Rating: 
Summary: Financial alchemy gone haywire____A cautionary Tale
Review: An absorbing account of the Long Term Capital Management (LTCM) fiasco that almost scuttled Wall Street in the summer of '98.Mr.Lowenstein has done a superb job putting this book togather given that most of the managers at the ill-fated fund were reluctant to talk , for obvious reasons .In retrospect , the story of LTCM's rise and fall seems to have the inevitability of a Greek tragedy _____ greed,hubris,brilliance and riches blinding the protagonists to the fatal dangers lurking in the unborn future . To put things in perspective , had you invested 1 dollar with LTCM in '94 it would have grown to 4 by the spring of '98 .Those 4 dollars would have shrunk to 25 CENTS in a little less than three months later after the dust had settled !The underlying principle behind LTCM being to take advantage on the "discrepencies" between bond and equity spreads (looking for "inefficiencies" ) with the assumption that markets tend to overshoot in the short term but revert to the baseline in the longer term . A bevy of ex-Salomen arbitrageurs (headed by John Meriwether) and a couple of Nobel laureates were supposed to gain LTCM an edge over the market . To amplify their results (since fluctuation in bond spreads are relatively small) they used leverage to their gills ____with assets of 4 billion dollars they were leveraged to the tune of 120 billion !Their plans worked brilliantly till '98 when the Russian default set off a domino effect that shook the entire international financial system : the spreads on LTCM trades instead of narrowing actually WIDENED (flight to safety) .This coupled with LTCM's fatal reliance on leverage saw to it that the fund was decimated as its Wall Street competitors (especially Goldman Sachs) smelling blood actually shorted the trades LTCM was long !!! The rest as they say is history .The Fed realising that LTCM's implosion could virtually dynamite Wall Street stepped in and engineered a buyout of its assets by 6 major firms .This is a page-turner and Lowenstein should be commended for it.
Rating: 
Summary: So Certain, So Wrong
Review: "When Genius Failed" is the amazing story of Long Term Capital Fund, a huge hedge fund (over $5 billion in equity capital) managed by people who were suppose to be brilliant (two partners won the Nobel Prize in Economics, three were former Harvard professors and several had advanced degrees from MIT and Harvard), which recorded astonishing growth in its first four years ($1 invested in May 1994 was worth $4.11 in April 1998) and then suddenly crashed ($5 billion lost in five months) during a time when the stock market was booming (mid- to late-1998).
Using complex economic models, the fund's managers had precisely calculated the risk of the fund losing twenty percent of its value to be an event that would occur no more often than once every fifty years and the risk of the fund crashing completely to be so statistically remote as to be nonexistent. So confident were the partners that they not only invested their own personal fortunes (some of the partners had net worths in the hundreds of millions), but also leveraged the funds assets to over $100 billion (a leverage ratio of 30 to 1) and exposed it to risks of over $1 trillion (through derivative investments). Investors were eager to participate and nearly all of the major investment banks (Merrill Lynch, Chase Manhattan, Bear Sterns, Bankers Trust, JP Morgan, Lehman Brothers, Morgan Stanley Dean Whitter, and Salomon Smith Barney, to name just a few) had big stakes in it. So successful was LTCF that less than a year before its demise, it returned $2.7 billion in cash to investors, since it had simply run out of opportunities in which to invest. The errors that brought LTCF down were in a sense quite basic. (1) It not only underestimated the human element of the markets, it ignored that factor altogether. People - and therefore markets - sometimes act irrationally, but the precise mathematical models LTCF was using to predict market behavior couldn't account for that. (2) It was both extremely leveraged and extremely illiquid, which in combination is a highly risky position (ask any real estate developer who's had to carry a project through slow times). And (3) while it foolishly thought it had diversified its investments, it really hadn't. Though it had numerous investments, which made it look diversified, they almost all mirrored each other. The same market condition that affected one investment necessarily affected nearly all of them. LTCF's rise and fall is a fascinating story filled with great themes -money, greed, hubris, success, failure - topics that make for great literature. That its a true story makes it all the more incredible. As a former columnist for the Wall Street Journal, Roger Lowenstein is well qualified to tell the story and he does a commendable job. Readers unfamiliar with economics may occasionally need to re-read sections to understand some of the investment concepts, but this flaw is easy to overlook. WGF is an otherwise fast read and one that will appeal to a wide audience.
