians, and traders about avoiding the same mistakes in the future. One particular reason to be so concerned is that John Meriwether and his crew of geniuses were back in business as of 1999, as reported by the book (apparently with some of the same investors as in LTCM).
You may recall that Mr. Meriwether appeared in the book, Liar's Poker, by challenging John Gutfreund, CEO of Salomon Brothers, to one hand of liar's poker for ten million dollars. Mr. Gutfreund correctly declined, but lost face. Mr. Meriwether later had to leave Salomon Brothers after the firm was found to have failed to notify the Federal Reserve promptly after discovering that it had been violating rules on bidding for government securities.
In this book, you will learn more about Mr. Meriwether and his love of brilliant people, betting on everything in sight, and taking outside bets when the odds seemed to be in his favor. This approach can work well when the odds can be known, but that is not the case in the financial markets. Mr. Meriwether did not make himself available to the author.
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18 of 18 people found the following review helpful
4.0 out of 5 stars A clear disaster 30 Nov 2004
Format:Paperback
A clear and not too technical account of how the house of Meriwether, Scholes et al devised a system to make themselves and their clients extraordinarily rich and eventually blew themselves up.
Lowenstein gives brief biopics of the main characters, concisely and clearly and gives an image of hugely intelligent men who were initially so successful that they thought they couldn't fail. He puts LTCM's ultimate failure down to pride; and the inability of the leader, Meriwether, to control his extraordinarily arrogant traders.
The author briefly explains how the company managed to leverage up so many times on its trades, allowing it to have an exposure to the market over a 100 times its capitalization; and how the clearing brokers and trading houses were so desperate to claim LTCM's business that the concerns of their credit officers were often ignored.
As to why the trades finally failed, he gives a series of answers. The trade modellers had failed, he says, to give enough importance to freak events in their models - what he calls 'ignoring fat tails', so that, for example, the Russian credit default which was largely responsible for a huge amount of the losses at LTCM had been deemed so unlikely that they hadn't fully accounted for it in their trading strategy. The lack of supervision by Meriwether comes in for a fair amount of criticism. And finally, as other companies saw LTCM's success and decided to jump on the bandwagon, the Greenwich boys' opportunities to exploit those small arbitrage opportunities that the market presented at the outset grew less frequent as other traders all looked to the same opportunities to make profits, making the pool all that more crowded.
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10 of 10 people found the following review helpful
5.0 out of 5 stars A great read / VERY Engrossing 25 Jan 2001
By A Customer
Format:Hardcover
as a trader in the city of the london at the time of the LTCM debacle, i was amazed at how well When Genius Failed made me relive the 10 "Hellish Weeks" of August 16th to October 25th, 1998. the book was so engrossing that had it not been for my wife taking me out for dinner, i would have easily finished the book in one read.
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4 of 4 people found the following review helpful
5.0 out of 5 stars Essential Reading 21 Oct 2007
By Chuck E VINE VOICE
Format:Paperback
It would be a shame if this book were confined to readers of the 'Business' section. It should be required reading for anyone whose life is affected by the machinations of the financial sector - i.e. everyone.

In itself the tale is one of high drama, but it helps that it's told by a writer with the ability to keep up the pace and energy throughout, despite the complexities and opaqueness of a lot of the subject matter - and then distil the argument into one killer sentence: "Neither the Nobel prize nor all the degrees mattered now; the professors were rolling the dice." This single phrase encapsulates the essence of the story. Emboldened by their initial success and oblivious to any flaws in their 'system' they took on the mind-set of the gambler in the casino who 'knows' he can beat the house and throws caution to the wind. Thus a buttoned-up bunch of academics and highly rational financiers succumbed to the not-always-rational dictates of markets, convinced to the end (and beyond) that it was the world outside their number-crunching computer programs that had got it 'wrong'.

To the layman a further irony seems to be contained in the fact that a group who'd focussed so much on translating the disciplines of science into the world of finance seemed to have ignored the market equivalent of the observer effect - the possibility that their own theorems might in some way influence behaviour in the markets, effectively making their 'rear-view mirror' calculations based on past experience if not redundant then less reliable than expected. Maybe in trying to follow the Black-Scholes paradigm contemporary players were adjusting market reactions in a way that computer progams premised on projections from the past simply didn't accommodate?
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Most Recent Customer Reviews
5.0 out of 5 stars A must read for financial advisors in 2013!
We all think we understand investment risk and probability, this book will make you think twice about that! Read more
Published 5 months ago by Andrew Ivory-Corr
5.0 out of 5 stars And you thought the current crisis was bad
This is a blip on the financial radar but it should be well studied. The book is outstanding and should be read whether you are or are not in the industry.
Published 13 months ago by Nicholas Nefouse
5.0 out of 5 stars The bigger they are, the heavier they fall
I bought this book because a friend of mine recommended it. I had never heard of Long-term Capital Management, although I was familiar with the Nobel prize winners involved. Read more
Published 16 months ago by Ex-wannabe banker
4.0 out of 5 stars Rise and Fall of a Hedge Fund
This book is not about long term capital management as you might expect from the title, but about the rise and fall of one very large and notorious hedge fund called "Long Term... Read more
Published on 26 Jan 2012 by FJPS
5.0 out of 5 stars Excellent, a must
A must read for anyone interested in this area. Has to go down with the classics like Liar's Poker, Den of Thieves etc. Excellent account. Read more
Published on 27 Nov 2011 by El Gran Senor
5.0 out of 5 stars very surprised...
i was genuinely surprised by this book. i had heard of the "long term capital management disaster" (a dodgy fund that applied so much risk to their strategy they almost "crashed... Read more
Published on 20 Sep 2011 by Gcrikey
5.0 out of 5 stars A work of genius...
Undoubtedly the finest business book I have ever read.

Lowenstein in recounting the awed bankers conversation during an LTCM sponsored Golf Tournament "they would get... Read more
Published on 15 Sep 2011 by Dr. Edward Austin
5.0 out of 5 stars Hubris Shrugged
A superb story of hubris like something out of a greek drama. If you have an "unquestioning" faith in financial and economics Ph. Read more
Published on 8 May 2011 by demola
5.0 out of 5 stars Frankly, Superb.
A thoroughly amusing and interesting read on LTCM. I came away from this amazed, awed and dazed, and will confess have read it so many times since that I can basically recount the... Read more
Published on 31 Dec 2010 by edikat
4.0 out of 5 stars A decent account
A very well written and engaging account of the fall of LTCM. He is good at explaining fairly complex financial terms to the general reader. Read more
Published on 13 Dec 2010 by The Emperor
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