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    When Genius Failed: The Rise and Fall of Long-Term Capital Management
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    When Genius Failed: The Rise and Fall of Long-Term Capital Management
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    When Genius Failed: The Rise and Fall of Long-Term Capital Management
    Audiobook (abridged)9 hours

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

    Published by Penguin Random House Audio

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    Currently unavailable

    About this audiobook

    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.

    LanguageEnglish
    PublisherPenguin Random House Audio
    Release dateSep 4, 2001
    ISBN9780375418563
    Unavailable
    When Genius Failed: The Rise and Fall of Long-Term Capital Management

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    Reviews for When Genius Failed

    4/5

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    • 3/5
      A fairly well written account of yet another collection of typically greedy Wall Street bankers. A good book to read if you want to learn the definition of hubris (and the OED entry is to short for you). It does need a bit of an update, to incorporate the latest instance of avarice nearly collapsing the world economy.
    • 3/5
      This book is about the four-year journey of one of the most infamous hedge funds in history. It outlines it's four-year lifecycle, from 1994 to 1998, starting with an monumental raise of $1.5 billion and concluding with a $3.6 bailout by sixteen financial institutions, organized by the Federal Reserve.The sector in which their money was made is the world of bond arbitrage. Arbitrage is about making money not in the rise and fall of asset prices, but in profiting on the spread between similar or almost identical assets. Spreads, on bonds in particular, are infinitesimally small. The only way to consistently make significant sums money on them is if you work on a massive scale with massive leverage [in LTCM's case, 30:1].The monumental failing of the mathematicians behind this fund was that they assumed the economy was a collection of totally random incidents. They thought it would be absolutely impossible for a trend to carry through the entire economy. Such an oversight is utterly bizarre, as obviously, the global economy experiences meta-trends all of the time.The book is very well researched and is a good mix of facts along with a narrative surrounding the personalities of the people involved.I would have liked to have heard a greater analysis of the systemic risks that led to the bailout, but it could be that this information just doesn't exist. Maybe the instabilities caused by LTCM were just totally unpredictable, and that's why they were assumed too much of a risk.
    • 5/5
      Gripping story that's an interesting look into the hubris and greed of the finance industry. Very similar to the 2008 meltdown, but a decade earlier!
    • 5/5
      Amazing book. I would definitely want all future employees of mine to have read it.
    • 4/5
      The main story here runs 1993 to 1998, from the start of LTCM to its collapse. There are lots of bits and pieces to the story. There is the arrogant confidence of the partners. There's how they bamboozled big bucks from investors. There's the backdrop of the ups and downs of Asia, Russia, etc., bonds and spreads and currencies and equities going up and down. This is a pretty short book that runs through the basics but doesn't drill down too deep anywhere.The book does quite a good job of explaining to those not in the know about various financial bits and pieces. The star of the show is the Black-Scholes pricing for options. Lowenstein explains how this is based on random walks and Gaussian distributions. The whole LTCM business was based on crazy complex mathematical games. Lowenstein unpacks the games quite well.My biggest complaint here is the way he diagnoses the errors of LTCM. I would point out three levels of mismatch between the efficient market hypothesis and reality. The most basic is the prevalence of fat tailed distributions in the place of Gaussian distributions. The next level is that the market is dominated by human behavior with all its wildness, e.g. folks getting swept up in whatever panic or enthusiasm of the day. The third level is that reality always stretches past any mathematical model. Lowenstein mentions all three of these problems, but he seemed to scramble them a bit. Fat tailed distributions can be modeled mathematically with wonderful precision - of course, there are many such distributions, but one can accumulate a shelf-full of books about them (trust me on this!) Even human behavior is not utterly impossible to model mathematically. No doubt even the breaking of waves on a rocky shore is going to exceed precise mathematics, and human behavior much more so. But if I were building models to support risk management on large portfolios, I'd be building fat tailed models that incorporate models of human behavior... and still leaving room for those frontiers of reality that exceed models. One method for addressing those frontiers is to work with multiple scenarios and with multiple models.The copyright of the book says 2000. I'd say the copy got finalized in the early months of 2000. It'd be interesting to get another look at LTCM from the perspective of the 2000 crash, and especially of the 2008 crash. What's around the corner now, one is inspired to wonder!
    • 3/5