Rating:
Summary: Is it true? Mindblowing
Review: Great story. Appears to be very well researched. My only criticism would be that I felt the author was striving for a conclusion or something we could learn from the story. Whilst it certainly kept me turning the pages with intrigue (and I, like some of the other reviewers I notice, wanted to find the right conclusion too), there was no answer and I don't think there is an answer. No doubt we will be persuaded and tempted by fantastic academics with ideas for awesome returns again and no doubt we'll be burnt again too. The story appears to describe a key episode in history which has influenced how the financial world has developed into what it is today. These few brilliant academics may have brought the largest banks in the world to the brink of collapse and perhaps we should frown upon them for it but they can also, arguably, be credited with shaking up the industry. The book still, a year on, philosophically entertains me. Is an efficient market a good thing? What kind of greed motivated these people? Can we ever fully compensate for risk?
Rating:
Summary: Requires a good deal of outside knowledge
Review: Roger Lowenstein has written a very interesting and insightful account of the rise and fall of LTCM. His style is very conversational, flowing, and easy to read. His writing is chock full of anecdotes and quotes, and his insight in to the people involved rather than merely the fund itself make his book a valuable read, as you learn as much about the industry as you do about the type of personal characteristics that will make or break you in it. His book is well researched and includes lots of information that would not be available to the general public. Its changing tone helps the reader run the gamut of emotions felt by the people involved in the collapse, everything from hope, confidence, and cockiness to denial, doubt, and dispair.
One caveat: it requires a certain degree of understanding of equity and debt markets, as well as the role of major players like investment banks and the government in them. An interesting read for anyone with a basic understanding of finance.
A 4 because its a good book, but not an essential read.
Rating:
Summary: Perspective over time
Review: It's now six years after the story, and still a lot of people, probably most people, don't understand LTCM. If anything, the memory is fading. I bought a copy of 'Genius' for my business collection, because it is now a classic. Andrew Tobias' and 'Adam Smith's' tails of speculation in the '60s/70s saved me from the bubble, and for that reason, it's important to have a copy of this book and read it. Because, have no doubt, we will go through this whole thing again. In your lifetime, probably sooner than later. Genius does fail, pretty regularly, especially in the investment arena. Index funds still out-perform most of the managed funds. And yet this week the managed funds were once again reporting net inflows. I see and hear lots of praise for Black-Scholes. Surf the he web and you'll find it loaded with training courses on how to use it. Never do they come with any examination of it's potential problems. Our Caveat Emptor society comes with an obligation to be educated on this stuff. Read Genius Failed, read Random Walk, read Popular Delusions, read Liar's Poker, read The Money Game, read, read, read. Otherwise, well, Wall Street's an expensive place to get an education, and with the coming problems in Medicare, and Social Security, we're all going to be faced with managing our retirements. The uneducated will be as lambs led to slaughter.
Rating:
Summary: Exceptional Financial Analysis
Review: As an I-Banker working in the fixed income markets that were drastically effected by the LTCM collapse, I wish I had read this book sooner as it does an excellent job describing how and why the collapse occurs. If nothing else, this book will show you the "inside" money game played on a very large scale that is virtually unknown to mainstream America. Lowenstein does an exceptional job tracing the history of the principals from Salomon and how their unique culture grew into a monster where the traders felt they could do nothing wrong. And that's always the reason rational money managers eventually take large losses as the market can surprise even the pros. Having left Salomon under a cloud of disgrace, Meriwether desperately wanted back in the game. While this book does an excellent job describing the complex arbitrage trades LTCM was running, readers should be aware it is a complex subject that you may not understand. The author shows the transition from complex trades that generate small profits to a borrowing machine intent on making this small profit on ever larger leveraged money. And that's a recipe for disaster IF the markets remain irrational for an extended length of time. And that's exactly what happened, the "perfect storm" of financial disasters. But that storm was helped by two factors. First, by being so cocky in their dealings with their bankers, when they needed the help from a friendly hand, there was none as everyone silently rooted for the failure of the 800 pound gorilla. In addition, as their problem became larger and they entered negotiations with various parties for a bailout, these parties were able to unload their own holdings of these unprofitable positions in front of LTCM compounding the loss until final capitulation. What may be of most interest to casual market followers is Warren Buffett's role in the attempted bailout. He makes a bid for the company at the very last minute but on terms that you would never accept unless you were forced to, the ulitmate value buy with limited loss exposure. It must be nice to be the only guy with enough money to be the ultimate bidder. In the current market upheaval of 2002, casual investors with losses may also be comforted by watching the brillant financial minds who overleveraged and didn't diversify, lose their massive fortunes like so many others in America. In summary, this is an excellent about a complex subject. My compliments to the author on an excellent research job where the information was not required to be communicated. He was able to piece together not only the events as seen from the outside, but also a good feel for what LTCM was doing and their strengths and weaknesses.
