Rating: 
Summary: Easy Reading
Review: This book is some of the best reading I have ever done. Lowenstein is a great author (see also his biography on Warren Buffet), and demonstrates an ability to translate the complexity of the trading activity of LTCM into a text that anyone can read and understand. Another book on the LTCM fiasco, Inventing Money by Dunbar, goes into more detail about the LTCM's trading strategy, and even the history of derivatives and options pricing, but Lowenstein is much easier, and more fun to read.
Rating:
Summary: Not enough Cream on the Coffee
Review: 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.
Rating:
Summary: BIG MEN MAKE SMALL MISTAKES!
Review: Small traders who break the simple rules are called 'dumb' by the professionals in the industry in their magazine articles, interviews on radio & TV etc. Here we have a group of top academics including Nobel Prize winners in economics who headed a firm that made some of the most silly 'mistakes' that caused them to lose over FOUR BILLION DOLLARS1 The reason: simple over-trading and mis-management of funds - just what the little guy is always told not to do! This book gives a brief introduction to the various players involved. It gives an indicationl of the greed involved, not only by over-leveraging but by forcing investors to take back their money so the partners could put all their money in the fund and make all the profits for themselves. Interestingly, they did these people a great favor by preventing them from going broke. Later in the book, when the crisis is really brought forward, we are given a detail day to day account of the stress and problems that the fund managers were creating for themselves and the rest of Wall Street as many banks and other financial institutions had tied up hundreds of millions with this firm. In the end the Federal Reserve arranged a bailout with fourteen major banks to save day. Ironically, the super-losers went and created another fund after this big crash and sure enough they raised a few hundred millions in trading capital so the 'bright' fellows can get running again!
Rating: 
Summary: Good Book, Lacks Financial Detail
Review: Lowenstein follows in a proud history of Wall Street Journal reporters that have written outstanding books about current events, such as "Den of Thieves" by Stewart and "Barbarians at the Gate" by Burrough and Heylar. Lowenstein walks us through the development of Long Term Capital management at the hands of "Liar's Poker" star John Merriweather. Merriweather and his band of academic, bond-trading proteges raised the mother of all funds in LTCM, dedicated to making massive bets, the majority of which were related to convergence amongst various interest rate spreads. Merriweather and his gang go on to do quite well (all the while we hear the Jaws-like music playing in the background), in fact they do a little too well. At one point they forcibly return money to investors - it is, of course, after this that things start to go tragically wrong. There are wonderful descriptions and backgrounds of the key characters involved along the way, which adds to the reader's desire to know just how things wind up. The fund continues to lose all of its holdings, and as things start to go bad, they continue to get worse and worse. Now it is no longer just the markets conspiring against LTCM, but also the growing number of bankers who learn of LTCM's positions, and knowing that due to their size LTCM's exit of those positions would ruin markets. Everything that could go wrong does, and eventually we are left with the aftermath, the fund being bailed out through the behind the scenes maneuvering of the New York Fed. The book does lack a couple of items, (i) there is little to no in depth discussion of the trading techniques used by LTCM, (ii) there isn't really any 'insiders' view of the behind the scenes maneuvering going on at the fund through the fall, and finally (iii) there isn't a real sense of finality at the end of the book. All in all this is a well written book about an interesting point in the financial history of the US, as there are few other major incidents that don't involve some kind of criminal misdeeds. Rather, what we see here is the sheer error of man's hubris and seeming belief that a resounding knowledge of the past would allow LTCM to be victorious no matter what the future lay before it. I believe that this book will grow more interesting with every revision and addition to the epilogue. I recommend the text, but I do look forward to reading "Inventing Money" by Dunbar, which supposedly is a bit more detailed when reviewing the actual trading techniques that LTCM was was built on.
