I suppose I've now read the canon, from Den of Thieves to Too Big to Fail. This was the weakest of the lot--the writing was clumsy (especially in metaphor)--and it was missing Stewart's spark. Although knowing it would happen again much worse in ten years hurts a little bit at well. ( )

Book on the collapse of the arbitrage firm Long Term Capital Management in 1998; one that's pretty scathing on the protagonists all over the board, more or less condemning LTCM as a batch of arrogant dupes, and the Wall Street banks as greedy dupes. It can be a bit breathless at times (why the author chooses to put millions and billions in italics constantly is a mystery), but the overall analysis is quite intriguing. An epilogue tying in the 2008 collapse, I think, feels flat and tacked-on. ( )

There's a graph at the very beginning of this book that's got to be one of the funniest displays of financial information I've seen in a while. It's very simple - a line showing the notional value of a dollar invested in Long-Term Capital Management over the firm's all-too-brief lifespan. The line climbs slowly from its beginning in March 1994, picks up speed through the intervening years, peaks at a bit over $4 in April 1998, and then drops off a cliff Wile E. Coyote-style to about 25 cents over the month of August that same year. You can practically see hedge fund managers jumping out of their windows.

Lowenstein's account of how this particular group of self-styled geniuses (including not one but two Economics Nobel laureates) met the depressingly inevitable fate of every other group of smarter-than-the-market Masters of the Universe is both well-written and informative, if somewhat slow towards the end when you read page after page of bankers asking each other if they should bail out the firm or let them eat cake. He's got a smooth writing style, not as gee-whiz or hero-worshipping as Michael Lewis, and though I wish he would have gone into a little more detail about the math behind their trading strategies solely for the nerd value, you can only expect so much from a popular work.

One thing that really stood out to me is how many names in the book could have been pulled straight from the headlines of the subprime crisis a decade after the book was set - Sandy Weill, Robert Rubin, Jon Corzine, Gary Gensler, etc. Finance is an unusually small world, and one of many ironies in this book is how dependent the principals of LTCM became on the assumption of personal goodwill between them and the banks they were asking for a bailout, given how impersonal and arrogant they became when they were on top. Despite Lowenstein's attempts to humanize them, they come off like every other hedge fund jerk you've read about, as exemplified in one particularly vomitous exchange:

The Merrill team was impressed with the arbitrageurs, who golfed with as much élan as they traded. Daniel Napoli, Merrill's risk manager, quipped, "If they could have earned a Ph.D at golf, they would have." Stephen Bellotti, who ran foreign currency trading at Merrill, turned to Myron Scholes at one of these weekends and playfully demanded, "Myron, what do you have more of - money or brains?" Scholes shot back: "Brains, but it's getting close!"

But the story of LTCM is unusually important for several reasons, because of the number of people who played large roles in the current financial crisis, because of what a big precedent the firm's too-big-to-fail status set, and because of the completely non-existent role played by regulators. The specific details of their trading strategies - highly leveraged arbitrage trades and bets on the convergence of bond yields - are not as important as their ignorance of tail risk, as Nassim Taleb has made a career out of discussing, and willingness to mindlessly leverage themselves to the skies. Some of the very same banks sitting around the New York Fed conference tables pondering how many pounds of flesh to take out of the reeling firm would be back a decade later to beg for their own lives, and it's worth considering how this incestuous network of half-bright suits gets to hold so much power over the broader economy, and how even half-measures to prevent these crises like Dodd-Frank get denounced as socialist.

It's an article of faith that macro stability in a market or in an ecosystem requires micro instability - repeated small fires in an area are healthy and restorative, while artificially suppressing them merely guarantees that when fires do happen they're vastly more destructive. Similarly, in order for a financial system to be healthy, there can't be any such thing as a too-big-to-fail bank or firm lest the entire network collapse under moments of great stress. In much the same way as the risks LTCM were speculating on weren't the uncorrelated random-walk events their Black-Scholes models assumed, the actions of the people who destroyed billions in value weren't uncorrelated precisely because they either studied together or were literally the same people who had made similar judgments before. The kind of anti-social behavior that Lowenstein recounts here, even the seemingly harmless kind of dickish condescension of one banker to another, has real consequences for people, and you won't be surprised at all to learn that barely a year after having to grovel before his rescuers, CEO John Meriwether was back in the game with an identical prospectus for the next round of suckers. That old Donald Trump line about how if you owe the bank $10,000 it's your problem but if you owe $10 billion it's their problem is funny when it's just between Trump and his bankers, but not so much when it becomes the taxpayer's problem.

