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When Genius Failed: The Rise and Fall of…
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When Genius Failed: The Rise and Fall of Long-Term Capital Management (edição 2001)

por Roger Lowenstein

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1,410249,706 (3.99)17
Picking up where Liar's Poker left off (literally, in the bond dealer's desks of Salomon Brothers) the story of Long-Term Capital Management is of a group of elite investors who believed they could beat the market and, like alchemists, create limitless wealth for themselves and their partners. Founded by John Meriweather, a notoriously confident bond dealer, along with two Nobel prize winners and a floor of Wall Street's brightest and best, Long-Term Captial Management was from the beginning hailed as a new gold standard in investing. It was to be the hedge fund to end all other hedge funds: a discreet private investment club limited to those rich enough to pony up millions. It became the banks' own favourite fund and from its inception achieved a run of dizzyingly spectacular returns. New investors barged each other aside to get their investment money into LTCM's hands. But as competitors began to mimic Meriweather's fund, he altered strategy to maintain the fund's performance, leveraging capital with credit on a scale not fully understood and never seen before. When the markets in Indonesia, South America and Russia crashed in 1998 LCTM's investments crashed with them and mountainous debts accumulated. The fund was in melt-down, and threatening to bring down into its trillion-dollar black hole a host of financial instiutions from New York to Switzerland. It's a tale of vivid characters, overwheening ambition, and perilous drama told, in Roger Lowenstein's hands, with brilliant style and panache. s performance, leveraging capital with credit on a scale not fully understood and never seen before. When the markets in Indonesia, South America and Russia crashed in 1998 LCTM's investments crashed with them and mountainous debts accumulated. The fund was in melt-down, and threatening to bring down into its trillion-dollar black hole a host of financial instiutions from New York to Switzerland. It's a tale of vivid characters, overwheening ambition, and perilous drama told, in Roger Lowenstein's hands, with brilliant style and panache.… (mais)
Membro:carmin73
Título:When Genius Failed: The Rise and Fall of Long-Term Capital Management
Autores:Roger Lowenstein
Informação:Random House Trade Paperbacks (2001), Paperback, 288 pages
Colecções:A sua biblioteca
Avaliação:
Etiquetas:Nenhum(a)

Pormenores da obra

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

  1. 10
    The Big Short: Inside the Doomsday Machine por Michael Lewis (browner56)
    browner56: The hubris, greed and mismanagement behind two of the most devasting financial collapses of the last 75 years, brilliantly and carefully told.
  2. 00
    The Ascent of Money: A Financial History of the World por Niall Ferguson (mikeg2)
    mikeg2: Like this book, The Ascent of money covers the major financial disasters that have taken place including the LTCM debacle.
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There's a graph at the very beginning of this book that's got to be one of the funniest displays of financial information I've seen in a while. It's very simple - a line showing the notional value of a dollar invested in Long-Term Capital Management over the firm's all-too-brief lifespan. The line climbs slowly from its beginning in March 1994, picks up speed through the intervening years, peaks at a bit over $4 in April 1998, and then drops off a cliff Wile E. Coyote-style to about 25 cents over the month of August that same year. You can practically see hedge fund managers jumping out of their windows.

Lowenstein's account of how this particular group of self-styled geniuses (including not one but two Economics Nobel laureates) met the depressingly inevitable fate of every other group of smarter-than-the-market Masters of the Universe is both well-written and informative, if somewhat slow towards the end when you read page after page of bankers asking each other if they should bail out the firm or let them eat cake. He's got a smooth writing style, not as gee-whiz or hero-worshipping as Michael Lewis, and though I wish he would have gone into a little more detail about the math behind their trading strategies solely for the nerd value, you can only expect so much from a popular work.

One thing that really stood out to me is how many names in the book could have been pulled straight from the headlines of the subprime crisis a decade after the book was set - Sandy Weill, Robert Rubin, Jon Corzine, Gary Gensler, etc. Finance is an unusually small world, and one of many ironies in this book is how dependent the principals of LTCM became on the assumption of personal goodwill between them and the banks they were asking for a bailout, given how impersonal and arrogant they became when they were on top. Despite Lowenstein's attempts to humanize them, they come off like every other hedge fund jerk you've read about, as exemplified in one particularly vomitous exchange:

The Merrill team was impressed with the arbitrageurs, who golfed with as much élan as they traded. Daniel Napoli, Merrill's risk manager, quipped, "If they could have earned a Ph.D at golf, they would have." Stephen Bellotti, who ran foreign currency trading at Merrill, turned to Myron Scholes at one of these weekends and playfully demanded, "Myron, what do you have more of - money or brains?" Scholes shot back: "Brains, but it's getting close!"

