Title: When Genius Failed
Author: Roger Lowenstein
Genre: Financial Non-fiction
Pages: 236
Rating (out of 5 stars): **
Reviewed by: Ben
Description: This book gives the history of the rise and fall of Long-Term Capital Management (LTCM), a hedge fund that went under in the September of 1998. LTCM was run by the brightest traders on Wall Street (two of them were Nobel Prize winners in Economics), but went under when the partners grew overconfident in their models, risked it all, and the markets went the wrong way. It gives some good insight into financial markets, leverage, risk, and the uncertainty of markets.
Thoughts: This book was interesting for me since (a) I have studied financial markets a fair bit and (b) I work for the NY Fed, which was quite involved in salvaging the whole mess. However, I felt that the author was pretty critical towards the partners, characterizing them as irresponsible, greedy villains. From an economics perspective, their theories were well-founded and, had they been able to hold on, they would have eventually come out on top. Their error was in underestimating how bad things could get before they got better, that's all. My only other difficulty with the book was that I look forward to my train-ride reading time as a break from the world of econ, and this book didn't provide that for me, obviously. Had I read it over the summer, I probably would have given it more stars. On the plus side, Lowenstein does a great job of making the book move along despite the density of the material, and I think that his insights are important for anyone working in financial markets.
Disclaimer: None.
1 comment:
Ben,
Do you still believe this:"From an economics perspective, their theories were well-founded and, had they been able to hold on, they would have eventually come out on top. Their error was in underestimating how bad things could get before they got better, that's all."
If so, what part of their "theories" were well-founded? Note that there is a Wikipedia link to the Black-Scholes Theorem in the first line of the article linked below. Yes, the theory holds, but not in the wonderful world of modern-day finance. And a whole bunch of quants, with silly greed-driven overseers, and ideologically blind politicans and regulators, once again led us down the road to ruin. For more episodes see Kindleberger's Manias, Crashes, and Panics.
Here's a Feb. 2012 article,that once again as many have done before, traces errors made by the LTCM bunch (with help from peripheral bankers), and others who were then to follow in their footsteps: Enron, ..., big Wall Street bankers who faced a waterloo of sorts in 2008 (along with the rest of us), etc.
I failed to cash in even a little on the booms that followed in the wake of the LTCM debacle in part because I believed naively that there were grownups in DC who would reign in the massive speculations before they blew up the world. Turned out that perchance only Brooksley Born, Elizabeth Warren and perchance a few others deserved the label "grownups" -- and they got their heads handed to them.
I blogged a bit about this stuff -- for a while (linked to my name) -- trying to better understand it all. I was rightfully quite hard on Alan Greenspan I likely should have been harder on Larry Summers and Robert Rubin, among others. Someday I'd like to see a whole bunch of folks from Wall Street attempt to pass a lie detector test to see which of them were "true believers" and which were more akin to charlatins.
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