Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It

by Nicholas Dunbar

LTCM was the fund that was too big to fail, the brightest star in the financial world. Built on genius, by legends of Wall Street and two Nobel laureates, it spiralled to ever greater heights, commanding unimaginable wealth. When it fell to earth in September 1998 it shook the world. This is the story of the rise and fall of LTCM and the legends behind it. A brave and ambitious work, Inventing Money was written by leading financial journalist Nicholas Dunbar.

Genres: Finance, Business, Economics, History, Nonfiction

288 pages, Paperback

First published December 31, 1999

Reviews

[Doug · Rating 5 out of 5]

Easily one of the best books I have ever read. The knowledge I gained from this book is worth 10 times what I paid for it. When the global economy was put at risk a second time, 7 years after I read this book, I knew what to expect. Because of this book I have an understanding of debt-equity swaps, mortage-backed securities, arbitrage, and options trading.

LTCM nearly brought down the world economy - and would have if it weren't for the bailout. It's amazing that history repeated itself less than a decade later on a much larger scale.

[Athan Tolis · Rating 5 out of 5]

Transatlantic flight the other day, so spare time available. Pulled this off my shelf, where it had gathered dust for almost two decades.

Lots of filler about the history of finance here, but in fairness it was good filler, especially for the year this little book was written. The story about how Samuelson discovered Bachelier must be in a good ten books, at this point, and chances are they all cribbed it from here!

Away from the filler, there’s also lots of digging, a lot of good, informed journalism. So you get to find out what trades LTCM and its peers had on and what happened to those trades.

It’s not all correct, of course. The main Italian trade was much less heroic than this account claims it was: LTCM bought CcTs in the market, sold CcT asset swap packages to the world via a number of intermediaries, and all that left them with was a swap whereby LTCM received the coupons of the CcT bonds (which the author correctly identifies as the results of BoT auctions with some margin on top) and paid out lira LIBOR plus a spread.

This arb did not really force Italy’s spreads to converge vs. Germany, the clients must have wanted Italian exposure to begin with, and only bought these bonds because they swapped (slightly) better than BTp paper… (au contraire, a failed BoT auction would land LTCM more money)

There must be other mistakes lurking, but if you want technical stuff, if you’re looking for trade details (example: if you want to find out about how the French scoundrels weaseled their way out of their Russian trade with Cliff Viner) you’ve come to the right place.

On the other hand, if you want to find out more about the life and times of the sundry principals of LTCM, or a minute-by-minute account of the last month in the fund’s life, then the other book about LTCM should be your first port of call.

[Tim O'Hearn · Rating 4 out of 5]

A denser and more substantive historical and technical look at LTCM than When Genius Failed. In comparing the two books, it is interesting to see how certain aspects that were emphasized by Roger Lowenstein are minimized and glossed over by Nicholas Dunbar. Overall, it was much less exciting to read though provided admirable descriptions of complex topics.

[Nick Reminder · Rating 4 out of 5]

Interesting dive into the story of Long-Term Capital Management, a quantitative hedge fund that represented the union of modern finance theory (Nobel Prize-winning Black, Merton, Scholes) with Wall Street S&T experience (Salomon Bros. fixed income kings of the 1980s). Dunbar documents the preceding context well; who the players were, how the business worked, etc., and spends significant care to illustrate the mechanics behind market changes and trading strategies. We can then see how LTCM organically formed, burned incredibly bright, and exploded before our eyes in the late 1990s, as widespread market irrationality and turmoil quickly exposed the oft taken-for-granted underlying assumptions of academic finance.

[Moro Bamber · Rating 4 out of 5]

Excellent, in depth explanation of the true forces behind the market.

[John · Rating 5 out of 5]

The best account of what happened at Long-Term Capital Management. Dunbar does a better job of detailing the trading strategies than Lowenstein's When Genius Failed.

[Jak · Rating 5 out of 5]

I really enjoyed ‘Inventing Money’. I started working on the periphery of the financial markets in May 1998 so knew something big was happening with LTCM in Sept 1998 and that it was a huge structural problem for the market as a whole but hadn’t really understood what had happed until I read this book.

Dunbar keeps it as simple as possible without dumbing it down nor being patronising, a very tough skill that he achieved very well.

All in all it’s utterly amazing to me the hubris of the LTCM protagonists and how they glossed over some of the most fundamental and fatal ‘road humps’ that could derail their financial Nirvana. Even as Dunbar explained some of their theories, it seemed obvious to me that assumptions were made that we’re unrealistic. Markets would always be liquid, there would never eb more than three standard deviations etc.

Even more astounding is reading the book post 2008. Do the smartest guys in the room never learn? I’m sure Dunbar was sitting somewhere knocking his head against a brick wall as he saw exactly the same mistakes being made. Overly complicated illiquid products being bought and sold that no one understood! Leveraging beyond what should be acceptable! Essentially people making massive, gargantuan, oversized bets when they had no idea of the risk of losing.

If you’ve no interest in finical markets it’s probably a very boarding book, but if you are. It very, very good.

[Henrik Warne · Rating 4 out of 5]

Inventing Money tells the story of the rise and fall of Long Term Capital Management and its main characters. In parallel, it chronicles the development of much of modern finance theory, including the development of the Black-Scholes formula for option pricing.

Although I didn’t understand all the trading strategies described in the book, I think Dunbar did a great job explaining many of the concepts and technique, often with analogies, like “the garden of forking paths”. Therefore, this book is a good compliment to more technical books on option pricing etc.

It was also very interesting to see how seemingly foolproof trading strategies could unravel very quickly when underlying fine-print assumptions (like the assumption of liquid markets) were violated, and how liquidity problems could have severe consequences.

Also, the counterparties didn't know about the offsetting trades (because of secrecy from LTCM), so they thought the risk was higher than it actually was. Once there is a rumor that you are in trouble, you are in much more trouble. Everybody wants more collateral, and nobody wants to lend to you. It becomes a self-fulfilling prophecy.

All in all an interesting and educational read.

[Crunknor · Rating 4 out of 5]

A broader scope than When Genius Failed: The Rise and Fall of Long-Term Capital Management, but much more jargon-y.

[Andy · Rating 4 out of 5]

An alternative to "When Genius Failed".

[Jim · Rating 4 out of 5]

"The rise and fall of Long-Term Capital Management. How brilliant academics and traders made and lost billions of dollars. Good job of explaining wickedly complex modern finance."

[Jonathan Weinberger · Rating 4 out of 5]

Great introduction to quantitative finance (pre-CDO) together with the LTCM story. (Better than Lowenstein's book.) Of course, that financial crisis looks quaint now.

[Hasan Qureshi · Rating 4 out of 5]

I read it a while ago. I don't remember it well enough to give a detailed review. It's a well written book. I remember enjoying it when I read it.