When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein Random House, September 2000, 264 pages Review score: *** out of ***** The classic image of a Wall Street market trader is someone, usually a man, on the trading floor, shouting buy and sell orders, clutching a sheaf of trading tickets.
There is a certain pleasure reading about the demise
the LTCM failure as a warning about applying high-tech, financial models
The
Rather, the banks relied on the brand name that
However, too much intellect can lead to too much arrogance, which can lead to the destruction of an otherwise extremely successful hedge fund. We examine economic issues that deeply affect our communities. of confusing the failure of a firm with the failure of markets. does a nice job in pacing the story and I recommend reading the book for
first place.
with access to easy money, facing increasing competition over time, shifting
seems to be a calculated risk that financial markets should encourage
Indeed, the expectation of future
than standard modeling assumptions project. technology or of financial markets as a whole.
of quality rather than investigating a product thoroughly, the banks
However, Lowenstein provides numerous examples suggesting that
that worked at first ultimately fail when subjected to the foibles
experience. book, "Everyone was catching up to us.
Ultimately,
the LTCM crisis in the first place. When Genius Failed.Random House, Inc. New York, NY. an unfavorable shift in prices. We provide the banking community with timely information and useful guidance.We strive to advance policy that promotes economic well-being.The book suggests that the lenders were clueless as to the nature
the banks. Wrapped up in such
effort, those that funded LTCM and the partners themselves would
Just as consumers might look to a brand name for a sense
My version of the story, based on Roger Lowenstein's When Genius Failed: The Rise and Fall of Long-Term Capital Management, would read as follows: Sorcerers (Mathematically oriented bond traders led by John Meriwether) make the humans they serve rich (the investment banking firm Salomon Brothers).
loss, we are more likely to see a repeat of the behavior that produced
The group included economists who had pioneered financial tools
who had contact with the magicians get burned (the investment banks
bode well for LTCM as it meant competition, from new entry and imitation,
that all the banks used, a former central banker with first-hand
hindsight to be based on large, but surprisingly run-of-the-mill
to markets it does not know well and relying on a strategy that leaves
of the Fed's role in the LTCM resolution outweigh potential costs.
He has published six books, half of them New York bestsellers. In fact, the one potential systemic
the U.S. government?
As one LTCM partner puts it in the
But, the Fed, putting a very high value on limiting
Lowenstein views
Nothing
of these events, Lowenstein provides enough evidence to weaken his claim
My version of the story, based on Roger Lowenstein's As they lord over mere mortals (the investment banks that provide
now, enjoy Lowenstein's fable but come up with your own more satisfying
these reasons alone. Lowenstein seems to have fallen into the trap
partner summarized the firm's strategy, "What we did is rely on
Perhaps with time we will have a clearer sense if the benefits
saw his net worth drop from $500 million to -$24 million).
A partner at LTCM described their technique as scooping up
the gods who intervened during the crisis (the Federal Reserve Bank
There is also a general suspicion about the stability
Read on to learn about how mathematical models of the market were rendered useless by the unpredictability of human behavior,...Roger Lowenstein is an American financial journalist and writer. At least
the crisis.
that LTCM was a firm where model devotion ran amok.
market turbulence, did lend its prestige to the effort to resolve
of New York) faced skepticism from previously fawning acolytes.LTCM is a great story/fable populated with memorable characters. notes that by halting that process and encouraging protection, the
...We'd put on a trade, but
1995. As one LTCM
Federal Reserve Bank of Minneapolis: Pursuing an Economy that works for all of us.
probably tell an equal number of stories where relying on a brand
News, author interviews, critics' picks and more.
However, it was only through leverage that such
loose nickels created when prices in financial markets got slightly
They understood that losses that occur infrequently could be larger
Lowenstein, Roger.