Rating: 
Summary: Great read!
Review: Everyone in finance remembers the LTCM fall, but what really happened is astonishing. The amount of business and financial leverage is impressive until managers make the wrong bet on Treasuries.
Rating: 
Summary: Read only if interested in LTCM...
Review: ...If you haven't heard of LTCM, then the book might not be worth it.The book is about the spectacular rise (1994) and fall (1998) of the trading firm LTCM. You will find in this book: 1) what sort of trades LTCM made (mostly fixed-income arbitrage, less foreign exchange, much less plain stocks), 2) yearly (and at times daily, when LTCM was going bankrupt) balance of LTCM's accounting books, 3) (somewhat vaguely) counterparties involved in LTCM trades, 4) personnel in LTCM who made the trades; their personalities, 5) heads of Wall Street firms between 1994-1998. If any of the above interests you, you will find the book worthwhile, not only because the author does a fairly good job in chronicling the events, but also because there are not many sources available that cover the LTCM debacle. (I personally find it strange that such a talked about firm in the 1990s has such little "publicity.") On the other hand, contrary to the opinions of some reviewers here seem to hold, I would not go so far as to draw investment lessons from the book. To me this is history, dry as it should be.
Rating:
Summary: Entertaining dose of schadenfreude - but inferior product
Review: A couple of years ago I read Nick Dunbar's account of the LTCM collapse "Inventing Money", and a friend recently lent me this book. They make an interesting comparison. Dunbar - a physicist by trade - is more interested in the theoretical economics that went into the risk arbitrage fund in the first place and how this came unstuck. He gives a long description of the Black-Scholes model, what it says, and how it was used to pull off the risk "free" trades which made Long Term so much money for three or four years. Lowenstein, by contrast, barely mentions either the Black-Scholes model (he barely touches on option pricing at all, as a matter of fact) or the Italian convergence trades which eventually blew the gaffe on the fund, but instead tells the human story, exposes the inevitable egos, and indulges in more than a little smuggery (this book is long on wisdom after the fact) in dissecting the naivety of the LTCM hedging and trading strategy and the people who ran it. As long as he sticks to the egos and the posturing, When Genius Failed is a dandy read: the negotiations amongst the Wall Street top brass as the fund is going under rate with anything served up in Barbarians at the Gate, and as this is a large part of the book, it rips along quite nicely. But the schadenfreude grates: One of the lessons of the whole fiasco was that the smart money is with the guy who can predict the future: any old mug can be a genius with hindsight. Lowenstein spends a lot of his time wisely pointing out what the traders should have done. Additionally, Lowenstein employs some metaphors which indicate he might not have much of a grip on his subject: for one, he states "a bit of liquidity greases the wheels of markets; what Greenspan overlooked is that with too much liquidity, the market is apt to skid off the tracks." It's a poor metaphor, because it isn't excess liquidity which causes markets to skid, rather, it's the sudden disappearance of it. As this is the fundamental lesson of the Long Term story, it's a bad mistake to make for the sake of a smart-alec aphorism. Similarly, in the epilogue states, with regard to the putative diversification in the fund "the Long-Term episode proved that eggs in separate baskets *can* break simultaneously". Again, this conclusion is not supported by the text, which observes several times that in a market crash, liquidity drains and the correlation risk of instruments in the market goes to one: that is to say, it turns out all your eggs are in the same basket after all. Diversity wasn't the problem; the problem was you wrongly thought you had it. For these reasons I prefer Dunbar's more academic work: it may not be such a sizzling read, but nor does it misguidedly kick a fund when it's down.
Rating: 
Summary: An excellent book on a fascinating real business story
Review: The book reads very well. The character development of all the main players is in depth and fascinating. The story thread is coherent, and makes complex topics related to optionality and other bizarre aspects of the hedge fund world very easy to understand. Even though it is easy to read, there is a bunch of stuff for the finance practicioner too. On the more technical aspects of this story, here is what I learned regarding what can go wrong in financial modeling:
1) understating volatility by using too short a data period when establishing volatility assumptions;
2) making volatility a constant instead of a dynamic random variable;
3) omitting correlation between apparently unrelated markets;
4) running into issues when selecting statistical distributions; 5) assuming the market is inefficient in your favor to boost your estimated returns; Also, regarding investment theory, the book gives you another few gems. 1) You can exploit market inefficiencies, but typically not for very long within the same investment vehicle;
2) Don't go outside your field of expertise. What works in one area, may not work at all in another. LTCM was successful doing some arbitrage deals with long term Treasuries. They later applied the same technics to merger & acquisition situations in common stock, and got killed.
3) Leverage is a two edge sword even for Nobel prize laureates. With leverage, the risk often increases faster than the return.
4) When you deal with esoteric stuff, don't assumme the markets are liquid.
5) When markets go down, assumme that everything correlates to each other much more than when markets go up.
Rating:
Summary: A must read
Review: A real eye-opener into what happens behind the scenes on Wall Street. Valuable lessons for anyone in business and those starting out.
