When Genius Failed The Rise and Fall of Long Term Capital Management Paperback 2 Jan 2002

by Roger Lowenstein

Genres: Business

Paperback

About the author

Roger Lowenstein is an American financial journalist and writer. He graduated from Cornell University and reported for The Wall Street Journal for more than a decade, including two years writing its Heard on the Street column, 1989 to 1991. Born in 1954, he is the son of Helen and Louis Lowenstein of Larchmont, New York. Lowenstein is married to Judith Slovin.
He is also a director of Sequoia Fund. In 2016, he joined the board of trustees of Lesley University. His father, the late Louis Lowenstein, was an attorney and Columbia University law professor who wrote books and articles critical of the American financial industry.
Roger Lowenstein's latest book, Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War, was released on March 8, 2022, and won the 2022 Harold Holzer Lincoln Forum Book Prize.

Reviews

[André Jan · Rating 3 out of 5]

Modern Finance seems more like a buddy cop movie than a serious jon

[Steven H · Rating 5 out of 5]

AN EXCELLENT HISTORY OF THIS (NOW DEFUNCT) INVESTMENT FIRM

Roger Lowenstein has also written 'Origins of the Crash: The Great Bubble and Its Undoing,' 'The End of Wall Street,' and 'Buffett: The Making of an American Capitalist.'

He observes, "Long-Term deftly exploited the banks' hunger for fees, pushing them to do business on the most advantageous of terms. The fund traded on razor-thin margins, cutting out the normal profit the banks could expect from servicing such a behemoth. But the banks didn't stop dreaming that Long-Term would deliver them a profit at the end of the rainbow; like frustrated but hopeful parents, they kept favoring their incorrigible child with treats." (Pg. 82)

He explains, "Readers may be excused for wondering how Long-Term could borrow so much toward the purchase of stocks... When Long-Term purchased stocks, it of course built its equity positions without buying actual securities. Rather, the fund entered into derivative contracts that mimicked the behavior of stocks." (Pg. 102) He adds, "The bankers were too busy making money to bother about the risks of the shoddy disclosure in this fast-growing business." (Pg. 104)

As the crisis approached, "everything was not fine. Long-Term, which had calculated ... that it was unlikely to lose more than $35 million on any single day, had just dropped $553 million---15 percent of its capital---on that one Friday in August... Since the end of April, it had lost more than a third of its equity." (Pg. 147) Later, he adds, "Theoretically, the odds against a loss such as August's had been prohibitive... But it had happened to Long-Term... The dice were not being thrown at random, or at least they seemed as if tossed by the same malevolent hand." (Pg. 159-160)

After the major banks (with the prompting of the Federal Reserve) agreed to jointly bail out LTCM, James Cayne of Bear Stearns refused to participate. "The Bear CEO said, 'We called this morning to tell people we wouldn't be in.' There was a deathly silence... Purcell of Morgan Stanley turned beet red. He fumed, 'It's not ACCEPTABLE that a major Wall Street firm isn't participating!' It was as if Bear were breaking a silent code; it would pay a price in the future, Allison vowed." (Pg. 205)

For LTCM executive Meriwether, "it was a horror of a different sort. Everything he had done since the scandal at Salomon [Brothers] had been, at least in his mind, aimed at restoring his reputation and career. Now it had all come crashing down. The most inward of men, Meriwether had become a public figure identified with the arrogance, greed, and speculative folly of Wall Street taken to staggering excess." (Pg. 209)

He notes in the end, "The fund's employees, like those at most Wall Street firms, had gotten most of their pay in the form of year-end bonus money. Most of those bonuses had been invested in the fund and went down the drain... The fund offered a small severance package, but even this was a carrot for which [they] exacted a price. Departing staff members were cajoled into signing termination agreements in which they repeated a pledge never to say a word about the fund---as if the partners feared the revelation of some secret shame." (Pg. 225)

This is a fascinating and very insightful recounting of the story of Long-Term Capital Management.

[bruceys books · Rating 4 out of 5]

Took a while to get through this, concepts are explained fairly. Some drawn out chapters.

[Rahim Hussain · Rating 4 out of 5]

Cool story, well written. Good lessons of caution. Obviously quite financy.

[Farzana Huysman · Rating 5 out of 5]

Fascinating to learn about the world of derivatives in the late 90s