Rating: 
Summary: If You are a Wall Street Junkie, This is Your book
Review: Assuming you have an adequate background to understand their trades, I think anyone who was inthe fray during the bleak days of 1998 will find this account faxcinating. If you followed the LTCM demise closely in the press, as I did, you may have thought you understood their situation well at the time. I know I did. After reading this book, I learned how little I really knew at the time, and how much worse and scarier the situation truly was.Not exactly Liar's Poker in its readibility, but a useful addtion to the cannon. Just don't expect light beach reading, particularly if not fluent in swaps, derivatives and arbitrage.
Rating: 
Summary: Drama on Wall Street
Review: In 1994, bond arbitrage guru John Meriwether, late of Salomon Brothers, launched a hedge fund. Its partners included two soon-to-be Nobel laureates and an ex-vice chairman of the Federal Reserve. The fund was to exploit highly quantitative techniques to bet on (primarily) bond spreads throughout the world, using large amounts of leverage to magnify small returns from supposedly low-risk positions. By early 1998, each dollar invested in the fund had grown to $4.11. By early fall 1998, that $4.11 was down to 33 cents. The fund's potential bankruptcy so threatened the world economy that the U.S. Federal Reserve had to step in to broker a rescue. The tale of the rise and fall of Long-Term capital was coming to its end as I was putting to press my own book on option-based trading strategies and their effects on market volatility (Capital Ideas and Market Realities). The whole adventure constituted a perfect capstone to my story, which goes back to the crash of 1929, showing how strategies that purport to eliminate the risk of investing can end up exploding in the face of their followers and investors generally. Now Roger Lowenstein, formerly a journalist at the Wall Street Journal and author of a biography on Warren Buffett, has devoted a whole book to LTC. Drawing largely on contemporaneous reporting and on his own personal interviews with many of the principal and supporting players (although not, alas, Meriwether himself), Lowenstein manages to create a real page-turner out of the unfolding events, even for readers who already know the ultimate outcome. Part of the tension, it seems to this reader, stems from the unresolved (and probably unresolvable) ambiguity about the real nature of the story. On the one hand, it seems to play out as a classic tragedy: Its larger-than-life protagonists hubristically pit themselves against the gods of the marketplace and fall hard. Certainly, for many of the players involved, it was a tragedy. Meriwether not only lost his money but his reputation. Nobel laureates Robert Merton and Myron Scholes found their lives' works on modern finance theory rocked to the core. Many of those instrumental in engineering LTC's rescue (including Goldman Sachs' Jon Corzine) ended up subsequently losing their own jobs. LTC's employees, who had been encouraged to invest their bonuses from the firm's fat years back into the firm itself, lost it all when the firm collapsed; nor did they get the $500,000 bonuses secured by the LTC partners as part of the bailout package. On the other hand, one can also view the whole affair as great comedy (especially if one is on the outside looking in). After all, a scene with 140 lawyers in one room is worthy of the Marx brothers. Then you have the Fed descending, at the eleventh hour, like some deus ex machina, to restore order and stability; not to mention Wall Street's viciously competitive masters of the universe gathered on folding metal chairs around the New York Fed's boardroom table, trying to rescue the world from themselves. Even LTC's partners bounce back. Meriwether (J.M. to friends, and throughout the book) starts a new hedge fund, bringing in several old LTC colleagues. Merton and Scholes are still teaching and consulting. A week after LTC was bailed out, many of the principals gather at the Pierre Hotel in New York to celebrate Scholes' remarriage; a wedding, of course, is the classic comedic emblem of reconciliation and renewal. The vibrancy of any play, whether comedy or tragedy, often rests on the quality of its villains. Lowenstein singles out a few individuals for special opprobrium. These include Victor Haghani and Lawrence Hilibrand, who basically ran LTC's trades and pushed the firm into ever larger, more highly leveraged positions, and into areas such as merger arbitrage in which the firm had no demonstrated expertise. Hilibrand comes across in a particularly bad light, especially when he shows up at the bailout negotiations with his own private lawyer and threatens to derail the whole process because "there was nothing in it for him." The person one might expect to hold the center of the story, J.M. himself, plays a strangely muted role. Lowenstein describes him as "an unlikely star, too bashful for the limelight." Even his contributions in furtherance