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on 16 April 2017
fine book
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on 9 August 2017
This book is insightful and doesn't impose a particular opinion.

There is a lot of attention to detail with regard to market positions that may not add to the understanding of the situation but does somewhat slow the pace.
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on 7 March 2017
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on 17 September 2014
Good and on time
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on 25 January 2001
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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VINE VOICEon 21 October 2007
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? Perhaps, paradoxically for such a cards-to-the-chest operation, they had signalled their own reactions in advance (revealing your strategy in any circumstance isn't the way to win at poker!). Or perhaps they were just victims of their own success - in securing such a major stake in the game they actually changed the rules and then set themselves up as an easy target to be picked off by their rivals as soon as the odds went against them. In any case, their belief in their own omniscience seems like an invitation to failure.

There's an element of shadenfreude in seeing arrogance get its come-uppance, but this is tempered by a (sometimes grudging) admiration for the way Meriwether was able to change the world around him through sheer force of his (albeit reserved) personality and (almost) bring it off - particularly after the apparent injustice of his demise at Salomon. If he'd been able to impose his more cautious impulses on to his gung-ho acolytes, or trust the gut instincts that had served him so well at Salomon over Nobel prize-winning theorems, his success wouldn't have been so short-lived. Still, you needn't feel too sorry for the partners who lost $1.9bn in five weeks - they would fare better than some of their employees, who ended up with nothing.

It gives you the sort of entertainment you get from watching a car wreck, as the banks scrabble round to find a way of protecting themselves - without doing too much for each other. Certainly there's an element of black comedy as one participant comments: '"They had a different view of the world ... they're completely self-interested." Suddenly these paragons of individual enterprise seethed with communitarian fervor.'!

More worryingly, given that little seems to have changed as a result in terms of the kind of improved reporting on derivatives called for by Lowenstein, it looks like, in this age of 'collateralized debt' instruments, more such debacles are almost inevitable - it's just the scale of the collapse that remains in the balance. One thing is for sure, the regulators are pretty much in the dark as far as derivative trading goes, and it seems we're dependent on threats of Mutually Assured Destruction to keep us above water if liquidity crises aren't going to sink the whole ship (I'll leave you to ponder how a lack of liquidity can sink a ship).

What I'm trying to say is that this book is as relevant today - if not more so - than when published, and suggests that the sub-prime problems that have almost submerged Northern Rock may be just the tip of the iceberg (sorry, I just can't get the image of the Titanic out of my head!), and Adam Applegarth's defence of his business model does resound with the injured pride and lack of comprehension that characterised the protestations of the LTCM partners as they continued to defend their models in the face of mounting disaster.

Meanwhile, the balancing act that the regulatory authorities face, between discouraging moral hazard and safeguarding the system from wreckless gambling seems increasingly precarious - and will continue to be, so long as extreme neoliberal sentiments dominate. No doubt those that resist even self-regulation would argue the the LTCM saga provides an object lesson in how markets can repair themselves - but it was a close run thing.
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on 15 September 2011
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 PhD's in golf if they could" brings tears to my eyes - the deadpan delivery in this book certainly match Liars Poker although perhaps not as dry - but heck - both feature JM prominently - and both portray him very sympathetically (with an appropriate touch of respect I might add as may be expected).

I believe the author narrated the unabridged audio book - and he does so superbly - it is a roller coaster of a ride and thoroughly thoroughly enjoyable.

