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

When Genius Failed: The Rise and Fall of Long-Term Capital Management
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Illuminating and Fascinating Business Classic

Incredible story

great book

A fantastic tale of risk, reward and rue

Great insight into market movements

When Genius Failed: The Rise and Fall of Long-Term Capital Management
Roger Lowenstein
Manufacturer: Random House
ProductGroup: Book
Binding: Hardcover

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ASIN: 037550317X
Release Date: 2000-09-12

Amazon.com

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 Lowenstein's When Genius Failed is the gripping story of the Fed's unprecedented move, the incredible heights reached by LTCM, and the firm's eventual dramatic demise.

Lowenstein, a financial journalist and author of Buffett: 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 fund's enigmatic founder, John Meriwether, spent almost 20 years at Salomon Brothers, where he formed its renowned Arbitrage Group by hiring academia's top financial economists. Though Meriwether left Salomon under a cloud of the SEC's 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 couldn't 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 couldn't 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 Lowenstein's detailed account of each successively worse month of 1998, culminating in a disastrous August and the partners' subsequent panicked moves, is riveting.

The arbitrageur's 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 book's 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 fund's short lifespan). Lowenstein's smooth, conversational but equally urgent tone carries it along well. The book is a compelling read for those who've always wondered what lay behind the Fed's controversial involvement with the LTCM hedge-fund debacle. --S. Ketchum

Book Description

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.

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Customer Reviews:

Illuminating and Fascinating Business Classic.......2007-10-07

Roger Lowenstein's 'When Genius Failed' has been justly acclaimed as a business classic. In the wake of the 2007 credit crunch, Lowenstein's riveting study of the 1998 collapse of Long Term Capital Management (LTCM) retains its relevance and has much to teach market observers.

Ironically, LTCM had much going for it. The firm was founded by savvy Salomon Brothers veterans, and its luminaries included Nobel Prize winner Myron Scholes, the creator of the acclaimed Black-Scholes options pricing model. LTCM was also established on the premise of hedging risk and thereby minimizing financial loss.

The unraveling of LTCM, lucidly and compelling depicted by Lowenstein, has many parallels with the subprime mortgage meltdown of 2007:
--An unwavering faith in financial engineering, coupled with the erroneous belief that financial structures will protect against substantial losses.
--The insatiable search for higher yields in crowded markets, which ultimately drives even savvy managers to investments with unfortunate risk profiles.
--The use of significant amounts of borrowed capital to boost returns. Sadly, the use of leverage forces the rapid liquidation of positions to repay lenders during declining market conditions, excarbating market slides and the withdrawal of credit.
--Hubris. Hedge fund managers and successful traders tend to get overconfident after a run of good luck, leading them to take riskier positions with borrowed capital.

Together, these factors led to the downfall of LTCM and to the 2007 subprime meltdown.

Kudos to Roger Lowenstein for demystifying the arcana of derivatives trading and the Black-Scholes model-- if you want an account that describes these subjects lucidly, this is your book. As well, Lowenstein offers a riveting depiction of the 1998 market slide that sent LTCM reeling toward insolvency, and the rescue events coordinated by the Federal Reserve and undertaken by an international capital consortium.

Bottom line: a five star financial read that maintains its relevance.

Incredible story.......2007-10-06

Two things make this a great book: a riveting story (losing hundreds of millions a day is mind-boggling) and excellent writing. Roger Lowenstein, first of all, is a master of using analogies explain complex things, like financial derivaties and how the big investment banks operate. Long Term Capital Management was a gang of complex gamblers (including a couple of Nobel Prize winners to boot) that employed equations and theories from the academic world of finance to build an enormously successful hedge fund that sucked in the big banks of Wall Street. Lowenstein details the rise of LTCM (it seems it had to have taken place with an interesting mixture of Luck, Smarts, and Arrogance) and their massive and rapid failure with a cadence that makes it difficult to put the book down. When Genius Failed offers a glimpse into the world of big-time finance and the unrepentant and bizarre characters that it attracts (the money these guys rake it in and how they do it will stun you if you aren't familiar with Wall Street). Highly recommended - even a decade after the collapse of LTCM!

great book.......2007-09-20

Great read. Didn't want to put it down and finished it in a few days. Great to read how these smart guys lost all their money by being too greedy. Thumbs up for sure.

