They couldn’t be wrong – the trade going against their models was just such an improbable event that – most surely – it wouldn’t happen again. In this business classic, Roger Lowenstein captures the gripping roller-coaster ride of Long-Term Capital Management. Drawing on confidential internal memos and interviews with dozens of key players, Lowenstein explains not just how the fund made and lost its money but also how the personalities of Long-Term's partners, the arrogance of their mathematical certainties, and the culture of Wall Street itself contributed to both their rise and their fall. The lessons Lowenstein draws from this story are relevant for any investor or financial institution today." did not want to use their diminishing capital to help a competitor. Sanford I. Weill, chairman of Travelers/Salomon Smith Barney, had suffered big losses, too. Weill was worried that the losses would jeopardize his company's Meriwether hired the very best financial minds in the world at the moment – Myron S. Scholes and Robert C. Merton (who shared the Nobel Prize in Economic Studies in 1997) – and acted like it.

Because the book is down-to-earth and instead of postulating some kind of a Midas formula, it promotes common-sense deeply rooted within the anecdote of Mr. Market as the wildly emotional guy you wouldn’t want to have as your partner . Lowenstein, Roger (2000). When Genius Failed: The Rise and Fall of Long-Term Capital Management. Random House. ISBN 978-0-375-50317-7. 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. But the bankers felt that Long-Term had already caused them more than enough trouble. Long-Term's secretive, close-knit mathematicians had treated everyone else on Wall Street with utter disdain. Merrill Lynch, the firm that had brought Long-Term When Genius Failed shows us the importance of understanding the full scope of a situation before taking risks."

Q: Somehow it makes sense that LTCM was based in the secret, monied playground of Greenwich, Connecticut. Maybe a bunch of guys from Jersey would have handled this better.

other way. This is what the book calls "the human factor." When people panic, markets don’t resemble what’s in a computer model. They go where the most nervous trader takes them. pending merger with Citicorp, which Weill saw as the crowning gem to his lustrous career. He had recently shuttered his own arbitrage unit-which, years earlier, had been the launching pad for Meriwether's career-andA 2016 CFA article written by Ron Rimkus pointed out that the VaR model, one of the major quantitative analysis tool by LTCM, had several flaws in it. A VaR model is calculated based on historical data, but the data sample used by LTCM excluded previous economic crises such as those of 1987 and 1994. VaR also could not interpret extreme events such as a financial crisis in terms of timing. [44] See also [ edit ] A: You know, I wasn’t in the room. It’s certainly notable that he said nothing for two years and then issued a mea culpa two weeks before the book came out. But then, he has always been a private man. Perhaps he was being sincere but also self-interested — as are most of us most of the time. Read: Learning from Warren Buffett’s 2014 letter to shareholders ) 2) Diversification does not help in crisis. Everything falls down simultaneously. LTCM's ability to control investment and borrowing is growing stronger – they can pour capital wherever they want.

If you have some money set aside, and you are thinking about investing in a hedge fund – or even if you have a lot of money set aside, and you are thinking about investing in a hedge fund of funds – “When Genius Failed” may help you separate the facts from the fiction better than any other theoretical work. O'Rourke, Breffni (1997-09-09). "Eastern Europe: Could Asia's Financial Crisis Strike Europe?". RadioFreeEurope/RadioLiberty . Retrieved 2015-08-22. The size of LTCM really makes it difficult for them to profit from risky investments. As problems and losses began to mount, LTCM's ridiculously high leverage became an obstacle: they had to continue to follow the pattern and take risks in the hope of making enough money to spend. pay for expenses, debt is piling up. They are more confident in their ability to pay off promised by the model. Change is no longer an option. They have to stay engaged.Roger] Lowenstein has written a squalid and fascinating tale of world-class greed and, above all, hubris.”— Business Week Panics are as old as markets, but derivatives were relatively new. Regulators had worried about the potential risks of these inventive new securities, which linked the country's financial institutions in a complex chain of reciprocal obligations.