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

1 rating: 5.0
A book by Roger Lowenstein

On September 23, 1998, the boardroom of the New York Fed was a tense place. Around the table sat the heads of every major Wall Street bank, the chairman of the New York Stock Exchange, and representatives from numerous European banks, each of whom had … see full wiki

Tags: Book
Author: Roger Lowenstein
Publisher: Random House
1 review about When Genius Failed: The Rise and Fall of...

Logicians Snared in their Lair

  • Oct 5, 2010
By now Long-Term Capital Management's tale is well known. A group of hot bond arbitrage traders joined forces with a pair of future Nobel Prize winning academics to form a hedge fund that promised it had conquered the ogre of risk. As profits grew, greedy bankers and brokers stood in line to provide financing on the finest of terms. Yet, like other speculators before them, they failed.

The markets, as G. K. Chesterton wrote, lay "a trap for logicians . . .. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait."

While the hedge fund's history is familiar, Lowenstein's conclusions are worthy of examination by both historians and investors.

1. Long-Term Capital Management's (LTCM) profits look less impressive in light of the losses that followed. The "profits" used by bankers and brokers to justify their loans and investments in the fund were not "earned", merely borrowed against the day the tide turned.

2. LTCM saw the cycle was turning, yet refused to limit its exposure. As spreads markets withered, the partners opted to increase their leverage to maintain returns.

3. The fund had faith in diversification. Its history serves as ample notification that eggs in different baskets can and do all break at the same time.

4. One can be big - read illiquid; one can be leveraged, but to be both is begging for trouble. No one can be right every trading day.

5. Traders are not computer chips. They are motivated by emotions; they run in herds, they retreat in hordes. Uncertainty will never conform itself to a numeric straitjacket despite the risk defining desires of the academic community.

This book tells a timeless tale. Markets are cunning animals, there to exploit investors' mistakes and hubris.

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