A fantastic tale of risk, reward and rue.......2007-09-20

It's a wonderfully written account of a remarkable risk taking adventrue crafted by the best of wall street's arbitrage mavens and acclaimed academic laureates. Author has done a supreb job as a slueth who followed the trail that aparantly divulged very little about its journey into the financial debacle that could've brought the whole financial world down. Throughout the work of the author, one can perceive the vastness of his research into this matter, his depth of knowledge in the world of arbitrage and his exquisite story telling skill.

He portrayed each character with great care that went above and beyond what I expected. Though at times the deatils seemed a bit overwhelming and unnecessary, it was enjoyable nonetheless.
Besides gaining a great deal of knowledge about bond trading, risk arbitrage and about all the parties associated with it, it also gave me a good picture about the human inter-relations that plays into the rise and fall of such wall street ventures. One thing I wanted to see in this book is Greenspan's involvement and opinion on this. But, not sure why his role in the shoring up of LTCM wasn't covered. I earlier read a book on Greenspan where his rebuttal on the criticism of Fed's involvement with the bail out LTCM was deatiled. I expected Lowenstein to cover this as well.

I first came across the story of LTCM from Taleb's "Black Swan", then went to wikipedia to know more about it, and finally got a hold of this book and I'm glad that I did. I love real life stories where turns of events and drama unfold from the work of an invisible hand, not from that of a gifted writer. I would love to see the story of LTCM on big screen one of these days. I caught a glimse of the NOVA's episode "The Trillion Dollar Bet [2000]" which covered LTCM, but I couldn't get a hold of the full content.

It's a must read for anyone who has interest in wall street, business, risk and how they all work. Lowenstein is a great writer in my opinion and I will move on to reading his pervious work on Buffet.

Great insight into market movements.......2007-09-12

The LTCM story is fascinating, and Lowenstein makes clear enough what kind of 'hedging' they were doing. The most valuable details to me were the intertwining of instituions and trades. I thought it illuminated how forced trading and fear can spread. Also captures the mood of the nineties well, I'd like to find detailed history of other market eras.
And from an academic viewpoint, his discussion of 'fat tails' was great.

The Investment Think Tank: Theory, Strategy, and Practice For Advisers

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The Investment Think Tank: Theory, Strategy, and Practice For Advisers

Manufacturer: Bloomberg Press
ProductGroup: Book
Binding: Hardcover

General | Popular Economics | Business & Investing | Subjects | Books

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A Theory of Hedge Investment
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With more than 14,000 mutual funds on the market today, many investors find themselves standing on the sidelines, overwhelmed, unsure about which funds are the right ones for their portfolios. Deciding what mutual funds to invest in can be a daunting process. The stakes are high, the margin for error small.

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Expect the Unexpected (or You Won't Find It): A Creativity Tool Based on the Ancient Wisdom of Heraclitus
Average customer rating:

Interesting but more of the same

A must-have book in your Creativity & Innovation Library, & must-have card deck on your desktop!

Ancient Greek Creativity Mental Gymnastics

Philosophy as if it Matters

Stoking the creative juices within...

Expect the Unexpected (or You Won't Find It): A Creativity Tool Based on the Ancient Wisdom of Heraclitus
Roger Von Oech , and George Willett
Manufacturer: Berrett-Koehler Publishers
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Binding: Paperback

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Amazon.com

The ancient Greek philosopher Heraclitus was the first "creativity teacher," says Roger von Oech, whose bestselling book A Whack on the Side of the Head set the standard for out-of-the-box thinking. In Expect the Unexpected, Von Oech uses 30 of Heraclitus's pithy and paradoxical epigrams to approach problems in a fresh manner. He explains his premise: "Creative thinking involves imagining familiar things in a new light, digging below the surface to find previously undetected patterns, and finding connections among unrelated phenomena."

