When Genius Failed covers the fascinating story of the rise and fall of Long-Term Capital Management (LTCM).
LTCM’s partners and traders including John Meriwether, David Mullins, Eric Rosenfeld, Gregory Hawkins, Larry Hilibrand, Victor Haghani, Myron Scholes, Robert C. Merton and the Wall Street banks form the crux of the story.
The first half of the book covers the rise including John Meriwether’s early days at Salomon, the genesis of trading strategy (J.F.Eckstein & Co.), the formation of the arbitrage group, the formation of LTCM, raising capital, first year in operation, first few years of success, the shift from bond trading to equities, Merton & Scholes winning the Nobel Memorial Prize, etc.
The second half delves into the beginning of the losses, the various crisis in the markets and their impact on LTCM’s trades, the attempt to raise additional capital, Warren Buffett’s offer to invest with Goldman Sachs & AIG, and finishes with the fourteen Wall street banks getting together at the Fed to take over the LTCM fund.
Favorite quotes from the book:
One time a trader named, Andy who was losing money on a mortgage trade asked for permission to double up, and J.M. gave it rather offhandedly. “Don’t you want to know more about this trade?” Andy asked. J.M.’s trusting reply deeply affected the trader. J.M. said, “My trade was when I hired you.”
Neal Soss: “You don’t sell what you should. You sell what you can.” By leveraging one security, investors had potentially given up control of all of their others. This verity is well worth remembering: the securities might be unrelated, but the same investors owned them, implicitly linking them in times of stress.
There was subtle pressure on the staff to invest their bonuses in the fund, but most of them were eager to do so anyway — ironically, it was considered a major perk of working at LTCM. And so, the staff confidently reinvested more of their pay.
David DeRosa, a currency trader who teaches at Yale, dubbed Value-at-Risk, “a lighthouse for the soon-to-be-shipwrecked”.
“You’re picking up nickels in front of bulldozers” (a friendly money manager to Eric Rosenfeld)
Eric Rosenfeld, one of the partners at LTCM, gave at MIT in February of 2009 analyzing their story, including the myths & misconceptions. (Thanks to Charles Krohn for recommending the video.)
Also, on Quora, What are the former employees of LTCM/JWM doing now?
If you liked this post, you might like my review of The Big Short by Michael Lewis.
