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When Genius Failed

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When Genius Failed

The Rise and Fall of Long-Term Capital Management

Random House,

15 min read
10 take-aways
Text available

What's inside?

Long-Term Capital Management had everything going for it: brilliant management, whiz-bang science, sweetheart financing, and it failed, anyway – because what's supposed to happen doesn't always happen.

Editorial Rating

9

Qualities

  • Innovative

Recommendation

This riveting page-turner reads like a financial thriller and is all the more compelling for being true. Author Roger Lowenstein has a knack for establishing character quickly and capturing the way that ego, hubris and Wall Street’s herd mentality came together to create a crisis that threatened a global financial meltdown unseen since the Great Depression, or perhaps never seen at all. At a time when markets have assumed an unprecedented stature, this is a powerful cautionary tale for financial professionals and those who idolize them. Lowenstein’s clear analysis shows that little has changed since the heyday of Long-Term Capital Management. In other words, brace yourself, because the conditions that made this crisis possible still exist. getabstract.com puts this book on the required reading list for investors, money managers, bankers and policymakers who are pondering the proper extent of regulation and financial

Summary

The Rescue

On September 28, 1998, the Federal Reserve Bank of New York and its president, William J. McDonough, hosted an unprecedented secret meeting of the heads of every major Wall Street bank. The reason for the meeting was the incipient failure of Long-Term Capital Management (LTCM), a Connecticut-based bond arbitrage firm. This firm had been the envy of Wall Street for four years, racking up returns of 40% per year with almost no volatility and - seemingly - no risk. It had accumulated $100 billion in assets, almost all of it borrowed from the banks at the meeting. LTCM had entered into $1 trillion worth of derivative contracts. If it defaulted, every bank on Wall Street would face huge, intolerable consequences. McDonough told the bankers there was a real systemic risk, a chance that the entire network of world financial markets could seize up or collapse. He said that the only way to avoid a global panic was for the banks in the room to work together, pool their resources and bail out LTCM. Bear Stearns, which had been clearing Long-Term’s trades, was especially fed up with the firm and its partners. When Bear Stearns’ chairman, James Cayne, bluntly stated that his...

About the Author

Roger Lowenstein reported for The Wall Street Journal for more than a decade. He wrote the Journal's "Heard on the Street" column from 1989 to 1991 and the "Intrinsic Value" column from 1995 to 1997. He now writes for Smart Money magazine. He is the author of the bestseller, Buffett: The Making of an American Capitalist.

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    R. A. 6 years ago
    What a Greek Tragedy

    LTCM was gaining more bucks than George Soros and its founders believed they were unfalaible, but the final was different.

    The financial desaster was so big that the US govt intervined.

    I am fascinated with two geniuses who built the black box.
    Too much learn to read and understand.