But the story of LTCM is unusually important for several reasons, because of the number of people who played large roles in the current financial crisis, because of what a big precedent the firm's too-big-to-fail status set, and because of the completely non-existent role played by regulators. The specific details of their trading strategies - highly leveraged arbitrage trades and bets on the convergence of bond yields - are not as important as their ignorance of tail risk, as Nassim Taleb has made a career out of discussing, and willingness to mindlessly leverage themselves to the skies. Some of the very same banks sitting around the New York Fed conference tables pondering how many pounds of flesh to take out of the reeling firm would be back a decade later to beg for their own lives, and it's worth considering how this incestuous network of half-bright suits gets to hold so much power over the broader economy, and how even half-measures to prevent these crises like Dodd-Frank get denounced as socialist.

It's an article of faith that macro stability in a market or in an ecosystem requires micro instability - repeated small fires in an area are healthy and restorative, while artificially suppressing them merely guarantees that when fires do happen they're vastly more destructive. Similarly, in order for a financial system to be healthy, there can't be any such thing as a too-big-to-fail bank or firm lest the entire network collapse under moments of great stress. In much the same way as the risks LTCM were speculating on weren't the uncorrelated random-walk events their Black-Scholes models assumed, the actions of the people who destroyed billions in value weren't uncorrelated precisely because they either studied together or were literally the same people who had made similar judgments before. The kind of anti-social behavior that Lowenstein recounts here, even the seemingly harmless kind of dickish condescension of one banker to another, has real consequences for people, and you won't be surprised at all to learn that barely a year after having to grovel before his rescuers, CEO John Meriwether was back in the game with an identical prospectus for the next round of suckers. That old Donald Trump line about how if you owe the bank $10,000 it's your problem but if you owe $10 billion it's their problem is funny when it's just between Trump and his bankers, but not so much when it becomes the taxpayer's problem.

One final amusing quote about risk and uncertainty:

The problem with the math is that it adorned with certitude events that were inherently uncertain. "You take Monica Lewinsky, who walks into Clinton's office with a pizza. You have no idea where that's going to go," Conseco's Max Bublitz, who had declined to invest in Long-Term noted. "Yet if you apply math to it, you come up with a thirty-eight percent chance she's going to go down on him. It looks great, but it's all a guess". ( )
  aaronarnold | May 11, 2021 |
Long-Term Capital Management (Subject)
  LOM-Lausanne | May 1, 2020 |
The main story here runs 1993 to 1998, from the start of LTCM to its collapse. There are lots of bits and pieces to the story. There is the arrogant confidence of the partners. There's how they bamboozled big bucks from investors. There's the backdrop of the ups and downs of Asia, Russia, etc., bonds and spreads and currencies and equities going up and down. This is a pretty short book that runs through the basics but doesn't drill down too deep anywhere.

The book does quite a good job of explaining to those not in the know about various financial bits and pieces. The star of the show is the Black-Scholes pricing for options. Lowenstein explains how this is based on random walks and Gaussian distributions. The whole LTCM business was based on crazy complex mathematical games. Lowenstein unpacks the games quite well.

My biggest complaint here is the way he diagnoses the errors of LTCM. I would point out three levels of mismatch between the efficient market hypothesis and reality. The most basic is the prevalence of fat tailed distributions in the place of Gaussian distributions. The next level is that the market is dominated by human behavior with all its wildness, e.g. folks getting swept up in whatever panic or enthusiasm of the day. The third level is that reality always stretches past any mathematical model. Lowenstein mentions all three of these problems, but he seemed to scramble them a bit. Fat tailed distributions can be modeled mathematically with wonderful precision - of course, there are many such distributions, but one can accumulate a shelf-full of books about them (trust me on this!) Even human behavior is not utterly impossible to model mathematically. No doubt even the breaking of waves on a rocky shore is going to exceed precise mathematics, and human behavior much more so. But if I were building models to support risk management on large portfolios, I'd be building fat tailed models that incorporate models of human behavior... and still leaving room for those frontiers of reality that exceed models. One method for addressing those frontiers is to work with multiple scenarios and with multiple models.

