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

This is a very interesting book... Reading through the whole book is like watching a thrilling drama.... The ups and downs in the LTCM are like a roller coaster where success and failure is either a thin or fine line along the journey... In fact, this is not the first time I read about LTCM. Many years ago, Nick Dunbar's "Inventing Money" was my favourite for a while and the said book still remains on my shelf...However, I think this is a better book as Nick Dunbar focus too much on the theoretical economics. At least, Roger Lowenstein (being the author of Warren Buffet biography) is good in telling stories... more of a human story!

This book is divided into two parts. First major part focuses on the rise of LTCM, while second part talks about the fall of LTCM. On the first rising part, there are few interesting events and statements:

1. Having worked at major Wall Street bank, J.M. felt that investment banks were rife with leaks and couldn't be trusted not to swipe his trades for themselves... As a precaution, Long-Term would place orders for each leg of a trade with a different broker... Even Long-Term's lawyer was kept in the dark. ~~~ What J.M. felt is true in real life... Contradict to usual perception that the world of investment is correlated with power, money and cash; "low profile" obviously is the key here...

2. LTCM on 25% of profit with 2% charge on assets plus the lockup period of 3 years, which was unheard... Some more, people have serious doubt with Meriwether after he had been sanctioned by SEC in the Mozer affair in Soloman's office. ~~~ Wow!!!! 25% + 2% is incredible stuff in US!!! So, of course "unheard", LOL.

3. There is a reason why financial markets run to extremes more often than coin flips. A key condition of random events is that each new flip is independent of the previous one... But market has memories. Sometimes a trend will continue just because traders expect (or fear) that it will. Investor may slavishly follow the trend for no other reason than that they think enough others will do likewise. ~~~ How true... That is why the market does not fit the ideal of rational investors in efficient market.

4. Over time, market does correct their mistakes... But, what if, before prices corrected, they got further - drastically further - out of line? ~~~ Spot on... this is why timing and money management is so important!

5. As their third year drew to a close, the partners collectively had a stake in the fund of $1.4 billion, nine times their initial $150 million investment. It was an incredible fortune to have made in so little time- and all from bond spreads! The partners' nervy decision to keep redoubling their bets had vaulted them into the super rich overnight. ~~~ Wow!!! Mr. Greed arriving...

6. Their hunger to turn millions into billions knew no bound, nor did it recognise any risks. For men who prided themselves on being disciples of reason, their drive to live on the edge seemed inexplicable, unless they believed that becoming the richest would certify them as also being the smartest... Hilibrand personally borrowed $24 million more from Credit Lyonnais, which set up a program to let the partners borrow against their interests in the fund. ~~~ Wow!!! Mr. Greed in control, LOL.

On the "fall" of LTCM:

1. True, it had happened in 1987 and again in 1992. But, Long-Term's models didn't go back that far. As far as Long Term knew, it was a once-in-a-lifetime occurrence- a practical impossibility. ~~~ A very good reminder to those who think analysing a short brief data is good enough...

2. There was no liquidity in credit markets. There never is when everyone wants out at the same time. This is what the models had missed. ~~~ Dreadful and horrible at the end...

3. When you need money, Wall Street is a heartless place. ~~~ 100% agreed!

4. Goldman represented investment banking at its mercenary ugliest. To J.M. and his partners, Goldman was raping Long-Term in front of their very eyes. ~~~ Mr. Cruel in charge right now...

5. When a quake hits, all markets tremble. Why was Long-Term so surprised by that? ~~~ Sounds weird but true...

6. As Keynes noted, one bet soundly considered is preferable to many poorly understood. The Long-Term episode proved that eggs in separate baskets can break simultaneously. Moreover, Long-Term fooled itself into thinking it had diversified when, in fact, it had done so only in form. ~~~ Diversify? Never in my dictionary...

In summary, this book by Roger Lowenstein is an amazing stuff. I just could not put down the book from the first moment I started it. It is a very nice journey (tough for the genius though) for readers to get a better understanding on the fall of LTCM. As I mentioned above, at least we are not being bombarded with tons of boring theoretical economics. With due respect to Nick Dunbar, I really prefer this book compares to "Inventing Money". As such, I am giving full mark 10/10 to this book. Thumbs up!