of LTC's eventual downfall seem to be more sins of omission than sins of commission. That is, he failed to rein in his uber traders, Haghani and Hilibrand, and he failed to heed the warnings of his more temperate (and, as it turned out, more realistic) colleagues. Of course, J.M. did set the tone for the firm-the air of infallibility that was to prove its downfall. The book emphasizes how LTC's greed, arrogance and even foolhardiness made it susceptible to a market crisis. But was this crisis purely a result of exogenous events, such as the turmoil in Asia and Russia, as Lowenstein suggests? If so, how did these troubles overwhelm markets in fundamentally sound Western economies? In my opinion, the book lets LTC off the hook in failing to explain how the very strategies it followed helped to create the perfect storm that ended up swamping the firm. The argument in my book, based on decades of debate with options experts in the industry and in academia, is that LTC provides yet another illustration of the market's susceptibility to certain large-scale trading strategies. These strategies tend to attract a lot of capital because they appear to offer a haven from the vicissitudes of market risk; given leverage and derivatives, they can command hundreds of billions (even trillions) of dollars of assets. Under adverse market conditions, however, the "rules" of these strategies call for dumping all these assets on the market-all at once. We saw this in the crash of 1987, and again in the turbulence of 1989, 1991,1994 and 1997. All in all, however, When Genius Failed is a classic tale of greed and fear on Wall Street. Lowenstein tells it well, especially in the later chapters, which give readers a blow-by-blow account of the bailout negotiations. What's more, he brings out the story's particular pertinence for today's investors: Even with all the brains and all the computers in the world, investors can't control, let alone predict, human nature. Bruce I. Jacobs (cimr@jlem.com), Principal, Jacobs Levy Equity Management, and author of Capital Ideas and Market Realities (Blackwell, 1999)
Rating:
Summary: A rare blend of arrogance, delusion and idiocy
Review: This book is a great read. These guys are very, vary, VERY hard to feel sorry for. From the book, I found that the LTCM crew were a deadly combination of arrogance, delusion, and idiocy. They should have NOT have been bailed out. Moreover, these guys should be branded as "too stupid to trade" and never let near a trading desk again.
Rating:
Summary: Stalled Thinking by Geniuses Leads to Staggering Losses!
Review: There's an old saying to the effect that every army prepares to fight the last war, rather than the next one. In financial circles, the equivalent is to create models that optimize decisions in light of the history of financial markets. That is great, as long as the future is like the past. As soon as the future becomes different, this 'rear-view mirror' vision of the future can create terrible crashes. That's what happened with Long Term Capital Management (LTCM). The cost was almost a meltdown in the financial markets around the world. This cautionary tale should stand as a warning to regulators, investors, academicians, and traders about avoiding the same mistakes in the future. One particular reason to be so concerned is that John Meriwether and his crew of geniuses were back in business as of 1999, as reported by the book (apparently with some of the same investors as in LTCM). You may recall that Mr. Meriwether appeared in the book, Liar's Poker, by challenging John Gutfreund, CEO of Salomon Brothers, to one hand of liar's poker for ten million dollars. Mr. Gutfreund correctly declined, but lost face. Mr. Meriwether later had to leave Salomon Brothers after the firm was found to have failed to notify the Federal Reserve promptly after discovering that it had been violating rules on bidding for government securities. In this book, you will learn more about Mr. Meriwether and his love of brilliant people, betting on everything in sight, and taking outside bets when the odds seemed to be in his favor. This approach can work well when the odds can be known, but that is not the case in the financial markets. Mr. Meriwether did not make himself available to the author. Roger Lowenstein is our most talented financial writer (you may remember him from his days at The Wall Street Journal and for his wonderful biography on Warren Buffett), and he has produced an outstanding work that will be a cautionary tale for future generations about the financial myopia of the 1990s. Long Term Capital Management was built around consensus in the financial markets. The firm attracted the thinkers in the financial markets with the greatest reputations (including future Nobel Prize laureates, Robert Merton and Myron Scholes -- of Black-Scholes option pricing fame, and the top talent from the arbitrage area at Salomon Brothers), a top regulator (the vice-chairman of the Federal Reserve Board), famous investors from the top investment