Rating:
Summary: wonderfull read and educating
Review: When genius from the academic world came to the real, It's fascinating to see that they were really capable to make real money. LTCM showed that it is possible to find mispriced anomalies in the markets and that its possible to capitalize from them withoout adding volatility to the portfolio. The tremendous fail wasnt caused by the academics and we can learn a little about the huge impact that leverage can make.
Rating:
Summary: Great Book if you are slightly interested in Finance
Review: This book showed most of the average American the dark side of Wall Street: greed and ego. When they clashed, things would get downright ugly. In sum, the author described vividly how one of the most powerful hedge fund rose to the top of the mountain in the first 4 years of its existence and grounded to the earth in a matter of 5 weeks. This book also does a great job in describing human interactions: treat others like you would want to be treated by them. Hilibrand, one of the most interesting persons in the book, was a great example of this maxim. He was uncooperative at first, and most of the Wall Street submits to him because he had the power at the time. However, once Long Term's aura diminished, he would have to literally beg others for help. What did he receive for begging? humiliations and rejections. Thus, I learned that I better treat people equally with dignity because you never know when you are going to lose your aura and would need other people's help. Warren Buffet said the best: "you should fear the market when everyone is greedy, and you should be greedy when everyone else fears the market." This book taught me exactly that.
Rating:
Summary: Riveting
Review: When Genius Failed is an exciting account of a Hedge fund that brought together the smartest people in the business, skyrocketed to amazing highs and lost everything in a few short months. This is best business narrative I have read.
Lowenstein does an excellent job of adding color and excitement to a financial calamity of immense proportions. What is somewhat amazing is that he was able to get such detailed information about the inner workings of Long Term Capital and the emotions among its various constituents.
Even readers far removed from Wall Street will find the drama and players quite exciting.
In addition to the enormous financial losses, there is a great deal of interpersonal drama. As colorful as any Hollywood script, there is an eclectic cast of characters: The Nobel prize winners, the professors, the Iranian, the Jew, and the Irish catholic who went from the south side of Chicago to become one of the greatest bond traders in history and the ring leader of LTCM.
As the fund is loosing hundreds of millions per day, the partners become increasingly unable to deal with events because the fund was driven by sophisticated mathematical models that did not address the chain of events leading to its demise. As the fund seeks to be rescued, some of the world's wealthiest and most powerful figures are brought into the fray. At one point, Warren Buffet was vacationing with Bill Gates when he conducted a three hour long satellite-phone call to discuss the bailout. To add to the anxiety, the phone kept disconnecting as the boat they were sailing on was getting too close to the sides of a fjord, blocking the signal. In scenes like this, the author does an excellent job of adding color and heightening the drama.
While this is best of the bond trading books, you should read Liars Poker and one of the books on Drexel first. Liars Poker describes the initial group at Salomon, including the central character, John Meriwether, who went on to create LTCM. Some of the individuals from Salomon also went to work for Drexel Burnham Lambert, which went bankrupt four years before LTCM was created. Reading books about each of the three organizations paints a much more complete picture of the pivotal characters and their bond trading exploits.
Rating:
Summary: A Must Read for New Managers
Review: I will not give too much detail about the story itself, since if you are here then you are familiar with LTCM's demise. I was on Wall Street when the story broke in 1998, as an equity trader with one of the firms mentioned in the book. I have only now just read this book (Jan 05), because I started a hedge fund in March of 2004, and I wanted to get more details about the LTCM blowup.
With that said, I can say that the book is a must read for any money manager or trader, especially when using leverage. I have been managing a highly leveraged portfolio since March 04, and I have had great success. While one knows the "possibility" of a devastating loss (initially), one can get quite comfortable and confident after a period of success. This book literally scared the crap out of me. As the LTCM portfolio was dropping and the partners were scrambling for capital, I realized how close that situation is to any of us who manage leverage. While their size added to the problem, it had nothing to do with what I believe is the most valuable quote in the book: "Markets can remain irrational longer than you can remain solvent" --Keynes
At any rate, it is wonderfully written book and I highly recommend it. As I said, it will be especially useful for new managers. Trading and managing client money is so much different than trading a firm's capital. Read and be careful.