Rating:
Summary: Murphy's law claims another victim
Review: The LTCM experiment had several key flaws: i) there is no such thing as leveraged arbitrage. As soon as you introduce leverage, you are now just gambling that your arb will converge to "fair value" before your margin call gets triggered (or you run out of cash to pay your interest costs). ii) They ignored Hume's critique of induction. Models based on past action only describe the past. Using them to try to predict the future is nothing but a speculation that the future will be just like the past. This can be believed but never proven with certainty. iii) Implied odds. If market has moved a certain amount against you, the probability that your initial assessment of the market was correct is now lower than you at first thought (given that you have imperfect information). LTCM did not have any process which assigned an increasing probability of model error, relative to losses suffered. iv) The evolving nature of markets. Even if LTCM's model was correct, the fact of their attempting to profit from the model would invalidate the conditions upon which the model was based. v) Their capital structure and lack of stop losses/downside protection (e.g. options) meant that the bigger the losses they suffered, the more leverage they employed. This is the exact opposite of correct speculative procedure. When your capital base erodes, you must reduce your positions in proportion. In fact you should reduce them in greater proportion, to take account of the fact that the losses suggest your speculative position was not as good as you orginally thought it was. The book doesn't really cover these issues. There is still a lot that is interesting, but you can read the other reviews to learn about that.
Rating:
Summary: Insightful and Informative
Review: The best aspect of Mr. Lowenstein's book is its informational content. He provides a good chronology of events comobined with solid descriptions of the main characters -- many of whom are among the most famous personalities in world finance. Where the book falls somewhat short is in its explanation of why the debacle occurred and in the insights for regulators, market participants and others, as well as the legacy of this incident. Otherwise, this is a great book for general audience.
Rating:
Summary: An excellent account of what really happened!
Review: Before I read this book, I thought that I had quite an understanding of what happened to LTCM and the highly volatile market during Aug/Sept 1998. The book told me how ignorant I had been. In that period, some hedge funds were raiding HK, or simply all the world's markets. I remember that on one Sunday Drunkenmiller, the arm of Soros, had made a public statement to all HK people that HK govt's intervention would eventually turn futile leaving everyone poorer the next morning. Of course, we now know what happened, though the argument whether the HK govt should have intervened at all and the genuine effect of such is still a mystery. Shamelessly the HK government just took all the credit without any attribution to the series of events brought about by the default of the Russian govt debt and the animous contraction of credit lines by banks to hedge funds which led to the exodus of even profitable positions of hedge funds to meet margin calls and the so claimed success of HK govt's intervention. Anyway, the author did a good job of telling a story in a highly interesting manner. The charcters were vividly projected and the many causes that brought forward the whole debacle had been disclosed, amongst others, the relentless greed and pride of the LTCM partners, the indulgence and the uncontrolled urge for profit/ business from the banks, the neglience or perhaps ignorance of FED or specifically Greenspan on the destructive power of derviatives, the over reliance of the public on World Bank/IMF as a last resort, the frontrunning by some private bankers and traders, .....simply anything you can think of about Wall Street, a place where money is king, and moral and honor simply do not exist. Actually I have been really sad after reading the book. Our financial system had just been so fragile, and the mistake/selfishness of a handful can easily sacrifice the interest of the countless mass. In the absence of improved monitoring system/legislation by the govts, such a tragedy is doomed to repeat.
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Summary: Hedge funds and new challenges.
Review: I very much enjoyed this expose of long term capital and the hubris of fund managers. Hedge funds are still leveraging their bets, but now use newer products such as total return swaps and credit derivatives. "Credit Derivatives" by Janet Tavakoli, gives examples of how hedge funds use these products and the risks involved.
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Summary: Perfect informatiion of LTCM is reflected here
Review: Efficient Market Hypothesis (EMH) taught in finance textbooks has told us that prices reflect not just public information but all the information that can be acquired by fundamental analysis of the company and the economy. Therefore, prices would always be fair. Right? Wrong. The market said. The underlying assumption of EMH has led to the downfall of Long-Term Capital Management (LTCM) and Nobel Prize winner, Myron S. Scholes, better known as the inventor of the famous Black-Scholes model in pricing options. LTCM believed that imperfect information would lead to pricing differentials in assets of similar quality. Nevertheless, convergence would finally occur and the prices would move towards fair values. LTCM's strategy was to spot these discrepancies. Once they were discovered, the fund would take huge positions and wait for market perfection. Although the difference may be very mini, the substantial bet leverage the fund's profit margins. Unfortunately, investors and the market were irrational indeed. The Asian financial crisis and Russian default in 1997 and 1998 respectively made the market extremely volatile. Divergence instead of convergence emerged. The bet of the fund was placed at the wrong side. LTCM and its investors lost their shirts and the former was subsequently bailed out by investment bankers under the " co-ordination" of the Federal Reserve. Roger Lowenstein does not let his supporters disappointed. The book is a comprehensive coverage of LTCM. The background and personality of important characters such as John Meriwether, Robert C. Merton and Mr. Scholes are included. Numerous personnels are involved in the story but their title are frequently repeated so as to refresh the memory of the readers. The book also explores the fund's investment philosophy and explains the reasons behind its collapse. If you are interested in the story of LTCM, my advice is that you must not miss this book.
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