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Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (Random House, 2000) Reissued in paperback by Random House in 2001. For hard-nosed investors, it sounded too good to be true. A small, secretive group had found the holy grail of money-making, yielding an annual 40 percent. But when the fairy tale collapsed, it did so with a loud bang. Within five weeks, the fund lost $4 billion, one of the largest financial failures ever occurred. The fund's history provided all ingredients for a gripping tale on the world of big money. Lowenstein, a former reporter for The Wall Street Journal and author of a best-selling biography on Warren Buffett, handles it well. In 236 pages, he vividly tells the story of LTCM's rise and demise. Compared to other investment behemoths, LTCM was a tiny hedge fund that employed only 200 people. Yet, it had two Nobel laureates on its board, was led by a well-known investment trader, and rose to star ranks from 1994 to 1998. For his book, Lowenstein repeatedly interviewed two of the firm's partners and conducted several interviews at major Wall Street banks. As he remarks in the introduction, attempts to get answers from John M. Meriwether, LTCM's founder and a former vice president at investment bank Salomon Brothers, "proved fruitless." Lowenstein devotes the first part of his book to the rise of LTCM. "The professors were smart," Lowenstein writes, and they had a "protector who shielded them from company politics and got them the capital to trade." He argues that the reputation of LTCM partners Robert Merton and Myron Scholes, who won a Nobel Prize in 1997 for their asset-pricing model, substantially contributed to LTCM's ability to borrow money almost limitlessly. The fund started in February 1994 with $1.25 billion in funds. By the end of 1995, its equity capital had tripled, and assets leaped to $102 billion. But in September 1998, the stellar flight ended: LTCM collapsed, and the Federal Reserve offered a $3.6 billion bailout, fearing that LTCM's crash could strike at the foundations of the stock market. In the second part, Lowenstein details the causes for the fall. Lowenstein claims that the fund's early successes boosted the partners' self-confidence to unhealthy levels, pushing them towards riskier ventures that ultimately led to their fall. Reviews of the book mostly marvelled about the author's narrative skills. "This book is story-telling at its best," wrote The Economist. The Library Journal called it a "well-crafted, easy-to-follow text." BusinessWeek praised it as a "squalid and fascinating tale of world-class greed and, above all, hubris." Only Publishers Weekly found that Lowenstein "obscures his narrative with masses of data and overwritten prose." The Economist, however, picked at Lowenstein's conclusions. And BusinessWeek faulted the book for its lack of a "particularly strong point of view." On the whole, the book offers an easy-to-understand, well-told insight into the world of higher finance – and its human shortcomings. MORE: Newshour's Interview with Lowenstein Comprehensive review of the book on Salon.com BusinessWeek review, including whereabouts of the former LTCM leaders |
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