When Genius Failed Audiobook By Roger Lowenstein
At first, Long-Term’s models stayed on script, and this new gold standard in hedge funds boasted such incredible returns that private investors and even central banks clamored to invest more money. Economics is more art than science, and this book Retail foreign exchange trading confirms that. The models assumed that the future would behave like the past, in a rational manner. Their mathematical precision, backed up by their academic credentials, and prior success attracted huge amounts of money into the hedge fund.
With the firm about to go under, its staggering $100 billion balance sheet threatened to drag down markets around the world. At the eleventh hour, fearing that the financial system of the world was in peril, the Federal Reserve Bank hastily summoned Wall Street’s leading banks to underwrite a bailout. Notice that there is a key difference between a share of IBM and a pair of dice. With dice, there is risk—you could, after all, roll snake eyes—but there is no uncertainty, because you know the chances of getting a 7 and every other result.
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There is a risk that the price of a share of IBM will fall, and there is uncertainty about how likely it is to do so. Mr. Lowenstein takes you through the strategies that resulted in those eye-popping returns, including a 59% growth for FY1995-still one of the best starts by any fund, ever. One of those strategies was «snap trades,» profiting on the narrowing of spreads between «on-the-run» Treasuries and «off-the-run» Treasuries, all backed with massive amounts of leverage. It proved very successful in Italy, where Mr. Haghani engineered a position on the two types of Italian government debt among the chaos of the coming monetary union. Investing involves certain risks, including possible loss of principal.
From this point on, having accepted a temporary ban on managing other people’s money, Hwang created his family office, Archegos. Meanwhile, forward to the present day, why did Bill Hwang use derivatives?
If you’re wrong on risk arb, you can lose half your position.” In short, the reason that deal spreads were so much wider than bond spreads was that you could lose a lot more money on merger arbitrage. Tisch left feeling that Long-Term didn’t know what it was doing. Including the money from new investors, the firm’s equity capital had, in less than two years, virtually tripled, to a total of $3.6 billion. Long-Term’s assets had also grown, to the extraordinary sum when genius failed of $102 billion. Of course, its return on total assets—both those that it owned and those that it had borrowed—was far, far less than the gaudy return cited above. This return on total capital was approximately 2.45 percent.23 This minuscule figure is what Long-Term would have earned had it invested only its own money. But even this figure is too high because it doesn’t reflect Long-Term’s derivative trades, which, as noted, weren’t recorded on its balance sheet.
Well, we have confirmed, once again, that when it comes to making money, people in positions of authority do incredibly stupid and greedy things. What makes this maddening is all these firms, especially the two that took the biggest losses, were coming off great years. For Nomura and Credit Suisse, 2020 was being hailed as a “turn-around year.” It was not as if they had to go out and throw a Hail Mary like this, rather they did it because it seemed like gobs of easy money.
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By buying the cheap and selling the dear, convergence would bring a profit no matter the common movement of bond prices. In principle, it was a low-risk strategy, with tiny returns on each trade. And Long-Term made up the difference by leverage–by borrowing 10, 20, 50 times capital. The speculator existed, and his name, as we learn from Roger Lowenstein’s genial account of Long-Term Capital Management, When Genius Failed, was John Meriwether. The New York crisis marked the takeoff of Meriwether’s career, which went from bailout to bailout over 23 very exciting years. Your Money Briefing is your personal-finance and career checklist, with the news that affects your money and what you do with it. From spending and saving to investing and taxes, the Wall Street Journal’s finance reporters and experts break down complicated money questions every weekday to help you make better decisions about managing your money.
It’s always fascinating to here about the maladaptive and weird personalities of these chess masters or math minds. I would suggest this book to anyone who likes business, even though it’s about finance a bit.
I was interested in a current non-fiction about business and especially some dramatic turn of business events; I liked Barbarians at the Gate. This has about 2/3 of the movement, pace, and drama of that, or perhaps half, but it’s enough. I was especially surprised about the unique characters of some of the geniuses these hedge funds have and this one had.
Prompted by deep concerns about LTCM’s thousands of derivative contracts, in order to avoid a panic by banks and investors worldwide, the Federal Reserve Bank of New York stepped in to organize a bailout with the various major banks at risk. This is a compelling story about people who thought they were smarter than everyone eur else. Read about the investors who lost 77% of their capital at a time when the ordinary stock market investor had been more than doubling his money. Eavesdrop on the maneuverings and cooperation among Wall Street players. “The only trouble is, if you’re wrong on a government bond the spread may change by a half a point.
