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When Genius Failed: The Rise and Fall of Long Term Capital Management Paperback – 2 Jan 2002
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'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
This title tells the story of long-term capital management where a group of elite investors believe they can beat the market and, like alchemists, create limitless wealth for themselves and their partners. In fact, they create a trillion-dollar hole in the international banking system.See all Product description
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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.
Roger Lowenstein, a well regarded financial journalist and author, carefully tells the story of how the business plan of using 'naked' academia, using highly complex computer modelling as a 'crutch' combined with excessive financial leverage, without reliance on or recourse to common-sense was a sure-fire route to pecuniary disaster.