When Genius Failed : The Rise and Fall of Long-Term Capital Management

Rating:
Summary: well written, reads like a story
Review: Friend of mine who is in the arbitrage business lent me the book. After starting to read it on a 3-hour plane ride, I had to finish it by the end of teh same day; it was very captivating.

I was amazed that the author was able to compile all the info despite having no cooperation from the core group of Long Term Capital Management. Hopefully John Meriwether (the founder of LTCM) will offer his own account of the disaster some day.

The book is very well written, and the explanations of the financial terms are done just right so that people like myself, who dont know much about derivatives, options, swaps etc, don't get overwhelmed by the jargon. Another factor that contributed to my being drawn into the book were appearances and key roles by well known figures such as alan greenspan, jon corzine (who is now NJ governor, at the time he was CEO of goldman sachs), george soros, warren buffet, etc.

Overall I recommend the book to everyone who is interested in the stock market. It is a good account of how short term success, coupled with arrogance, can blind even the smartest of people. Trading decisions with lack of auto-control (or any other governing body for that matter) ended up becoming a giant mess such that the federal reserve had to jump in to bail them out for fear of a stock market doomsday.


Rating:
Summary: Don't just assume a N(0,1);first,get empirical evidence
Review: Lowenstein's(L) book is much more than a history of the failure of a group of high powered mathematical economists making use of a combination of the Black-Scholes options pricing model,the Capital Asset Pricing model,leverage,and the Efficient Market Hypothesis.It is the latest demonstration that economics is not a science or an art.One need only go back to the Ricardo-Malthus exchanges to see that economics is a profession based on fads and not on the bedrock of science,which is clearcut empirical and experimental support for the model or theory(hypothesis) that is duplicated and replicated BEFORE it is implemented.The biggest fad infecting the economics profession is to simply assume that a normal probability distribution can be used in practically every market.This fad has had a very long life,stretching back over 150 years.This doesn't mean that the misuse of the normal probability distribution has not gone unchallenged.Both Joseph Schumpeter,in his Theory of Economic Development(first published in German in 1911)and John Maynard Keynes,in chapters 17,29,and 30 of his A Treatise on Probability(1921),and in his exchange with Jan Tinbergen over the logical foundations of econometrics in the Economic Journal of 1939-40,warned that clearcut empirical evidence,especially about the stability and symmetry of the data over time,were required before the assumption of normality was made.These warnings went unheeded.Since the early 1950's,Benoit Mandelbrot has carried on what can only be described as a one man crusade against the assumption of normality without empirical support.In market after market,Mandelbrot has demonstated that the data DO NOT support the assumption of normality.Mandelbrot's research has been duplicated and replicated by a large number of other researchers in a number of different markets.The only scientific response is for economists to drop the general assumption of normality.Unfortunately,the economics profession is not able to do this because they have placed all their theoretical eggs in one basket-All markets,assuming away any government regulation,are efficient and governed by normal probability distributions.Thus,all false trading(contracting)engaged in by consumers and/or producers at disequilibrium(nonequilibrium)prices must cancel out in the long run in all markets so that the market clearing ,equilibrium price is also an optimum price.It is automatically assumed that this market clearing price is the mean of a normal probability distribution.This guarantees that the mean price will be the maximum.The failure of the economics profession to base their theories on empirical analysis of the data means that they can't deal with Mandelbrot's scientific evidence.Lowenstein relegates Mandelbrot to an obscure footnote(p.72,ft.11) in chapter 4(Mandelbrot's name is not listed in the Index).In fact,the entire fiasco of LTCM follows as a direct prediction from Mandelbrot's analysis,as does the collapse of the NASDAQ and S&P500 in March-May,2000.Roger Lowenstein is correct that there was a failure of"genius."However,this story is also about the unheeded warnings of Mandelbrot,an unrecognized genius.Lowenstein appears not to have wanted to include the whole story.A reader of this review is encouraged to buy Mandelbrot and Hudson's The (Mis)Behavior of Markets(2004).I have deducted one star from my rating due to L's failure to cover Mandelbrot.

Rating:
Summary: A must-read for anybody considering hedge funds
Review: If you are considering hedge funds because you think they are safer than other investments, read this book and then think again. Long-Term Capital Management combined the best and brightest of the financial world to cook up a financial folly that almost left the rest of our gooses cooked (only last-second intervention by the Fed prevented a second Great Depression).

Rating:
Summary: You can't model human behavior
Review: This book makes for an interesting read both for those who do not work directly in the area of finance and those who do. You shouldn't read this book expecting to find too many financial details about why LTCM failed. This is not a text book; it is the story of LTCM's demise as told by a journalist with some financial knowledge. Once can't help but feel that there is a certain vindictiveness in the narrative. Once almost gets the sense that the author either lost money during the period that LTCM was in business or was affected by it in some way. He repeatedly implies that the markets need be disciplined occasionally and that excessive risk taking should be punished. I believe he should have demonstrated a greater degree of impartiality when writing this book. Even so, it makes for an interesting read.