Von Oech uses the epigrams as creativity exercises--accompanied by mental puzzles, anecdotes, questions, and punchy footnotes--to demonstrate that Heraclitus's 2,500-year-old creative insights have aged well. With his whimsical wand, von Oech transforms the epigram "A Donkey prefers garbage to gold" into an exploration of values. He uses Heraclitus's observation that "A wonderful harmony is created when we join together the seemingly unconnected" to examine the use of metaphors in understanding problems. When Heraclitus observes that "Dogs bark at what they don't understand," Von Oech crafts a meditation about criticism. Executives, students, teachers, and parents will find an exciting and entertaining map for changing thought patterns, tolerating ambiguity, confounding expectations, and searching for hidden meanings. --Barbara Mackoff

Book Description

Heraclitus lived 2,500 years ago, but his adages, including "You can't step in the same river twice" and "Dogs bark at what they don't understand, " remain surprisingly relevant today. Expect the Unexpected or You Won't Find It uses 30 of Heraclitus's epigrams to unleash creativity. Treating each saying as an inexhaustible source of inspiration, author Roger von Oech supplies anecdotes, riddles, questions, and hidden jokes designed to topple old modes of thought and fire the imagination. Reversing expectations, turning change to advantage, creating powerful metaphors -- these concepts derived from Heraclitus can help anyone searching for new approaches to problem solving.

Customer Reviews:

Interesting but more of the same.......2006-09-12

Seems to me a different approach and format with the same recommendations as his other books. Read the authors other stuff along the way and this one is creative in its layout and approach but found it more of the same. Had trouble staying with it.

A must-have book in your Creativity & Innovation Library, & must-have card deck on your desktop!.......2006-05-30

I am a raving fan of Roger von Oech's creative work as embodied in his books & card decks, namely:

Books:

- A Whack on the Side of the Head;
- A Kick in the Seat of the Pants;
- Expect the Unexpected;

Card Decks:

- Creative Whack Pack;
- Innovative Whack Pack;
- Ancient Whacks of Heraclitus;

I have used all his creativity stuff ever since I started my own strategy consulting (& book store) business in late 1991.

From my personal & professional experience, I would like to say that the entire collection of Roger von Oech's creative work has been designed to serve three strategic purposes:

- understanding - & removing - your mental blocks;
- breaking your habitual patterns;
- shifting your focus & changing your paradigms;

As a matter of fact, once you appreciate & commit to these three strategic purposes in your life, you will soon realise that there is nothing in this world to stop you from getting rid of old ideas & getting new & fresh ideas.

Allow me to quote Edward de Bono: "...the mind is habitually uncreative - it is usually preoccupied with organising masses of incoming data into convenient patterns. Once this pattern is established, then the mind tends to rely upon that pattern in future situations, in order to facilitate decision making & action in an otherwise complex world..." (The Use of Lateral Thinking).

Breaking old habitual patterns is definitely the first & foremost priority in your journey to creativity!

Once your shift your focus, you begin to change your paradigms or the way you look at the world around you. Always remember this: Your brain follows the direction of your dominant thought. Once you focus on something, that thing becomes the foreground. Everthing else will fall into the background. Most opportunties are unfortunately hidden in the background. The moment you begin to shift your focus, you are pushing the 'foreground' into the 'background', & pulls the 'background' into the 'foreground'. Get it?

'A Whack on the Side of the Head' will help you to break through your mental blocks. They will open up your mind for innovation. This book is filled with provocative puzzles, exercises, stories & helpful tips.

'A Kick in the Seat of the Pants' takes you on a guided tour through the four stereotype roles of the creative process - Explorer, Artist, Judge & Warrior. Understanding - & applying - these roles will fire up your personal & professional creativity. Tactically, they will change your mental focus as you change to play each of the four roles. I would like to add one more role from what I have learned from the Japanese creativity experts: Antique Dealer. This singular role will allow you to combine all the four roles into one.