The copyright of the book says 2000. I'd say the copy got finalized in the early months of 2000. It'd be interesting to get another look at LTCM from the perspective of the 2000 crash, and especially of the 2008 crash. What's around the corner now, one is inspired to wonder! ( )
1 vote kukulaj | Mar 22, 2019 |
This book examines the history of Long Term Capital Management, a firm that failed during the 1998 financial crisis, and explains how the firm was built and constructed, and why it collapsed. Pretty vivid writing (my copy was annotated by a previous owner with many "!"), though the snark and schadenfreude levels tend to put one off a little bit. No one in the book comes off particularly well; Merrill Lynch probably the least badly off, and Goldman, Sachs comes across as a greedy villain, almost as bad as the protagonists. The explanation for why LTCM failed does seem to me to make sense, but as I say, the schadenfreude level is a bit off-putting. Still, recommended. ( )
  EricCostello | Feb 5, 2019 |
This book is about the four-year journey of one of the most infamous hedge funds in history. It outlines it's four-year lifecycle, from 1994 to 1998, starting with an monumental raise of $1.5 billion and concluding with a $3.6 bailout by sixteen financial institutions, organized by the Federal Reserve.

The sector in which their money was made is the world of bond arbitrage. Arbitrage is about making money not in the rise and fall of asset prices, but in profiting on the spread between similar or almost identical assets. Spreads, on bonds in particular, are infinitesimally small. The only way to consistently make significant sums money on them is if you work on a massive scale with massive leverage [in LTCM's case, 30:1].

The monumental failing of the mathematicians behind this fund was that they assumed the economy was a collection of totally random incidents. They thought it would be absolutely impossible for a trend to carry through the entire economy. Such an oversight is utterly bizarre, as obviously, the global economy experiences meta-trends all of the time.

The book is very well researched and is a good mix of facts along with a narrative surrounding the personalities of the people involved.

I would have liked to have heard a greater analysis of the systemic risks that led to the bailout, but it could be that this information just doesn't exist. Maybe the instabilities caused by LTCM were just totally unpredictable, and that's why they were assumed too much of a risk. ( )
  willszal | Jan 10, 2017 |
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LTCM is a great story/fable populated with memorable characters. Lowenstein does a nice job in pacing the story and I recommend reading the book for these reasons alone. There is a certain pleasure reading about the demise of the haughty and rich (or least people characterized that way). The book fails, however, in communicating a convincing moral. Lowenstein views the LTCM failure as a warning about applying high-tech, financial models and theories of efficient capital markets to financial markets that "are not always reasonable."
 
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Picking up where Liar's Poker left off (literally, in the bond dealer's desks of Salomon Brothers) the story of Long-Term Capital Management is of a group of elite investors who believed they could beat the market and, like alchemists, create limitless wealth for themselves and their partners. Founded by John Meriweather, a notoriously confident bond dealer, along with two Nobel prize winners and a floor of Wall Street's brightest and best, Long-Term Captial Management was from the beginning hailed as a new gold standard in investing. It was to be the hedge fund to end all other hedge funds: a discreet private investment club limited to those rich enough to pony up millions. It became the banks' own favourite fund and from its inception achieved a run of dizzyingly spectacular returns. New investors barged each other aside to get their investment money into LTCM's hands. But as competitors began to mimic Meriweather's fund, he altered strategy to maintain the fund's performance, leveraging capital with credit on a scale not fully understood and never seen before. When the markets in Indonesia, South America and Russia crashed in 1998 LCTM's investments crashed with them and mountainous debts accumulated. The fund was in melt-down, and threatening to bring down into its trillion-dollar black hole a host of financial instiutions from New York to Switzerland. It's a tale of vivid characters, overwheening ambition, and perilous drama told, in Roger Lowenstein's hands, with brilliant style and panache. s performance, leveraging capital with credit on a scale not fully understood and never seen before. When the markets in Indonesia, South America and Russia crashed in 1998 LCTM's investments crashed with them and mountainous debts accumulated. The fund was in melt-down, and threatening to bring down into its trillion-dollar black hole a host of financial instiutions from New York to Switzerland. It's a tale of vivid characters, overwheening ambition, and perilous drama told, in Roger Lowenstein's hands, with brilliant style and panache.

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