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

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 Lowensteins?ÿWhen Genius Failed?ÿis the gripping story of the Feds unprecedented move, the incredible heights reached by LTCM, and the firms eventual dramatic demise.
Lowenstein, a financial journalist and author of?ÿBuffett: 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 funds enigmatic founder, John Meriwether, spent almost 20 years at Salomon Brothers, where he formed its renowned Arbitrage Group by hiring academias top financial economists. Though Meriwether left Salomon under a cloud of the SECs 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 couldnt 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 couldnt 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 Lowensteins detailed account of each successively worse month of 1998, culminating in a disastrous August and the partners subsequent panicked moves, is riveting.
The arbitrageurs 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 books 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 funds short lifespan). Lowensteins smooth, conversational but equally urgent tone carries it along well. The book is a compelling read for those whove always wondered what lay behind the Feds controversial involvement with the LTCM hedge-fund debacle.?ÿ–S. Ketchum