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

JohnMeriwether,afamouslysuccessfulWallStreettrader,spentthe1980sasapartneratSalomonBrothers,establishingthebest--andthebrainiest--bondarbitragegroupintheworld.Amysteriousandshymidwesterner,heknittedtogetheragroupofPh.D.-certifiedarbitrageurswhorewardedhimwithfilialdevotionandfabulousprofits.Then,in1991,inthewakeofascandalinvolvingoneofhistraders,Meriwetherabruptlyresigned.Fortwoyears,hisfiercelyloyalteam--convincedthatthechiefhadbeenunfairlyvictimized--plottedtheirboss'sreturn.Then,in1993,Meriwethermadeahistoricoffer.HegatheredtogetherhisformerdisciplesandahandfulofsupereconomistsfromacademiaandproposedthattheybecomepartnersinanewhedgefunddifferentfromanyWallStreethadeverseen.AndsoLong-TermCapitalManagementwasborn.Inadecadethathadseenthelongestandmostrewardingbullmarketinhistory,hedgefundsweretheneplusultraofinvestments:discreet,privateclubslimitedtothoserichenoughtoponyupmillions.Theypromisedthattheinvestors'moneywouldbeplacedinavarietyoftradessimultaneously--a"hedging"strategydesignedtominimizethepossibilityofloss.AtLong-Term,Meriwether&Co.trulybelievedthattheirfinelytunedcomputermodelshadtamedthegenieofrisk,andwouldallowthemtobetonthefuturewithnearmathematicalcertainty.Andthankstotheircast--whichincludedapairoffutureNobelPrizewinners--investorsbelievedthem.FromthemomentLong-TermopenedtheirofficesinposhGreenwich,Connecticut,milesfromthepandemoniumofWallStreet,itwasclearthatthiswouldbeahedgefundapartfromallothers.ThoughtheyviewedthebigWallStreetinvestmentbankswithdisdain,sogreatwasLong-Term'saurathattheseverybankslineduptoprovidethefirmwithfinancing,andontheverysweetestofterms.Soself-certainwereLong-Term'stradersthattheyborrowedwithlittleconcernabouttheleverage.Atfirst,Long-Term'smodelsstayedonscript,andthisnewgoldstandardinhedgefundsboastedsuchincrediblereturnsthatprivateinvestorsandevencentralbanksclamoredtoinvestmoremoney.ItseemedthegeniusesinGreenwichcouldn'tlose.Fouryearslater,whenadefaultinRussiasetoffaglobalstormthatLong-Term'smodelshadn'tanticipated,itssupposedlysafeportfoliosimploded.Infiveweeks,theprofessorswentfrommega-richgeniusestodiscreditedfailures.Withthefirmabouttogounder,itsstaggering$100billionbalancesheetthreatenedtodragdownmarketsaroundtheworld.Attheeleventhhour,fearingthatthefinancialsystemoftheworldwasinperil,theFederalReserveBankhastilysummonedWallStreet'sleadingbankstounderwriteabailout.RogerLowenstein,thebestsellingauthorofBuffett,capturesLong-Term'sroller-coasterrideingrippingdetail.Drawingonconfidentialinternalmemosandinterviewswithdozensofkeyplayers,Lowensteincraftsastorythatreadslikeafirst-ratethrillerfrombeginningtoend.Heexplainsnotjusthowthefundmadeandlostitsmoney,butwhatitwasaboutthepersonalitiesofLong-Term'spartners,thearroganceoftheirmathematicalcertainties,andthelate-ninetiescultureofWallStreetthatmadeitallpossible.WhenGeniusFailedisthecautionaryfinancialtaleofourtime,thegrippingsagaofwhathappenedwhenanelitegroupofinvestorsbelievedtheycouldactuallydeconstructriskandusevirtuallylimitlessleveragetocreatelimitlesswealth.InRogerLowenstein'shands,itisabrillianttalepepperedwithfastmoney,vividcharacters,andhighdrama.