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

This is an amazing story about Long-Term Capital Management. A group of brilliant individuals with a combined experience of easily over 100 years, investing their own life savings and doing business in their field of expertise, go broke and nearly take down the entire financial system. This was all possible with their reliance on mathematics combined with an unbelievable amount of leverage. Their mistake was that they assumed that the markets were going to behave according to their mathematical models. Unfortunately, they forgot that markets are driven by humans that experience emotions such as fear and greed. I could not put this book down. I believe every investor should read this book including the hot shots on Wall Street who think they cannot go wrong and apply lots of leverage. This is simply a fabulous story that anyone can learn from. - Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

This classic Wall Street story is another must-read for anyone with an interest in money management. When Genius Failed chronicles the failure of the hedge fund Long Term Capital Management (LTCM), a pioneer in quantitative investment strategies. With roots from the renowned Salomon investment bank, LTCM gathered some of the world's top financial gurus to design mathematical arbitrage strategies so well planned, they were widely regarded as having virtually no risk. Among the mathematical wizards was Myron Scholes, co-creator of the Black-Scholes model. After several years of handsome returns, this formula turned out too good to be true. After convincing investment banks and clients to pour billions of dollars into this near-"riskless" fund, tragedy struck in 1998. A credit crisis in Asia prompted a chain reaction of panic that the fund's mathematical models could not anticipate. The story of this fund's collapse proves that markets are not efficient. It is a lesson that precision calculations in the world of finance, no matter how correct or ingenious, are no match for human irrationality when panic strikes. Amplifying the unforeseen risk of the fund were human errors made by the principals. The firm's superior performance depended on incredible leverage (borrowed money), but that leverage also led to LTCM's demise when the margin calls hit. The principals also deviated from their core investment strategy when arbitrage opportunities started to dry up; they began making directional bets and speculating, something for which mathematical models are just inadequate for quantifying the risk. One disadvantage of this book is that it focuses so much on the people involved that it sacrifices explanation of the market forces behind the Asian currency crisis. I felt that some chapters contained too many dry details on the interaction between the LTCM principals and the banks. The advantage of its focus on people is that the reader can see many of today's Wall Street icons in action. Almost a continuation of Liar's Poker, many of the same Salomon traders including John Meriwether are pivotal to LTCM. Warren Buffett and George Soros play a role, allowing readers to see their investment acumen at work. Many Wall Street characters and investment banks still prevalent in today's news were plugged into the LTCM fiasco. Because of the high-profile characters and Wall Street firms involved with LTCM, this is a great read for students aspiring for a career on the Street. It also provides good insight into trading strategies and the hedge fund world. I would recommend When Genius Failed to anyone with an interest in investing.

Roger Lowenstein details how the partners of "Long Term Capital Management" let greed and ego overwhelm them. LTCM was a hedge fund that was supposed to use arbitage to make money at low risk. It worked for a while, but then lots of people started getting in on the act. The rational thing to do, under the circumstances, would have been to cut back, and look for a new fields of endevour. Instead, the partners of LTCM decided to screw their investors. They returned most of the investor's capital, and then made even bigger bets with oodles of borrowed money, so they could hog all the profits for themselves. And then, something happened, as it always does. Suddenly, all LTCM's positions were losing money. Being 'geniuses,' they doubled down, and lost it all. In a page out of Greek tragedy, they would have rode out the storm fine, if they hadn't forced their former investors to take back all their capital. As it was, the former investors profited greatly, while the geniuses lost almost everything and nearly destroyed Wall Street. If ever you hear someone talking about how markets are "efficient," give them this, which shows how the emotional human animal REALLY behaves in the financial world.

This is quite an entertaining book on the failure of LTCM. It is well documented but I think it will be much more appreciated by the outsiders to the realm of Finance. It disappointed me on two accounts: First, it is another one of those typical American business storytelling books where you have to read through bios of the lives of all characters before you ever get to the meat of the subject (e.g. Barbarians at the Gate) Second, the book "Inventing Money" by N. Dunbar is in my view a much better account of the LTCM downfall if you have been studying economics and finance as it describes the mechanics a lot more. Nevertheless, the book tells the story quite well and I would highly recommend, by the same author, "Buffett : The Making of an American Capitalist".

The story of LTCM's rise and fall is a compelling one not only for people interested in finance, but for anyone fascinated by the spectacle of very smart people losing enormous sums of money. Lowenstein's book makes this story accessible by glossing over some of the technical details, a tradeoff of readability for depth, but still provides insight into the causes of LTCM's collapse. I recommend reading both this book and Nicholas Dunbar's excellent _Inventing Money_: Dunbar provides more technical explanations, while Lowenstein has a richer story to tell about the people involved.