The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal (Bloomberg)

ArareanalyticallookatthefinancialcrisisusingsimpleanalysisTheeconomiccrisisthatbeganin2008revealedthenumerousproblemsinourfinancialsystem,fromthewaymortgageloanswereproducedtothewayWallStreetbanksleveragedthemselves.Curiouslyenough,however,mostofthereasonsforthebankingcollapseareverysimilartothereasonsthatLong-TermCapitalManagement(LTCM),thelargesthedgefundtodate,collapsedin1998.TheCrisisofCrowdinglooksatLTCMingreaterdetail,withnewinformation,foramoreaccurateperspective,examininghowthesubsequenthedgefundsstartedbyMeriwetherandformerpartnersweredestroyedagainbythelapseofjudgementinallowingLehmanBrotherstofail.CoveringthelessonsthatwereignoredduringLTCM'scollapsebuteventuallyconnectedtothefinancialcrisisof2008,thebookpresentsaseriesoflessonsforhedgefundsandfinancialmarkets,includingtouchinguponthecircleofgreedfromhomeownerstorealestateagentstopoliticianstoWallStreet.GuidesthereaderthroughtherealstoryofLong-TermCapitalManagementwithaccuratedescriptions,previouslyunpublisheddata,andinterviewsDescribesthelessonsthathedgefunds,aswellasthemarket,shouldhavelearnedfromLTCM'scollapseExploreshowthefinancialcrisisandLTCMareaglobalphenomenarootedinfailurestoaccountforriskincrowdedspaceswithleverageExplainswhyquantitativefinanceisessentialforeveryfinancialinstitutionfromriskmanagementtovaluationmodelingtoalgorithmictradingIsfilledwithsimplequantitativeanalysisaboutthefinancialcrisis,fromtheQuantCrisisof2007tothefailureofLehmanBrotherstotheFlashCrashof2010Auniqueblendofstorytellingandsoundquantitativeanalysis,TheCrisisofCrowdingisoneofthefirstbookstoofferananalyticallookatthefinancialcrisisratherthanjustanaccountofwhathappened.Alsoincludedarealayman'sguidetotheDodd-Frankrulesandwhatitmeansforthefuture,aswellasanevaluationoftheFed'sreactiontothecrisis,QE1,QE2,andQE3.