'Expect the Unexpected' uses thirty of Heraclitus' (the world's first creativity master) epigrams as creative springboards. It has intriguing questions designed to topple old habits of thought & fire up your imagination.

All the three card decks are basically extensions of the three books, to allow convenient usage during brainstorming sessions.

From my strategy consulting experience, these three card decks have proven to be inexhaustible sources of inspirations.

In fact, the Innovative Whack Pack combines the creative power of both the 'Creative Whacks' & 'Ancient Whacks of Heraclitus'.

I strongly urge readers to seriously consider having the entire collection of Roger von Oech's creative work added to your Creativity & Inovation Library, & all the three card decks placed permanently on your desk top at all times.

Ancient Greek Creativity Mental Gymnastics.......2006-01-25

Roger von Oech, the founder and president of a consulting firm that specializes in stimulating innovation and creativity, has written a very enjoyable and mentally invigorating toolbook for unleashing the power of thirty of the passed-down paradoxical sayings of the ancient Greek philosopher, Heraclitus (500 B.C.E.). If you want to improve your ability to "think outside the box," then this little book may be just the right tool for you.

Why Heraclitus, and what is his connection to creative thinking and innovation? According to von Oech, "I've been consulting Heraclitus for many years, and he rarely lets me down. Indeed, if creative thinking involves imagining familiar things in a new light, digging below the surface to find previously undetected patterns, and finding connections among unrelated phenomena, then I believe that Heraclitus is the world's first creativity teacher. His ideas not only inspire us to think in these ways, they also provide us with strategies to understand our problems in a fresh manner. For these reasons, Heraclitus is the guide I turn to whenever I need a new perspective."

The book is well researched with a lot of good supporting stories, examples, and historical anecdotes that brought to life the meanings of Heraclitus' sayings. Von Oech did a great job of showing how these sayings can be applied to everyday situations when creative and innovative solutions to problems and challenges are needed. The book also contained many thought-provoking sketches and good introspective questions to further stimulate individual creative thinking.

Von Oech identified three ways to read and use the book. The first is to read it straight through like a creativity workbook to find some ideas you can apply to your life. The second way is as a source for daily meditation by reading and focusing on one saying each day for the next month. Lastly, you can consult it like it was an oracle to help you break out of your normal thinking patterns when you need a shot of creativity. I read it like a workbook, liked how it made me think, and now I am using it for daily meditation. I will also use it as an oracle to help me deal with some challenging issues.

I believe that this book has the ability to unlock the potential of my creative spirit, and I believe it can do the same for anyone who reads it.

Philosophy as if it Matters.......2004-03-25

I was first tempted to give this book only one star for disparaging the notion of "pure philosophy." But then I began to question what the purpose of philosophy was. Who has done philosophy more of a disservice, Von Oech, who sees the creative potential in Heraclitus and passes it on to willing readers, or the academics, who have purified and rarefied philosophy into something quite unrecognizable to the ancient Greeks? That was the easiest question I've had to answer in quite a while. Von Oech gets what the pointy-headed pettifoggers of academe do not: philosophy is only effective as it relates to the world. It is not a mere matter of linguistics nor an interpretation by each textual reader, but rather a force guiding humans towards creativity through its answers to our everyday questions. There was a time in the past when philosophers wrote for the educated public. Nowadays, philosophers write for other philosophers, substituting rhetoric and wordplay for creativity. The loser is our culture, which depends upon philosophy as a lynchpin.

Von Oech's fascination with Heraclitus goes back to 1971 while studying in Germany. Picking up a book of Heraclitus' epigrams, Von Oech became instantly hooked when he read "the way up and the way down are one and the same." He writes that this caused him to spend the next several weeks trying to figure out its meaning. Since then, he says, he's wanted to put out a "creativity tool" based on the works of Heraclitus.

