Late post because I'm just returning from Saratoga and I hadn't finished reading before I left. Personally I was fascinated with this book, mostly because of my actuarial background. When Genius Failed is about the company Long-Term Capital Management and their hedge fund, which had unbelievable returns and unbelievable losses, all within a four year span.
John Meriwether led a very successful arbitrage group at Salomon Brothers. Unfortunately, things soured and he left to start his own fund in 1994: Long-Term Capital Management. He recruited some of the best people from Salomon Brothers. He recruited the best in academia, including Robert Merton and Myron Scholes (yes, the same guy who designed the Black-Scholes formula). He even recruited David Mullins, the vice chairman of the Federal Reserve. This group of geniuses was able to raise $1.25 billion, the largest start up ever at that time.
For the first few years, LTCM achieved incredible profits (using their brainy models) while setting all the rules. They dictated above-average fees from clients and pushed around banks who lent money and executed trades. Initially, their goal was to profit from arbitrage between spreads. They were so successful at this, other competitors started to crowd the market and opportunities dwindled. LTCM forced clients to take back money while at the same time starting to delve into equities, derivatives, mergers and equity volatility. However, in 1998 things turned real bad as Russia had major currency issues which affected the worlds' markets and spreads. They were highly leveraged at this time (100 to 1), multiplying the intensity of their problems.
I've probably lost most of my blog's readers by now, so I'm not going to try to explain any more. Eventually, the Federal Reserve ordered banks to meet in their offices in New York. The Fed coordinated a consortium between 14 banks valued at $3.65 billion. Basically a bailout. Sound familiar?
This is one of those books that will only interest 1 in 10 people. You need to read slow to grasp all of the concepts and people, and even I had to re-read sections. But this is a book that should be required reading for everyone in finance, insurance, banking, etc. The author pointed out countless times how this story should be a warning for the future. It seemed other executives mentioned in the booked understood this. Yet, ten years later, the story repeated itself.
How I have never heard of this book until now is mind boggling.
My rating for When Genius Failed: 4 stars out of 5. Get it here!
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