Rating:
Summary: So Certain, So Wrong
Review: "When Genius Failed" is the amazing story of Long Term Capital Fund, a huge hedge fund (over $5 billion in equity capital) managed by people who were suppose to be brilliant (two partners won the Nobel Prize in Economics, three were former Harvard professors and several had advanced degrees from MIT and Harvard), which recorded astonishing growth in its first four years ($1 invested in May 1994 was worth $4.11 in April 1998) and then suddenly crashed ($5 billion lost in five months) during a time when the stock market was booming (mid- to late-1998).
Using complex economic models, the fund's managers had precisely calculated the risk of the fund losing twenty percent of its value to be an event that would occur no more often than once every fifty years and the risk of the fund crashing completely to be so statistically remote as to be nonexistent. So confident were the partners that they not only invested their own personal fortunes (some of the partners had net worths in the hundreds of millions), but also leveraged the funds assets to over $100 billion (a leverage ratio of 30 to 1) and exposed it to risks of over $1 trillion (through derivative investments). Investors were eager to participate and nearly all of the major investment banks (Merrill Lynch, Chase Manhattan, Bear Sterns, Bankers Trust, JP Morgan, Lehman Brothers, Morgan Stanley Dean Whitter, and Salomon Smith Barney, to name just a few) had big stakes in it. So successful was LTCF that less than a year before its demise, it returned $2.7 billion in cash to investors, since it had simply run out of opportunities in which to invest. The errors that brought LTCF down were in a sense quite basic. (1) It not only underestimated the human element of the markets, it ignored that factor altogether. People - and therefore markets - sometimes act irrationally, but the precise mathematical models LTCF was using to predict market behavior couldn't account for that. (2) It was both extremely leveraged and extremely illiquid, which in combination is a highly risky position (ask any real estate developer who's had to carry a project through slow times). And (3) while it foolishly thought it had diversified its investments, it really hadn't. Though it had numerous investments, which made it look diversified, they almost all mirrored each other. The same market condition that affected one investment necessarily affected nearly all of them. LTCF's rise and fall is a fascinating story filled with great themes -money, greed, hubris, success, failure - topics that make for great literature. That its a true story makes it all the more incredible. As a former columnist for the Wall Street Journal, Roger Lowenstein is well qualified to tell the story and he does a commendable job. Readers unfamiliar with economics may occasionally need to re-read sections to understand some of the investment concepts, but this flaw is easy to overlook. WGF is an otherwise fast read and one that will appeal to a wide audience.
Rating:
Summary: Excellent engrossing story of finance, greed and ego.
Review: 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.
Rating:
Summary: Not A Work of Fiction - Just Reads Like One
Review: Any fool knows that playing the futures game is a risk. But here we have a situation where John Meriwether, having left Salomon Brothers under a cloud, is trusted with lots of investment money to start an arbitrage group - which in hindsight was a half step away from financial insanity. This "arbitrage group" is a fancy way of saying a group of people that gambled on futures using derivatives. Not hog futures but large international financial instruments. The financial swings and risks were enormous. You might have trouble at the bank getting a car loan but these guys got billions from banks and investors to essentially play the futures markets. The group included academics, market veterans, and financial analysts. The academics were so sure of themselves that they did not even blink at the thought of betting billions. They played for high stakes and won at first. But eventually they lost their stake like some giant crap shoot. Again where were the regulators? Where were the regulators when junk bonds were king and where were the regulators when Enron had their fake trading floor? They did not arrive until the building was on fire and burned down. The losses were so great that only the Federal Reserve could fix the situation by applying pressure to "encourage" the New York banks to bail out the arbitrage group. A very interesting read. One has to remind oneself that it is not fiction, but that it all actually happened. Four stars. Jack in Toronto
Rating:
Summary: A Four Star Cautionary Tale of Financial Arrogance
Review: The geniuses who ran Long-Term Capital Management thought they could do no wrong. They believed they had developed a can't fail system of playing small margins in bond and equity spreads. They even projected that only a unique set of circumstances could ever fall into place and spoil the niche they thought they had found in the market. And the odds of that happening were determined to be so infinitesimal that they never were concerned about it. Naturally, that unique set of circumstances fell into place and brought them down at the same time very nearly ignited a financial crisis that required the intervention of the Federal Reserve to prevent a potential meltdown of the markets. It reads like fiction by the likes of Michael Crichton, but it is all the more frightening that it is true. This is a true cautionary tale, one that will probably go unheeded by future "geniuses" on the Street. It is well researched and well-told. This book is must reading for anyone interested in the stock and bond markets. It should be required reading for all of the self-proclaimed financial geniuses who keep appearing on Wall Street and who all seem to manage to flame out when they learn that the markets are unpredictable and answer to no one.
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