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 by the Fed to discuss the highly unusual prospect of 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: The Rise and Fall of Long-Term Capital Management” is the gripping story behind the Fed’s unprecedented move, the incredible heights reached by Long-Term Capital Management, and its eventual dramatic demise.
Lowenstein, a financial journalist and author of Buffet: The Making of an American Capitalist, uncovers and examines the personalities, academic expertise, professional relationships, and layers of numbers behind Long-Term Capital Management’s roller-coaster ride with the precision and knowledge 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 US Federal Reserve–to join him in starting a hedge fund that would beat all hedge funds.
Long-Term Capital Management began trading in February 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 dollars. 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, Long-Term Capital Management earned 1.6 billion dollars, profits that exceeded forty 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 at the start 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), and 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 Long-Term Capital Management hedge-fund debacle. –S. Ketchum
‘When Genius Failed: The Rise and Fall of Long-Term Capital Management
‘Richly textured and lucid…A riveting account that reaches beyond the market landscape to say something universal about risk and triumph, about hubris and failure.’ New York Times
‘Lowenstein has written a squalid and fascinating tale of world-class greed and, above all, hubris.’ Business Week
‘When Genius Failed: The Rise and Fall of Long-Term Capital Management
| Title | When Genius Failed: The Rise and Fall of Long-Term Capital Management |
| Author | Roger Lowenstein |
| first published | January 1st 2000 |
| Publisher | Random House Trade Paperbacks |
| ISBN | 0375758259 |
| Language | English |