banks and consulting firms, and lines of credit from every major financial institution in these markets. The firm planned to invest by finding small mispricings of one security versus another (such as the interest rate on one bond maturity versus another compared to history, an option versus the underlying stock for the time remaining on the option, a bond yield in a foreign currency versus the currency futures, and the price of a stock versus a hostile takeover bid price for the company). Here, it hoped to proverbally make lots of nickels by borrowing lots of money to make these trades. Although other firms took similar risks (and many also took enormous losses in 1998), LTCM stood out for two things: It had no independent evaluation of its risk to control what it was doing (the traders monitored themselves -- a little like letting the fox guard the hen house) and it took on vastly more debt than others did compared to its equity base. At the firm's peak, it had borrowed over $100 billion against a base of $4 billion in equity and had derivative (option) positions for an exposure of another $1 trillion. This enormous finanical leverage magnified the size of any gains or losses it took. Part of what had been deceptive is that the firm had been regularly and spectacularly profitably for most of its initial four years. What the firm had neglected was to consider what might happen to historical price differentials in a market crisis (particularly a 'stress-loss liquidation'). In 1998, an unprecedented financial crisis occurred following the Asian meltdown and Russia's refusal to pay its debt. In the panic that followed, there were many sellers and few buyers. Tens of billions evaporated quickly in these abritrage trades. LTCM moved slowly to unwind the trades, believing that things would come back to normal. Soon, it was too late, and the New York Federal Reserve supported a shotgun wedding of the firms that would lose the most if LTCM died to put another $4 billion in the firm until it could be wound down. The aftermath was not much fun for anyone. Mr. Lowenstein does an excellent job of describing what occurred at the level of a college-level course in finance. If you have a higher level of knowledge than that about trading, you can skip most the explanation of what happened and why. The crash exposed several major weaknesses in the financial system. One, the lenders were too lax. Two, the risk review of the firm was essentially nonexistent, although it reported risk levels monthly (apparently based on incorrect assumptions). Three, the Federal Reserve doesn't know what goes on with hedge funds, until they are about to blow up the financial markets. Four, Wall Street goes along with reputations more than due diligence. Five, excess risk compared to current market conditions creates excess losses. Six, modeling historical trends is a dangerous way to make money unless you use small amounts of leverage to hedge against the risk of unexpected market volatility. After reading this interesting book, I hope you will also ask yourself if you know what the risk level is with your financial investments for the current market. If you don't know, I hope you will quickly find out. And have your testing done against the potential risk of something extreme happening, not just with history. Certainly, the 80-90 percent losses that many Internet stocks have suffered in the last year or so should be an indication of how much risk can occur even in a successful industry. Good luck with avoiding large losses in pursuing financial gains!
Rating:
Summary: Ego on Wall Street- What a Shock!
Review: Lowenstein missed the following two points: 1) The reason Long Term blew up is because they had a) bad trades on in large size and b) they had the same risk (credit spreads widening) on in almost all their trades, so that you would expect high correlation among their trades; and 2) the magnitude of the blow up was insignificant with respect to the size of the capital markets. As for point number 1, the trades they had on have not come back to this day, and in the middle of 1999 would have been even more against them, so the "100 year year flood" analogy is plain wrong. As for point number 2, just yesterday, Intel lost almost $100 billion in market value, while the most aggresive estimates would have had LTCM and the Banks losing $20 billion in total. The fact that somebody was fooled into believing that there was systematic risk is the most surprising development during the crisis. Nonetheless, Lowenstein does keep the story moving and it is an easy read, but it basically is just another story of ego run amuck.
Rating: 
Summary: Reads like fiction
Review: Lowenstein vividly paints his portrait of a major financial failure of the 90s. However, he does so largely by using stereotypes. He confuses posturing and PR for reality. His understanding of models and markets is crude. For a better understanding see Michael Lewis' 1/24/99 article in the NYTimes magazine (also available on the web).