      The sin of arbitrage isn't that it is impossible. It *is* possible to exploit market inefficiencies and make a profit. But those profits are usually very, very small. Which means that it requires an enormous investment to make any real money. You have to borrow to get enough cash to make the small percentage profit worthwhile. So the sin of arbitrage is leverage.And even leverage can be handled. You can work with it. For a while. Like a cocaine habit. But since you are dealing with the real world, where new things come along now and again; and with people, whose reactions can be hard to predict, accounting for all the risks is, really, impossible. So even geniuses are faced with the possibility that their risk models aren't sufficient. That they will, quite suddenly, be on the line for massive margin calls (the collateral on all that money they borrowed to lay down their many, many small-profit bets) that they just can't meet. And even if this is only the result of a short-term market irrationality (YOU ARE, AFTER ALL, PLAYING THE GAME OF MARKET IRRATIONALITY) you must pay or, as LTCM--the genius-packed company that is the subject of this book--had to, go bankrupt. Lowenstein's book is a good basic telling of this story, but he unfortunately doesn't seem to really appreciate the richness of the irony when a company that runs on exploiting irrationality gets eaten by another aspect of that same human irrationality. And is outraged.
    • 4/5
      if you enjoyed the book "Inventing Money" consider this that books sister – not twin – whereas Inventing Money is very heavy on financial modelling, this book is very heavy on the personalities that invented convergence arbitrage.
    • 4/5
      While a better title might be “When Hubris Failed,” Lowenstein still tells an engaging and comprehensible story of fools who thought they were too smart to go broke, and turned out to be too big to fail. Indeed, after crashing a multibillion-dollar fund, many though not all of the principals went back to merely gorging themselves like ticks on the body politic, earning outrageous Wall Street salaries and waiting once again for the government to come fix the problems their risk-taking caused. The basic problems were simple: LTCM thought that it could arbitrage irrationalities in the market, but as more and more people figured out those irrationalities, it was required to take more and more risk for less and less profit—aka supply and demand, except that when the demand is for risk and when you can leverage (borrow) to multiply your exposure then things can go very wrong indeed. Moreover, LTCM’s model assumed that markets would behave pretty much as they’d done during the period covered by its models, which they then didn’t; as Nassim Taleb and others have pointed out, the market can stay “irrational” longer than you can stay solvent—unless of course Uncle Sam rides to your rescue, which poses a pretty serious moral hazard problem of its own. The most awful thing is that this wasn’t the last act: LTCM’s implosion demonstrated how dangerous derivatives were and how deluded Wall Street had become, and yet neither the government nor the market participants—too enamored of their bonuses and their short-term greed—took action to avoid another disaster. It’s as if there was a second Titanic following the first that didn’t even bother to change course.
    • 4/5
      This book is aptly named as it delivers just what the title implies. Young John Meriwether began his career as a high school math teacher. After only one year of teaching he enrolled in the University of Chicago and began work to attain a business degree after which he was hired by the investment giant, Solomon Bros. Just as inflation was changing the way bonds were sold and held, Meriwether entered the field in the mid 1970’s as a bond trader. Being one to adapt to a situation he found a niche for himself working within a division of Solomon and with other egghead intellectuals or quants, if you will. The quants, using quantitative methods , historic data and computer models, played the market to their advantage. Meriwether soon left his division of Solomon to create his own firm, Long Term Capital Management. By using an increasingly large amount of leverage to purchase bonds and work the spread Long Term became quite a significant power on Wall Street in just a short period of time. Still, Meriwether, his ultra private partners, and Nobel Prize winner mathematicians could not have foreseen the world events that transpired in the later part of the 1990’s which had a negative effect on their investments. They had sent themselves on a course for disaster.This book could have been just another rehashing of Wall Street greed but it is more than that. Lowenstein offers up enough information about the major players to humanize them, each with their own foibles, ambitions and wants. The reader who is not familiar with John Meriwether and Long Term Capital Management will be on the edge of their seat as the story unfolds watching each personality react to dire situations.
    • 4/5
      This book traces the rise, fall, and rescue of Long-Term Capital Management, perhaps the most celebrated (and infamous) hedge fund in history. It is a remarkable account of how a lot of really smart people—from the fund’s partners to its bankers to the regulators charged with protecting the public’s interest—did some things that, with the luxury of hindsight, proved to be very foolish. It is a story with few heroes, but one with many lessons to be learned. However, beyond merely offering a cautionary tale of how greed, hubris and myopia almost brought down the entire financial system, Lowenstein also provides the reader with an excellent description of the myriad investment strategies that continue to be employed by the hedge fund industry today. At the very least, this is a book that will challenge what you think you know about leverage, liquidity and diversification.