Rating:
Summary: when hubris flailed
Review: This is a great story. Not so much due to the breathtaking scope of financial disaster, but rather the timeless human lessons presented in such fascinating detail. If it were a movie, the plot would be dismissed as unrealistic. The heroes (anti-heroes?) of LTCM make choices so obtuse, they literally boggle the mind. You would think the most sophisticated players in the most sophisticated markets in the world would have a keen grasp of simple things, like position sizing. These guys are nobel prize winners, ubergeeks with multiple PhDs, the high quants of Salomon. You would assume they had an assortment of complex and finely tuned algorithms, implemented in real time via massive computing power, to determine the proper size of positions. And yet, when LTCM came a cropper, it was in large part simply because their positions were too big. Not just too big: ridiculously, massively, insanely big. Technical details aside, the how of their failure is not as interesting as the why. As in Why, Oh Why did these guys think they were invincible?
Conviction cuts both ways. Without it, you can't achieve anything truly noteworthy. With too much of it, you're likely to drive yourself over a cliff. These guys' conviction levels made UFO cults look downright modest. When you feel strongly about something, you increase the size of your bet. If you feel very strongly, maybe you bet a significant portion of your net worth. But what do you call it when you bet not only a few hundred times your net worth, but that of your friends and clients as well- when you act with a certainty greater than that of the sun coming up tomorrow? At least they walked the walk; by doubling down on their own personal stakes, the partners went out of their way to ensure they had more exposure than anyone. True believers to a man.
The details are complex, but the heart of the story is simple. Genius did not just fail, it got hijacked and turned against itself. A sufficiently intelligent and creative person can convince him(or her)self of anything, no matter how outlandish, given strong enough emotional motivation to do so. Rationality was outflanked by ego, smarts subsumed by pride... in the normal world there are checks and balances on this sort of thing. If you start thinking you are a modern day Icarus, you are usually brought back to earth by various limits and circumstances -friends and family if you are lucky- before inflicting too much damage. But if the people around you actively encourage your hubris -if they whisper sweet nothings in your ear and hoist you on high- there's no telling how far your delusions may take you.
In the end, all the credentials and intelligence, all the skills and smarts presented on a silver platter, didn't mean a damn thing. This is instructive and eye opening; the emperor has no clothes. Those outside Wall Street typically assume that those inside know what's going on. That the monolothic skyscrapers, the PhDs in mathematics and physics, the rows of supercomputers mean something. That these people have some intrinsic grasp of reality that the rest of us do not, that they know exactly what they are doing at all times. But they don't. Or if they do, they can still fall prey to the reign of emotions and the folly of the human heart. This lesson is never fully learned; bigger giants will fall.
This isn't to paint all market players with the same brush. Just because LTCM flamed out in spectacular fashion doesn't mean every hedge fund is one bad day away from disaster. There are managers out there, running billions of dollars, whose success is measured in decades. But they are successful in the long term because they understand risk, they understand fallibility, and they know not to fly too close to the sun. Markets are like the ocean; you don't try to tame the ocean. You respect it... or you pay the price.
Rating:
Summary: So many lessons, so few pages...
Review: I was sorry to see this one end. What a great story about knowing your weaknesses. Some people will characterize this as a story of arrogance and greed, but to me, that misses the point. Not that these guys weren't arrogant and greedy - they were - but that isn't what got them into trouble. Instead, they made a mistake that can be made by anybody at any time, they failed to recognize and deal with their weaknesses.
It is the universal nature of that mistake tat makes this book so fascinating to me. If the rocket scientists of Long-Term Capital Management with all of their genius for risk-assessment can miss this pitfall, then so can anybody. Besides, it's a lot easier and more fun to learn about a mistake you can avoid by reading about somebody else making that mistake and nearly dragging down the whole world's financial markets in the process.
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