[.ca] When Genius Failed: The Rise and Fall of Long-Term ... (ISBN 0375758259)

From 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

"...in crisis, correlations go to 1":
The author of this book is a journalist - not a trader or banker - and it's helpful to remember that as you read through this moralistic account of LTCM's rise and fall. Lowenstein has the audacity to write of Merton, a Nobel Laureate, that he held a "naive belief in perfect markets." Perfect markets may be mythical, but the author is not qualified to call this view naive. The output of the model is as important as the tenability of its' assumptions. In the end, the fund was too big and successful, not hubristic, to remain in its' sphere of expertise (bond arbitrage) and was forced to become the 800-pound gorilla in other markets like merger arbitrage. Yes, the top two traders were arrogant (a requirement for traders) but the markets broke the fund, not Hilibrand and Haghani. More details on the transactions would have been interesting but these may have burdened the flow of the book. There are copious footnotes and the author does a nice job of outlining the players and their stakes in the fund.

Not enough Cream on the Coffee:
1997, 30 year Treasury Bonds Fell to 5.58; traders were selling short to hedge against riskier bonds, treasuries rallied and spreads increased between bonds; Japanese bonds dropped opposite of the bet by LTCM. Blame the Asian flu, IMF unresponsiveness, and Salomon Barney Smith abandonment of its arbitrage positions as causes for the evaporation of 4 billion dollars LTCM within months. LTCM was too big, possessing $128 billion in assets and $3.6 billion in the bank and 2/5 of money belonging to the owners. Notation derivates reaching leverage 100 to 1 preventing rapid sell off and bankruptcy out of question, for bankruptcy would have caused a world cascade economic crash and loses reaching above $1 trillion. Bankruptcy was not an option; LTCM was too big to fail and the Fed knew it. LTCM only chance was too secure money from warranties, loans, or a buy out; none of which in the end would save them. In the end, the Feds 16 banks would invest $250 million each with a total accumulation of $4 billion dollars rescuing LTCM and the partners would leave with relatively nothing in their pockets. How did smartest guys on Wall Street fail? How did the impossible happen? 1997, Indonesia, Rupiah dropped 85 percent as currency traders forced devaluation revealing a corrupt banking practices and overextension of bad credit; volatility rose to 27 percent. 1998 LTCM bet that no future recession would occur and believed the Bond margins would narrow. Instead, the world economy were experience new global forces as communism was breaking down, China's GNP was heating up, and East Germany was experiencing new economic freedoms. A U.S - 56 point margin increase on the swap, England - 45 point margin, and German - 20 point margin and LTCM was losing money on all of its markets. LTCM had previously negotiated a warrant by UBS and UBS was being seriously exposed while LTCM was claiming "Future expected returns are good" although Equity Volume was in trouble, Swap margins were increasing, and Treasuries were falling as investors fled to safer securities and as Treasuries were being bought up their rates dropping to 5.56. With Indonesia falling - all eyes were turned to Russia. There was no rescue by the IMF for the Russian ruble. Shares in Europe and Turkey were weak and Venezuelans were buying dollars all the while swaps margins increased. Aug 21, the Dow fell 280 points and investors continued to prefer the safest bonds, the 30 year treasures, US swaps increased to 76 points, 20 points in one day, Britain swaps increased to 62 points and mortgage spreads spread to 121 points, high yield climbed to 276, and treasurers were at 13. LTCM lost $558 million in a single day, 15 percent of their capital. LTCM was certain the markets would correct rationally and the spreads converge. Losses accumulated faster because leverages increased. Additional $200 million in funding was requested from Merrill Lynch. Hedge funds were not considered a bank and so credit extension regulation was constrained. The drop in LTCM performance caused banks to tighten their credit lines to hedge funds. In fact, the hedge funds poor performance screamed default and banks demanded their entitlement to repayment. LTCM was very close to insolvency. Mattone told Meriwether, "when you're down by half, people figure you can go down all the way" and "your out". Aug 31, the DOW crashed 512 points, Hong Kong Authority stopped supporting local markets by buying local shares. For the month of Aug, LTCM had lost $1.9 billion, 45 percent of its equity capital, and still had $125 billion in derivative assets. Death was imminent, the leveraging could not be stopped, LTCM was immobilized by its size, and Bear was threatening to suspend trading. After reviewing LTCM books, Bear allowed LTCM trades and gave a harsh warning, if they dropped below $500 million all trades would halt. Sep 10, LTCM experiences a sum lose of $500 million dollar for five days of trading. LTCM still has 7,000 derivative contracts totaling $1.4 trillion dollars. In 1987, Alan Greenspan was appointed as chairman of the Federal Reserves. Greenspan did not totally understand hedge funds, they were fairly private, and the Fed had no authority over them. Greenspan was nervous about the credit lines extended too these funds. Some call the funds, banks. What were the hedge funds? What is a bank? The New York Fed keeps in touch with its branches and they talk with private industry, so supposedly the Fed keeps a pulse on the private sector. The Fed has a trading desk and trades $450 billions in treasuries, buying and selling to affect the amount of available money supply. If the Fed buys treasures, this act increase money supply and gives banks more money for banks to loan, and interest rates decrease. If the Fed buys back treasures, this act decrease money supply and makes less available loanable money and interest rates rise. The volatility of LTCM was rising because it was so vulnerable. LTCM was being pressured by Goldman as they continued buying down increasing spreads. Goldman exasperated the European bond market cutting apart LTCM. Warren Buffet was a seemly friend but of no help to LTCM. Berkshire Hathaway made an offer: 250 million for $3.57 billion to stabilize the fund and all partners fired. Legal confusion forfeited the deal. The last thing the economy wanted was an economic meltdown, so the Fed offered a deal and the LTCM partners were out in the cold with tears in their eyes, a perfect model (Merton, Black, Scholes) and not enough liquid money to save them against the impossible.

