Eminently readable account of a complex debacle

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	• When Genius Failed: The Rise and Fall of Long-Term Capital Management Roger Lowenstein Random House Trade Paperbacks, 2001 - 288 pages average customer review:based on 212 reviews view larger image
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highly recommended

Never again in a hundred years? Perhaps . . .

This short book tells the story of the rise and fall of Long- Term Capital Management during the second half of the 1990s and the Wall Street investment banks that came to Long-Term's rescue. The author does a great job recreating the events through interviews with the key players and news coverage at the time, and the story he tells is beautifully written. I was mesmerized, wanting to know what happens next. I don't remember the event when it actually occurred because I was out of the country at the time and failed to follow the events on Wall Street. But now that I am working on Wall Street with an interest in private equity, I realized quickly that I needed to learn from other people's previous mistakes.

In short, this book is about how a small group of economic and financial geniuses raised an incredible sum of money in a short time, betting that the past was indicative of the future. The author argues, however, that the traders at Long-Term failed to account for the human factor and the fact that the market is not always rationale. In only a few months, the fund's billions had disappeared and the titans of Wall Street, which were all intertwined with the fund, had to step in under the auspices of the Federal Reserve to avoid a financial disaster. Once bailed out, the Long-Term traders brushed off the events of autumn 1998 as a fluke that occurred only once every hundred years. After completing the book, however, I am convinced that is not the case. Anyone willing to bet all they have on limited information with the result resting on numerous variables is bound to fall sometime - even if it's only twice a century.

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AWESOME book!

i'd write a long-winded review, but i'd only be repeating what everyone else has already said. THIS IS A MUST-READ FOR COLLEGE STUDENTS INTERESTED IN FINANCE. i cannot stress it enough. i've had job interviews where i just happened to slip LTCM out of my mouth and next thing you know we're having a 10 minute discussion about interest swaps and derivatives.

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LCTM Saga

Lowenstein presents a well-researched history of the LCTM scandal. This is a classic and well-told story of financial hubris. It should provide the basis for case studies in hedge fund follies for years to come.

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Story of Quants Made for the Non-Quants

This book is fairly well-written but is toned down to suit a mass audience. Of course, with such an approach, accuracy is sacrificed. However, this book was a decent read and it was not too dragging. It actually makes a quite boring discussion (at least for normal people) into something quite interesting. How can a quant book ever become a bestseller, right?! Well, I don't think that the book presents some of the finance concepts accurately. The discussion on market efficiency contained cherry-picked quotes, and does not truly present how the academe really views the theory of market efficiency. However, for the intended audience, this is clearly definitely not a big problem. Anyway, for those who want to read an interesting part of finance history and how financial derivatives got a bad name, you can benefit from reading this book.

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Eminently readable account of a complex debacle

Turning topics like bond arbitrage, volatility selling, and "flight to liquidity" into a crisp, condense, top-selling book is probably Lowenstein's crowning achievement with "When Genius Failed." He's a very talented writer with a knack for fleshing out a diverse array of colorful characters, and that makes this book appealing both to the interested layman, as well as all but the most curmudgeonly financial professional.

The book takes us back to Saloman's bond arbitrage desk, where the enigmatic John Meriwether first mastered some of the convergence strategies he and the brain trust would later use to great effect in Greenwich.

Then we learn some about how the fund's management was constructed, all the various places they drew money from, and ultimately observe the masters in action, placing their token efficient market bets that yield spreads just couldn't get any wider. All this leads up to 1998, where even early in the year certain cracks in the hull began to appear; namely concerns over vanishing opportunities in the bond arbitrage market (the rifraff had become wise to some of the professors' token strategies, thereby eliminating their effectiveness), and LTCM's extensions into fields beyond its expertise, particularly merger arbitrage. All this leads to the perfect storm of 1998, when the fund's short volatility positions exploded in a summer storm of apocalytic proportions. Lowenstein chronicled the actual debacle superbly.

One quibble is Lowenstein's cautioning reptition of how dangerous it is for traders/investors to use historical patterns to get a read on how the market might look in the future. While I agree that it's dangerous to bet 10,000% of your equity on the likelihood of a particular pattern repeating, one can't really trade without a healthy understanding of historical precedent. In the financial markets, history does repeat itself more often than not. So, I think LTCM's debacle was more the result of its gargantuan margin than a horrible, fatal flaw in its trading models.

All that aside, this is a great book, as fun to read as it is informative.

Highly Recommended

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reviews: 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, page 14, 15, 16, 17, 18, 19, 20

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