One final amusing quote about risk and uncertainty:

The problem with the math is that it adorned with certitude events that were inherently uncertain. "You take Monica Lewinsky, who walks into Clinton's office with a pizza. You have no idea where that's going to go," Conseco's Max Bublitz, who had declined to invest in Long-Term noted. "Yet if you apply math to it, you come up with a thirty-eight percent chance she's going to go down on him. It looks great, but it's all a guess". ( )

The main story here runs 1993 to 1998, from the start of LTCM to its collapse. There are lots of bits and pieces to the story. There is the arrogant confidence of the partners. There's how they bamboozled big bucks from investors. There's the backdrop of the ups and downs of Asia, Russia, etc., bonds and spreads and currencies and equities going up and down. This is a pretty short book that runs through the basics but doesn't drill down too deep anywhere.

The book does quite a good job of explaining to those not in the know about various financial bits and pieces. The star of the show is the Black-Scholes pricing for options. Lowenstein explains how this is based on random walks and Gaussian distributions. The whole LTCM business was based on crazy complex mathematical games. Lowenstein unpacks the games quite well.

My biggest complaint here is the way he diagnoses the errors of LTCM. I would point out three levels of mismatch between the efficient market hypothesis and reality. The most basic is the prevalence of fat tailed distributions in the place of Gaussian distributions. The next level is that the market is dominated by human behavior with all its wildness, e.g. folks getting swept up in whatever panic or enthusiasm of the day. The third level is that reality always stretches past any mathematical model. Lowenstein mentions all three of these problems, but he seemed to scramble them a bit. Fat tailed distributions can be modeled mathematically with wonderful precision - of course, there are many such distributions, but one can accumulate a shelf-full of books about them (trust me on this!) Even human behavior is not utterly impossible to model mathematically. No doubt even the breaking of waves on a rocky shore is going to exceed precise mathematics, and human behavior much more so. But if I were building models to support risk management on large portfolios, I'd be building fat tailed models that incorporate models of human behavior... and still leaving room for those frontiers of reality that exceed models. One method for addressing those frontiers is to work with multiple scenarios and with multiple models.

The copyright of the book says 2000. I'd say the copy got finalized in the early months of 2000. It'd be interesting to get another look at LTCM from the perspective of the 2000 crash, and especially of the 2008 crash. What's around the corner now, one is inspired to wonder! ( )

This book examines the history of Long Term Capital Management, a firm that failed during the 1998 financial crisis, and explains how the firm was built and constructed, and why it collapsed. Pretty vivid writing (my copy was annotated by a previous owner with many "!"), though the snark and schadenfreude levels tend to put one off a little bit. No one in the book comes off particularly well; Merrill Lynch probably the least badly off, and Goldman, Sachs comes across as a greedy villain, almost as bad as the protagonists. The explanation for why LTCM failed does seem to me to make sense, but as I say, the schadenfreude level is a bit off-putting. Still, recommended. ( )

This book is about the four-year journey of one of the most infamous hedge funds in history. It outlines it's four-year lifecycle, from 1994 to 1998, starting with an monumental raise of $1.5 billion and concluding with a $3.6 bailout by sixteen financial institutions, organized by the Federal Reserve.

The sector in which their money was made is the world of bond arbitrage. Arbitrage is about making money not in the rise and fall of asset prices, but in profiting on the spread between similar or almost identical assets. Spreads, on bonds in particular, are infinitesimally small. The only way to consistently make significant sums money on them is if you work on a massive scale with massive leverage [in LTCM's case, 30:1].

