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

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Compelling . . . The fund was long cloaked in secrecy, making the story of its rise . . . and its ultimate destruction that much more fascinating.” The author attempts to give the reader insight into the personalities of the LTCM members, and his descriptions of them work to a certain degree. Such insight is necessary to gain a proper understanding of their behavior. But a description of their overt behavior and demeanor still leaves the reader wanting as to whether their appearance, i.e. the way they portrayed themselves to others, did reflect what they truly believed inside. Was their behavior part of their salesmanship, a conscious strategy to portray themselves as savvy business people who had great insight into the workings of the financial markets, masking their hidden insecurities on these workings? Or was their behavior reflective of what they truly were, i.e. individuals who through their training in finance and mathematics, were confident in themselves and in the concept of LTCM. For example, was John Meriwether indeed a quiet, private individual with a "steel-trapped" mind as the author portrays him, or was this merely a facade that Meriwether thought would give him a sphinx-like aura of mystery? And if the latter is true, why did Meriwether think that such behavior was ne America’s impending pension problem is brutally simple: private companies and governments have pledged to provide retirement income and health care for workers, but have not set aside the Continue reading »

In the 1990s it was hip to invest in hedge funds. People saw them as new, exciting, and above all incredibly profitable financial products. Many wealthy individuals and companies wanted desperately to get a piece of the pie.

LTCM uses more and more leverage to maximize profits.

Roger] Lowenstein has written a squalid and fascinating tale of world-class greed and, above all, hubris." --BusinessWeek This compelling academic approach effectively lured investors and contributed to LTCM's resounding success. Hedge funds grew in popularity in the 1990s, but LTCM still outperformed. Lowenstein's analysis of the LTCM crisis provides valuable lessons for those in the financial sector."

But on the Wednesday afternoon of September 2-3, 1998, Long-Term did not seem small. On account of a crisis at LTCM, McDonough had summoned— invited," in the Fed's restrained idiom-the heads of every major Wall Street bank. For the first Meriwether hired the very best financial minds in the world at the moment – Myron S. Scholes and Robert C. Merton (who shared the Nobel Prize in Economic Studies in 1997) – and acted like it. Lawrence Summers, now the U.S. Treasury secretary , told The Wall Street Journal after the crash, "The efficient market hypothesis is the most remarkable error in the history of economic theory.”Investors should always avoid leverage while investing. Warren Buffett does not call derivatives “Weapons of Mass Destruction” without reason. Warren has always advised Berkshire Hathaway shareholders and investor around the world to avoid borrowing for investing. In his 2014 letter, Warren writes: a b c d e f "Too Interconnected to Fail?" Stephen Slivinski, senior editor of Region Focus, quarterly publication of the Federal Reserve Branch of Richmond [Virginia], which is the 5th of 12 districts of the U.S. Federal Reserve system, Summer 2009. When losses mount, leveraged investors such as Long-Term are forced to sell, lest their losses overwhelm them. When a firm has to sell in a market without buyers, prices run to the extremes beyond the bell curve.” As a result, the company recruited prominent figures in the business world, notably two 1997 Nobel Prize winners, Myron S. Scholes and Robert C. Merton. A: Yes. Some of Meriwether’s former partners, who are partners with him now in a new venture, asked me to make changes because they thought sections of the book would be harmful to their future fund-raising efforts. We, of course,

Do you know the story of Icarus? He was given a pair of wings that allowed him to fly, and he took full advantage. Unfortunately for him, he got a little carried away. Despite warnings not to, he proceeded to fly as high as he could, so high that the sun started to melt the wax that held his wings together. Within seconds, his wings fell apart and he plunged to his death.


Many investors in the initial euphoria forget this basic premise and invest in derivatives like futures & options. LTCM managers learned the effects of leverage by paying up with their careers, social positions apart from personal investments in LTCM. Common investors also many times suffer heavy losses in derivatives. As expected, the initial success of LTCM dwarfed its competitors: it had annualized return of 21% in the first year of its existence, 43% in the second, and 41% in the third. Hedge funds bet on tiny discrepancies between the present and future price of financial products, which means that they need large investments to make any significant profits. In this case, the shot was Long-Term Capital Management, a private investment partnership with its headquarters in Greenwich, Connecticut a posh suburb some forty miles from Wall Street. LTCM managed money for only one

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