Lowenstein offers up enough information about the major players to humanize them, each with their own foibles, ambitions and wants. The reader who is not familiar with John Meriwether and Long Term Capital Management will be on the edge of their seat as the story unfolds watching each personality react to dire situations. From the moment Long-Term opened their offices in posh Greenwich, Connecticut, miles from the pandemonium of Wall Street, it was clear that this would be a hedge fund apart from all others. Though they viewed the big Wall Street investment banks with disdain, so great was Long-Term’s aura that these very banks lined up to provide the firm with financing, and on the very sweetest of terms. So self-certain were Long-Term’s traders that they borrowed with little concern about the leverage.
Floor traders must have an instinctive feel for trading and get by on their quick wits. They are now a vanishing species and will soon join Mark Twain’s riverboat captains in extinction and myth. Bailout was supposedly needed since LTCM’s tanking would have destroyed the balance sheets of all the financial institutions who had invested with them . Exclusive 60 day trial to the world’s largest digital library. It is said that the banks got together on a call before the fateful Friday in an attempt to manage this dumpster fire. Credit Suisse and Nomura suggested that the banks worked together too slowly and quietly unwind the mess. It seems that, while nodding their heads, Goldman, Morgan Stanley, and Deutsche Bank ran to the exits and pulled the rip cord, selling millions of shares of the nine companies.
- If we look at Viacom share price, the price nearly doubled from February 1 to March 22.
- LTCM began trading in 1994, after completing a road show that, despite the Ph.D.-touting partners’ lack of social skills and their disdainful condescension of potential investors who couldn’t rise to their intellectual level, netted a whopping $1.25 billion.
- Over the short run, stocks are subject to the whim of often emotional traders.
- In principle, it was a low-risk strategy, with tiny returns on each trade.
- Therefore, to avoid having to file a 13-D, he –helped along by obliging dealers—gained ownership behind the curtain of dealing banks.
- A fairly well written account of yet another collection of typically greedy Wall Street bankers.
Lowenstein presents the statistical issue competently, given that his own understanding is not deep and he expects his readers to have none at all. Economists have known for decades that the assumption of normality in the distribution of future events is false, particularly in financial markets. In 1937, John Maynard Keynes made the distinction between risk and incalculable uncertainty the foundation stone of his theoretical revolution. But Merton, Scholes, and the others came from a branch of economics that had rejected Keynes.
Download When Genius Failed: The Rise And Fall Of Long
You should understand and carefully consider a strategy’s objectives, risks, fees, expenses and other information before investing. The views expressed in this commentary are subject to change and are not intended to be a recommendation or investment advice. Such views do not take into account the individual financial circumstances or objectives of any investor that receives them. All indices are unmanaged and are not available for direct investment. Indices do not incur costs including the payment of transaction costs, fees and other expenses. This information should not be considered a solicitation or an offer to provide any service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Then, in 2012, Hwang reached a $60 million settlement with the SEC on claims of insider trading.
Over the short run, stocks are subject to the whim of often emotional traders. Over the long run, they vary with business performance, which is subject to great uncertainty and is notoriously hard to forecast. Modern trading is now almost entirely paperless and takes place in the cyberspace of computers and computer networks. The instincts of market traders are being augmented and in some cases replaced by mathematical pricing models. Traders forex are being drawn from schools like MIT, rather than the City College of New York. A feeling for market dynamics and trends will always be important, but along side these skills modern traders have a command of statistics and probability theory. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
When Genius Failed: The Rise And Fall Of Long
He explains not just how the fund made and lost its money, but what it was about the personalities of Long-Term’s partners, the arrogance of their mathematical certainties, and the late-nineties culture of Wall Street that made it all possible. This book is aptly named as it delivers just what the title implies. Young John Meriwether began his career as a high school math teacher. After only one year of teaching he enrolled in the University of Chicago and began work to attain a business degree after which he was hired by the investment giant, Solomon Bros. Just as inflation was changing the way bonds were sold and held, Meriwether entered the field in the mid 1970’s as a bond trader.
But the end was soon in sight, and Lowenstein’s detailed account of each successively worse month of 1998, culminating in a disastrous August and the partners’ subsequent panicked moves, is riveting. The book received numerous accolades, including being chosen by BusinessWeek among the best business books of 2000. The book’s account is largely based on interviews conducted with former employees of LTCM, the six primary banks involved in the rescue, and the Federal Reserve, as well as informal interactions by phone and e-mail with Eric Rosenfeld, one of LTCM’s founding partners. As of 2014, there have been four editions in English, five editions in Japanese, one edition in Russian and one edition in Chinese. Taking its derivative trades into account, its cash-on-cash return was probably less than 1 percent.24 The exact number is unimportant. The point is that almost all of its heady 59 percent return was due to the remarkable power of leverage.