I'd give it six stars if that were possible. The Book almost makes you seem you were there.
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on 30 November 2004
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. This led Meriwether's traders to broaden their remit beyond the original intentions of the company as they then got involved in, for example, M&A arbitrage, staking huge, often unhedged, amounts of money on the successful or unsuccessful outcome of a mooted corporate action; investments which, especially in London, often went unsupervised.
As the house came tumbling down in an avalanche of hubris. Well researched, well written, reasonably paced if a little lacking in the detail of the actual individual trades.
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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.
Roger Lowenstein is our most talented financial writer (you may remember him from his days at The Wall Street Journal and for his wonderful biography on Warren Buffett), and he has produced an outstanding work that will be a cautionary tale for future generations about the financial myopia of the 1990s.
Long Term Capital Management was built around consensus in the financial markets. The firm attracted the thinkers in the financial markets with the greatest reputations (including future Nobel Prize laureates, Robert Merton and Myron Scholes -- of Black-Scholes option pricing fame, and the top talent from the arbitrage area at Salomon Brothers), a top regulator (the vice-chairman of the Federal Reserve Board), famous investors from the top investment banks and consulting firms, and lines of credit from every major financial institution in these markets.
The firm planned to invest by finding small mispricings of one security versus another (such as the interest rate on one bond maturity versus another compared to history, an option versus the underlying stock for the time remaining on the option, a bond yield in a foreign currency versus the currency futures, and the price of a stock versus a hostile takeover bid price for the company). Here, it hoped to proverbally make lots of nickels by borrowing lots of money to make these trades.
Although other firms took similar risks (and many also took enormous losses in 1998), LTCM stood out for two things: It had no independent evaluation of its risk to control what it was doing (the traders monitored themselves -- a little like letting the fox guard the hen house) and it took on vastly more debt than others did compared to its equity base. At the firm's peak, it had borrowed over $100 billion against a base of $4 billion in equity and had derivative (option) positions for an exposure of another $1 trillion. This enormous finanical leverage magnified the size of any gains or losses it took. Part of what had been deceptive is that the firm had been regularly and spectacularly profitably for most of its initial four years.
What the firm had neglected was to consider what might happen to historical price differentials in a market crisis (particularly a 'stress-loss liquidation'). In 1998, an unprecedented financial crisis occurred following the Asian meltdown and Russia's refusal to pay its debt. In the panic that followed, there were many sellers and few buyers. Tens of billions evaporated quickly in these abritrage trades. LTCM moved slowly to unwind the trades, believing that things would come back to normal. Soon, it was too late, and the New York Federal Reserve supported a shotgun wedding of the firms that would lose the most if LTCM died to put another $4 billion in the firm until it could be wound down. The aftermath was not much fun for anyone.
Mr. Lowenstein does an excellent job of describing what occurred at the level of a college-level course in finance. If you have a higher level of knowledge than that about trading, you can skip most the explanation of what happened and why.
The crash exposed several major weaknesses in the financial system. One, the lenders were too lax. Two, the risk review of the firm was essentially nonexistent, although it reported risk levels monthly (apparently based on incorrect assumptions). Three, the Federal Reserve doesn't know what goes on with hedge funds, until they are about to blow up the financial markets. Four, Wall Street goes along with reputations more than due diligence. Five, excess risk compared to current market conditions creates excess losses. Six, modeling historical trends is a dangerous way to make money unless you use small amounts of leverage to hedge against the risk of unexpected market volatility.
After reading this interesting book, I hope you will also ask yourself if you know what the risk level is with your financial investments for the current market. If you don't know, I hope you will quickly find out. And have your testing done against the potential risk of something extreme happening, not just with history. Certainly, the 80-90 percent losses that many Internet stocks have suffered in the last years should be an indication of how much risk can occur even in a successful industry.
Good luck with avoiding large losses in pursuing financial gains!
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on 8 May 2011
A superb story of hubris like something out of a greek drama. If you have an "unquestioning" faith in financial and economics Ph.Ds then this is one book to pluck your erstwhile confidence. Events like LTCM go to the heart of whether hedge funds should be regulated and compelled to be more transparent. The arguments against are that HF manage private money for sophisticated investors and their operations are no one's business. Maybe once when they held inconsequential amounts that was ok but that's now indefensible as this story shows. These funds have huge impact on the real economy and I have finally come round to the conviction that they definitely must be regulated. It might/would be the end of their fantastical profits perhaps but the world will be a safer place. And I'd rather protect our world than their profits. After all there's far more of us than them.
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