The monumental failing of the mathematicians behind this fund was that they assumed the economy was a collection of totally random incidents. They thought it would be absolutely impossible for a trend to carry through the entire economy. Such an oversight is utterly bizarre, as obviously, the global economy experiences meta-trends all of the time.

The book is very well researched and is a good mix of facts along with a narrative surrounding the personalities of the people involved.

I would have liked to have heard a greater analysis of the systemic risks that led to the bailout, but it could be that this information just doesn't exist. Maybe the instabilities caused by LTCM were just totally unpredictable, and that's why they were assumed too much of a risk. ( )

A fairly well written account of yet another collection of typically greedy Wall Street bankers. A good book to read if you want to learn the definition of hubris (and the OED entry is to short for you). It does need a bit of an update, to incorporate the latest instance of avarice nearly collapsing the world economy. ( )

The sin of arbitrage isn't that it is impossible. It *is* possible to exploit market inefficiencies and make a profit. But those profits are usually very, very small. Which means that it requires an enormous investment to make any real money. You have to borrow to get enough cash to make the small percentage profit worthwhile. So the sin of arbitrage is leverage.

And even leverage can be handled. You can work with it. For a while. Like a cocaine habit. But since you are dealing with the real world, where new things come along now and again; and with people, whose reactions can be hard to predict, accounting for all the risks is, really, impossible. So even geniuses are faced with the possibility that their risk models aren't sufficient. That they will, quite suddenly, be on the line for massive margin calls (the collateral on all that money they borrowed to lay down their many, many small-profit bets) that they just can't meet. And even if this is only the result of a short-term market irrationality (YOU ARE, AFTER ALL, PLAYING THE GAME OF MARKET IRRATIONALITY) you must pay or, as LTCM--the genius-packed company that is the subject of this book--had to, go bankrupt. Lowenstein's book is a good basic telling of this story, but he unfortunately doesn't seem to really appreciate the richness of the irony when a company that runs on exploiting irrationality gets eaten by another aspect of that same human irrationality. And is outraged. ( )

if you enjoyed the book "Inventing Money" consider this that books sister – not twin – whereas Inventing Money is very heavy on financial modelling, this book is very heavy on the personalities that invented convergence arbitrage. ( )

While a better title might be “When Hubris Failed,” Lowenstein still tells an engaging and comprehensible story of fools who thought they were too smart to go broke, and turned out to be too big to fail. Indeed, after crashing a multibillion-dollar fund, many though not all of the principals went back to merely gorging themselves like ticks on the body politic, earning outrageous Wall Street salaries and waiting once again for the government to come fix the problems their risk-taking caused. The basic problems were simple: LTCM thought that it could arbitrage irrationalities in the market, but as more and more people figured out those irrationalities, it was required to take more and more risk for less and less profit—aka supply and demand, except that when the demand is for risk and when you can leverage (borrow) to multiply your exposure then things can go very wrong indeed. Moreover, LTCM’s model assumed that markets would behave pretty much as they’d done during the period covered by its models, which they then didn’t; as Nassim Taleb and others have pointed out, the market can stay “irrational” longer than you can stay solvent—unless of course Uncle Sam rides to your rescue, which poses a pretty serious moral hazard problem of its own. The most awful thing is that this wasn’t the last act: LTCM’s implosion demonstrated how dangerous derivatives were and how deluded Wall Street had become, and yet neither the government nor the market participants—too enamored of their bonuses and their short-term greed—took action to avoid another disaster. It’s as if there was a second Titanic following the first that didn’t even bother to change course. ( )

