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

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

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

Author: Roger Lowenstein

My Review Rating: 5/5

Date: 02-Oct-2020

This is an excellent book about the meteoric rise and spectacular fall of the highly vaunted hedge fund Long Term Capital Management (LTCM). The book aptly describes how greed, hubris and overconfidence led to its which was once considered to be non susceptible to failures. The firm boasted of a team that had a great leader in John Merriwether, top bond traders and acclaimed financial wizards including Nobel Prize winners, Myron Scholes and Robert Merton. They loved to called themselves Mathematicians! At its inception the fund raised $1.3 billion of investments from fund owner partners, employees, large sophisticated investors and investment banks. In its initial years it generated spectacular returns of upto 40%. The mathematicians at the fund believed that using their mathematical models they were able to deconstruct risk and could use exorbitant leverage to create the limitless wealth for themselves and their investors. However, four years later at the end of September 1998 their mathematical models had failed to factor in non-quantifiable factors such as greed and human behaviour when there is “flight to liquidity”, because of which their own models doomed them! The fund lost substantial amounts of the investor’s equity and because of excessive leverage, it was teetering on the brink of default and to avoid the threat of a systemic crisis to the world financial markets, the US Federal Reserve “orchestrated” a $3.5 billion rescue package from leading U.S. investment and commercial banks.

The book is very well researched and with a good amount of detail on what actually happened and what trades LTCM had on. To sum up, it is a good lesson in what can happen if you get too greedy and you believe that financial modelling can trump the human element. Furthermore, how it has been written and events described, I believe there could not have been a more suitable title to this. Although the events occurred around 20 years ago and a lot has changed in how the financial markets operate today, but given the recurrence of financial crisis (again can be ascribed to human greed) and notwithstanding that financial markets are more interlinked globally today, the book remains relevant and is a must read for all those who have interest in financial markets.

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