Ideology and greed defy common sense:
There should be a sinking feeling in the pit of your stomach as you read this book. Long-Term Capital Management was almost guaranteed to fail from its outset and, when the end finally did come, the fund's collapse almost took a big chunk of Wall Street with it. The scary part is that there are more LTCMs out there, operating without regulatory oversight and all subject to wrong-headed economic hypothesizing as the basis for their trading operations. The poison pill at the center of Long-Term Capital Management's very being was the efficient market theory, an almost universal belief among economists and financiers alike that free markets always operate in the most effective, logical manner possible over the long term. They don't, of course, and that refusal to acknowledge fundamental human irrationality led LTCM over the brink. Lowenstein does an outstanding job of untangling the fund's complicated derivatives trades and explaining how the fund eventually over-leveraged itself into a sudden collapse. We normally read business stories like this for the thrill of seeing moral hazard at work, seeing the rich fall from grace and thinking how well-deserved that fate is. I would recommend, however, that you approach this book as a template for how the next Great Depression could spring from the simultaneous self-destruction of derivatives trading firms. And thanks to Roger Lowenstein, you don't have to be a genius to see how it could happen.

Excellent engrossing story of finance, greed and ego.:
This book is a great inside look into the world of finance and greed and hedge funds. Although LTCM was not your typical hedge fund, it did bring some of the brightest minds in finance together for an amazingly successful investment enterpirse, only to watch it fail miserably as ego and pride took over. Lowenstein does an amazing job of taking complex financial transactions and stories and making them read like pure enjoyable fiction. The book starts out with a background of the main partners in LTCM who started the venture. Geniuses in the private and academic world who wanted to use their knowledge to create an sure fire investment fund guaranteed to make huge profits. Each character is almost like a fictional figure but they ar emost certainly real and Lowenstein brings them to life through descriptions and anecdotes. Then the investments begin and wether or not you have a strong background in finance, the authoer explains complex interest rate arbitrage strategies in a way anyone can udnerstand them. The story of how the fund grew to over $100 billion in assets and produced some amazing returns early on is amazing. You see how much money these guys made and how they became richer larger than life figures. Then, they become victoms of their own success. They deterimined that the likelihood of failure was so infintesiimally small that they were basically risk-free. But as Murphy's Law taught us, the unexpected can happen when you think you are better than everyone else and better than the market. The story provides great details in the characters involved, the transactions, and how the bankers picked apart LTCM to cover all their losses. The writing is excellent and keeps the story moving at a fast pace. You almost forget you are reading a true story and instead feel like you are reading a fictional story of greed wealth and international finance. Great insight into complex trading strategies, hedge fund positions, how investment banks work, derivatives, outright greed and the taking down of a legends in the finance world. I read the book in about a week or so because I could not put it down and plan to read it again. If you enjoyed the great classic Liar's Poker, then you will find the same great writing style and pure enjoyment.

A Fascinating Account of Hubris:
Lowenstein is one of the finest financial journalists around, and his work in this book is no exception. More than anything, Long-Term Capital's collapse is the story of hubris and arrogance. The men who ran LTCM were brilliant financial minds and legendary traders, and their investment strategies would worked (or at least not failed on such a massive scale) if they had stayed within their realm of competence (fixed-income arbitrage). But Lowenstein chronicles their ill-fated forays into merger arbitrage, emerging markets and other areas that the gurus of LTCM didn't really understand as well as they thought they did. The ultimate irony of the story is thatmany involved still don't think they were wrong in their investment strategy, viewing Russia's default (the exogenous event that directly led to the firm's liquidation) as a one-time, unforeseeable event. With the meticulousness of a great journalist, Lowenstein brilliantly renders a story of arrogance run amok. As a derivatives trader, I think this book is must-reading for any trader or investment professional, since it teaches us all a couple crucial trading lessons: (1) The market is bigger than any one participant, and (2) Check your ego at the door.