This book is aptly named as it delivers just what the title implies. Young John Meriwether began his career as a high school math teacher. After only one year of teaching he enrolled in the University of Chicago and began work to attain a business degree after which he was hired by the investment giant, Solomon Bros. Just as inflation was changing the way bonds were sold and held, Meriwether entered the field in the mid 1970’s as a bond trader. Being one to adapt to a situation he found a niche for himself working within a division of Solomon and with other egghead intellectuals or quants, if you will. The quants, using quantitative methods , historic data and computer models, played the market to their advantage. Meriwether soon left his division of Solomon to create his own firm, Long Term Capital Management. By using an increasingly large amount of leverage to purchase bonds and work the spread Long Term became quite a significant power on Wall Street in just a short period of time. Still, Meriwether, his ultra private partners, and Nobel Prize winner mathematicians could not have foreseen the world events that transpired in the later part of the 1990’s which had a negative effect on their investments. They had sent themselves on a course for disaster.
This book could have been just another rehashing of Wall Street greed but it is more than that. Lowenstein offers up enough information about the major players to humanize them, each with their own foibles, ambitions and wants. The reader who is not familiar with John Meriwether and Long Term Capital Management will be on the edge of their seat as the story unfolds watching each personality react to dire situations. ( )

This book traces the rise, fall, and rescue of Long-Term Capital Management, perhaps the most celebrated (and infamous) hedge fund in history. It is a remarkable account of how a lot of really smart people—from the fund’s partners to its bankers to the regulators charged with protecting the public’s interest—did some things that, with the luxury of hindsight, proved to be very foolish.

It is a story with few heroes, but one with many lessons to be learned. However, beyond merely offering a cautionary tale of how greed, hubris, and myopia almost brought down the entire financial system, Lowenstein also provides the reader with an excellent description of the myriad investment strategies that continue to be employed by the hedge fund industry today. At the very least, this is a book that will challenge what you think you know about leverage, liquidity, and diversification. ( )

Just about as good as Michael Lewis, but less on the instant laughs and more on the long setup. I am now going to read everything Roger Lowenstein has ever written.

Excellent ...and frightening. Have we learned nothing? The '07-'08 "sub-prime" rose from the same thinking and behavior. Very well written. ( )

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. ( )

Note: I first read this and then read "Inventing Money" by Nicholas Dunbar on the same event.
Pros: a more personal and dramatic account; good readability
Cons: lack of more in-depth background knowledge on the derivatives and LTMC's positions; typical journalist reporting style rather than a more academic style ( )

I remember this to be captivating. I am not especially interested in hedge funds or Wall Street. I was interested in a current non-fiction about business and especially some dramatic turn of business events; I liked Barbarians at the Gate. This has about 2/3 of the movement, pace, and drama of that, or perhaps half, but it's enough.

I was especially surprised about the unique characters of some of the geniuses these hedge funds have and this one had. It's always fascinating to here about the maladaptive and weird personalities of these chess masters or math minds.

I would suggest this book to anyone who likes business, even though it's about finance a bit. ( )

Roger Lowenstein does a good job of telling this sort of story, making it far more interesting than the usual journalist's book about some business venture. But ultimately this is a depressing and frustrating book.

Not only do the principals involved not really get their just desserts, the mathematicians of finance involved don't seem to learn anything from the experience.

It seems to me that, among other things, the following could be added to the mathematics
* replace normals in certain situations with fatter-tailed curves
* construct finite universe models (ie models in which there is only so much demand and supply, and in which huge trades will result in a drying up of liquidity)
* dynamic rather than static models, ie models that, rather than assuming a stable equilibrium (thermodynamics), try to model exactly how things change (including, in the simplest case, how things approach equilibrium). Such a model might include different types of environments, leading to different dynamics, for example a bear market environment, a bull market environment and a panic environment. Thus we get something closer to statistical mechanics.

On the other hand, it may well be that the mathematicians know exactly how to make better models, but are also well aware that in spite of the rhetoric, the system will usually bail them out when something goes wrong, so why not take risks with high upside and limited downside? ( )

A wonderful account of the fall of LTCM. Well written and detailed - one of the better business books I have read. ( )

This is an awesome chronicling of the rise and billion dollar fall of the guys from Solomon brothers. Roger did some great investigative journalism. ( )

The best account I have hitherto read of leverage, lack of liquidity, and the meltdown of LTCM, as the dislocation and irrationality of the markets lasted longer than the rationality and solvency of their margins. Caveat emptor of securities. ( )

possibly the best finance book i've read. explains many arcance financial topics with brilliance. very well written ( )

See also papers in SH Archive Financial Institutions box 2.

Long-Term Capital Management (Subject)

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