And what a creativity tool he has created. His grasp of Heraclitus is firm and, moreover, he is able to apply each epigram he examines to the problems of thinking and creativity in the workplace. The reader will also notice a warmth coming through: a deep love of the subject and philosophy in general, something we do not always get from our academics, as anyone who had to sit through Philosophy 101 with a boring pedant will tell you. And Von Oech will succeed in doing what our friends in the ivory tower have failed to do, and that is to instill a love of wisdom in the heads of his students. For that, Roger von Oech, I salute you.

Stoking the creative juices within..........2003-06-16

A number of years ago, I read Roger von Oech's A WHACK ON THE SIDE OF THE HEAD. It was fairly early in my career, when the mold is still unformed but the message was poignant. Recently, when I ran across EXPECT THE UNEXPECTED and saw von Oech was the author, I decided to pick it up and renew myself to von Oech's teachings. What a breath of fresh air he offers with EXPECT THE UNEXPECTED.

von Oech draws heavily upon the ancient wisdom of Heraclitus, the Greek philosopher. Heraclitus, like Parmenides, postulated a model of nature and the universe which created the foundation for all other speculation on physics and metaphysics. The ideas that the universe is in constant change and there is an underlying order or reason to this change-the Logos-form the essential foundation of the primary Heraclitean view. Everytime one walks into a science, economics, or political science course, at most any level, significantly all the teachings originate with Heraclitus's speculations on change and the Logos.
Despite this and the fact the ancient Greeks considered Heraclitus one of their principal philosophers, precious little remains of his writings. The passages remaining are tremendously obtuse, not because they are quoted out of context, but because Heraclitus deliberately cultivated an obscure writing style (one that makes one THINK!). However, thanks to von Oech's passion for all that is Heraclitus and his teachings, we are presented with many the ancient 'riddles' and a modern day correlation and translation of each. von Oech recalls being struck with "the Heraclitean bug" while studying in Germany many years ago. Now, he has written a book in which he brilliantly and entertainingly examines concepts such as symbol, paradox, and ambiguity in relation to creative thought.

At the beginning of EXPECT THE UNEXPECTED, von Oech provides the reader with 30 creative insights to consider and explore our creative psyches. von Oech goes through each of the thirty selected epigrams, provides his interpretation along with examples, parables, and questions-the kind that make you go "Hmmm"- all the while stoking the creative being within. von Oech does not attempt to inform the reader that his interpretation is the correct one; to the contrary, he implores the reader to step outside the boundries of conventional thought to find the "correct" answer.

As he was in A WHACK ON THE SIDE OF THE HEAD, von Oech is immensely entertaining. He is an individual who has spent his career assisting others to think creatively. As a byproduct of this career, von Oech has proven himself to be a prodigous creative thinker in his own right. Those in the 'concrete' professions-attorneys, consultants, accountants-will find this book extremely insightful. Thinking in the abstract is incongruent with the 'concrete' professions (I know, I'm one of them). As such, having the fodder to stoke the creative juices, particularly when problem-solving, is a boon to any professional.

At it's small physical size and only 190-odd pages, this book is perfect to keep handy at your desk or any place one engages in thought. I plan to keep it nearby just to refer to when a problem presents itself in an ostensibly unsolvable manner.

Highly recommended.

Customer Reviews:

What Christians Need To Know And The Book Forgot To Say!.......1999-05-20

As Christians, we must defend our rights and our nation from internal attack. When asked by the IRS to conduct an audit of your return, the very best thing to say is, "Is it mandatory or voluntary for me to let you see my private books and records?" Just watch, they will never answer - because it's VOLUNTARY! The courts have said so! It HAS TO BE voluntary, otherwise it would be a violation of your 4th and 5th amendment rights! You NEVER have to let the IRS see your records - even if they send you a summons, all you do is show up and claim the 5th each time they ask a question, or to see a document!! The book never tells you this!!

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