    • 3/5
      A couple of years ago I read Nick Dunbar's account of the LTCM collapse "Inventing Money", and a friend recently lent me this book. They make an interesting comparison.Dunbar - a physicist by trade - is more interested in the theoretical economics that went into the risk arbitrage fund in the first place and how this came unstuck. He gives a long description of the Black-Scholes model, what it says, and how it was used to pull off the risk "free" trades which made Long Term so much money for three or four years.Lowenstein, by contrast, barely mentions either the Black-Scholes model (he barely touches on option pricing at all, as a matter of fact) or the Italian convergence trades which eventually blew the gaffe on the fund, but instead tells the human story, exposes the inevitable egos, and indulges in more than a little smuggery (this book is long on wisdom after the fact) in dissecting the naivety of the LTCM hedging and trading strategy and the people who ran it.As long as he sticks to the egos and the posturing, When Genius Failed is a dandy read: the negotiations amongst the Wall Street top brass as the fund is going under rate with anything served up in Barbarians at the Gate, and as this is a large part of the book, it rips along quite nicely.But the schadenfreude grates: One of the lessons of the whole fiasco was that the smart money is with the guy who can predict the future: any old mug can be a genius with hindsight. Lowenstein spends a lot of his time wisely pointing out what the traders should have done.Additionally, Lowenstein employs some metaphors which indicate he might not have much of a grip on his subject: for one, he states "a bit of liquidity greases the wheels of markets; what Greenspan overlooked is that with too much liquidity, the market is apt to skid off the tracks." It's a poor metaphor, because it isn't excess liquidity which causes markets to skid, rather, it's the sudden disappearance of it. As this is the fundamental lesson of the Long Term story, it's a bad mistake to make for the sake of a smart-alec aphorism. Similarly, in the epilogue states, with regard to the putative diversification in the fund "the Long-Term episode proved that eggs in separate baskets *can* break simultaneously". Again, this conclusion is not supported by the text, which observes several times that in a market crash, liquidity drains and the correlation risk of instruments in the market goes to one: that is to say, it turns out all your eggs are in the same basket after all. Diversity wasn't the problem; the problem was you wrongly thought you had it.For these reasons I prefer Dunbar's more academic work: it may not be such a sizzling read, but nor does it misguidedly kick a fund when it's down.
    • 4/5
      I remember this to be captivating. I am not especially interested in hedge funds or Wall Street. I was interested in a current non-fiction about business and especially some dramatic turn of business events; I liked Barbarians at the Gate. This has about 2/3 of the movement, pace, and drama of that, or perhaps half, but it's enough.I was especially surprised about the unique characters of some of the geniuses these hedge funds have and this one had. It's always fascinating to here about the maladaptive and weird personalities of these chess masters or math minds.I would suggest this book to anyone who likes business, even though it's about finance a bit.
    • 4/5
      Roger Lowenstein does a good job of telling this sort of story, making it far more interesting than the usual journalist's book about some business venture. But ultimately this is a depressing and frustrating book. Not only do the principals involved not really get their just desserts, the mathematicians of finance involved don't seem to learn anything from the experience.It seems to me that, among other things, the following could be added to the mathematics* replace normals in certain situations with fatter-tailed curves* construct finite universe models (ie models in which there is only so much demand and supply, and in which huge trades will result in a drying up of liquidity)* dynamic rather than static models, ie models that, rather than assuming a stable equilibrium (thermodynamics), try to model exactly how things change (including, in the simplest case, how things approach equilibrium). Such a model might include different types of environments, leading to different dynamics, for example a bear market environment, a bull market environment and a panic environment. Thus we get something closer to statistical mechanics.On the other hand, it may well be that the mathematicians know exactly how to make better models, but are also well aware that in spite of the rhetoric, the system will usually bail them out when something goes wrong, so why not take risks with high upside and limited downside?
    • 3/5
      A wonderful account of the fall of LTCM. Well written and detailed - one of the better business books I have read.
    • 5/5
      This is an awesome chronicling of the rise and billion dollar fall of the guys from Solomon brothers. Roger did some great investigative journalism.
    • 5/5
      The best account I have hitherto read of leverage, lack of liquidity, and the meltdown of LTCM, as the dislocation and irrationality of the markets lasted longer than the rationality and solvency of their margins. Caveat emptor of securities.
    • 5/5
      possibly the best finance book i've read. explains many arcance financial topics with brilliance. very well written