Rating:
Summary: Greed, Hubris, and Disaster
Review: In ancient Greece, people believed that disaster was man-made. Hubris ranked on top of the list of reasons why the gods might punish you. Today, we don't believe in those gods any longer. However, the basic story told by Lowenstein is not too different from the idea that hubris triggers disaster. Lowenstein tells the story of "Long-Term Capital Management", a gigantic "hedge" fund, founded by people who thought they were the smartest people around. The fund was able to lure the "finest" Wall Street bankers into their scheme and, eventually, it failed. When it crashed, it got bailed out by the Fed because it was widely believed that many banks were so exposed in the whole affair that the financial system of the whole world might collapse. Today, we know that the bailout was wrong but that is only one side of the story. If you're a financial specialist you might be interested in it.
For the financial layman like me, the other side of the story is more interesting. How could a group of people set up such a scheme? The answer seems to be surprisingly simple. The reason why LTCM was able to lure everybody into their scheme was because they claimed they had the smartest people in their team. Everybody believed that having people like Merton and Scholes on board would guarantee success. Merton, Scholes, and all the other people really believed they were the smartest persons you could talk to. Most of them had at least a Ph.D., preferrably from MIT, and they all had worked on financial computer models (quite interestingly, the same attitude can be found at software startups...). I myself also have a Ph.D. and I also worked on computer models. No money was ever made or lost in computational cosmology but I think there is an important lesson those "smart" people never seemed to realize. Computer models, and scientific models in general, simplify the world. They reduce the complexity of the world to simpler terms. Hence, they can always be wrong because the model can always miss something. LTCM's smart model makers never seemed to grasp that even though in reality, it would have been enough to look at what the markets really did. If a computer model in cosmology fails you write a paper about it and bury it. If a computer model in the financial world fails you might crash the financial system of the whole world (no, seriously, I am not envious! ;-) ). So the story of LTCM is also the story of people from academia who thought they were really smart but who in fact were also incredibly arrogant and who lacked common sense. Even though you might win the Nobel Prize some common sense doesn't hurt. PS: The other day, I read Merton and Scholes advise financial clients again. Let's hope those clients read the book, too.
Rating: 
Summary: fascinating book but slightly biased
Review: This book is fascinating. The author put in tremendous effort to put such a book together. The last 2-3 chapters are slightly boring but overall, it is still a splendit account of a piece of finance history. But I think the author's conclusion on the usefulness of finance models is slightly extreme. In one paragraph in the Epilogue, it vaguely says that if Rob Merton suggests any models in the future to Wall Street....people should run away. It seems that the author is suggesting that effort spend on predicting financial markets is a waste of time. The definition of a good model is simple and high predictive accuracy. It is always contain assumptions that makes the model an abstraction of reality. The purpose of model building is to provide guildlines. After reading the book, I think LTCM's problem is not so much the models are bad...they are just executed poorly. Execution often has to do with human factor and office politics. Most of the time, scientist build the models but the traders are the one that execute them. Somewhere in the book it says that Myron Scholes were concerned about the hugh positions of some of the trades. My impression is that the two top traders of LTCM were totally blinded by greed and arrogance that instead of minimizing risk, they saw no risk at all!!! They misused the models by taking unreasonably huge positions and ventureed into unknown territory such as risk arb and equity vol. Tremendous effort has been made to build models so as to forecast the weather. Often times, these models also made simplified assumptions and sometimes completely off!! Does it mean that we should forget about weather reports?? The answer is obvious.
Rating:
Summary: When Genius Failed
Review: WHAT DOES THIS BOOK HAVE to do WITH ME? Very much if you have a time deposit, own a mutual fund, or even just a checking account. You'll learn what all banks and funds do with YOUR MONEY by reading Lowenstein's book. Although LTCM was in a league of their own in the world of arbitrage and derivative trading, quite ordinary funds and banks follow some form of this technique. This is a book about how small our planet has become; how much the actions of a few affect us all. This is also, in the end, a gripping tale of human nature--philosopy. It's a great read, but not comforting to anyone who wants the "experts" to manage their money. Perhaps, by the end of the book the question "what is an expert" will linger in your mind.
Rating:
Summary: Glaring error
Review: Overall interesting read, however I'm surprised and disappointed by Mr. Lowenstein and his staff in their incorrect reference to insurance/financial services giant American International Group (AIG) as American Insurance Group.
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