When Genius Failed: The Rise And Fall Of Long Term Capital Management
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- Update Date：2025-09-06
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- Author：Roger Lowenstein
- ISBN：1841155047
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Summary
Picking up where Liar’s Poker left off （literally， in the bond dealer’s desks of Salomon Brothers） the story of Long-Term Capital Management is of a group of elite investors who believed they could beat the market and， like alchemists， create limitless wealth for themselves and their partners。
Founded by John Meriweather， a notoriously confident bond dealer， along with two Nobel prize winners and a floor of Wall Street’s brightest and best， Long-Term Captial Management was from the beginning hailed as a new gold standard in investing。 It was to be the hedge fund to end all other hedge funds: a discreet private investment club limited to those rich enough to pony up millions。
It became the banks’ own favourite fund and from its inception achieved a run of dizzyingly spectacular returns。 New investors barged each other aside to get their investment money into LTCM’s hands。 But as competitors began to mimic Meriweather’s fund， he altered strategy to maintain the fund’s performance， leveraging capital with credit on a scale not fully understood and never seen before。
When the markets in Indonesia， South America and Russia crashed in 1998 LCTM’s investments crashed with them and mountainous debts accumulated。 The fund was in melt-down， and threatening to bring down into its trillion-dollar black hole a host of financial instiutions from New York to Switzerland。 It’s a tale of vivid characters， overwheening ambition， and perilous drama told， in Roger Lowenstein’s hands， with brilliant style and panache。
Founded by John Meriweather， a notoriously confident bond dealer， along with two Nobel prize winners and a floor of Wall Street’s brightest and best， Long-Term Captial Management was from the beginning hailed as a new gold standard in investing。 It was to be the hedge fund to end all other hedge funds: a discreet private investment club limited to those rich enough to pony up millions。
It became the banks’ own favourite fund and from its inception achieved a run of dizzyingly spectacular returns。 New investors barged each other aside to get their investment money into LTCM’s hands。 But as competitors began to mimic Meriweather’s fund， he altered strategy to maintain the fund’s performance， leveraging capital with credit on a scale not fully understood and never seen before。
When the markets in Indonesia， South America and Russia crashed in 1998 LCTM’s investments crashed with them and mountainous debts accumulated。 The fund was in melt-down， and threatening to bring down into its trillion-dollar black hole a host of financial instiutions from New York to Switzerland。 It’s a tale of vivid characters， overwheening ambition， and perilous drama told， in Roger Lowenstein’s hands， with brilliant style and panache。
Reviews
M Cooper
，
Fascinating story。 definitely some moments of the book are serious page turners， if you are into financial ruins of wall street hedge funds。
Gardner Gendron
，
Although Lowenstein provides a well written account of LTCM’s demise， he often would downplay the bigger turning points of the book。 The writing read more like a report than an analysis of a crisis。 I personally would have liked more drama at the various climax’s of book。 Lowenstein recovers in his epilogue and conclusion which provides interesting commentary。 Definitely a great read。
Tenzin Wangdhen
，
The collapse of LTCM is one of the great cautionary tales of late 20th century finance。 LTCM， which included Nobel Prize winners such as Myron Scholes （of Black Scholes） and Robert C Merton， who developed the risk and options pricing models taught to most at Wall Street， collapsed in the most spectacular way。 Their basic strategy was to make bets that would generate only a few "nickels"， but could be magnified through scale and leverage。 Over 4 years， the fund almost 3x'd and made their partners The collapse of LTCM is one of the great cautionary tales of late 20th century finance。 LTCM， which included Nobel Prize winners such as Myron Scholes （of Black Scholes） and Robert C Merton， who developed the risk and options pricing models taught to most at Wall Street， collapsed in the most spectacular way。 Their basic strategy was to make bets that would generate only a few "nickels"， but could be magnified through scale and leverage。 Over 4 years， the fund almost 3x'd and made their partners worth hundreds of millions。 As lower risk opportunities started disappearing due to competition， the firm started taking making risky trades。Their $4B in assets evaporated in around a month as markets around the world trended downwards， sparked by the default of Russia。 At one point， LTCM was leveraged 100x， meaning even a drop of a few basis points resulted in massive losses。 The tragedy here was that the partners， through greed or stupidity， decided to force most of their investors to cash out to increase their own share in the fund， just before the bottom fell out。 As news of the firm's collapse spread， every trade started going against them as smaller traders tried to get out first， or profit from LTCM's collapse。 Eventually they had to be bailed out by a consortium of banks， who were scared of what might happen if LTCM collapsed， given how intertwined they were through derivatives contracts。 The book was much more entertaining to read than one would suspect because Lowenstein describes each character in such vivid detail。 Like any crime drama there is a rise to lofty heights， followed by a precipitous fall。 Lowenstein does not make any judgements except in the epilogue， where he makes it clear that he thinks Greenspan should have let the firm fail。 He almost foresees the housing market collapse， saying that by not limiting derivatives trading and more generally subsidizing losses from risk taking with public funds， Greenspan was creating a moral hazard， encouraging risk taking。 The moral here is that models can never account for human nature and the herd mentality of crowds。 The collapse of LTCM in someways foreshadowed the much larger systemic collapse of the housing market。 。。。more
Vijay
，
Well worth a read although always disappointing from the point of view that as long as you are considered too big to fail， you won't fail。 Our government stands in the way to revive you。 Well worth a read although always disappointing from the point of view that as long as you are considered too big to fail， you won't fail。 Our government stands in the way to revive you。 。。。more
Vasudeva Reddy
，
Roger Lowenstein is a John Grisham on steroids。 It's nothing Short of any first grade thriller。 Starts slowly then sprints towards the end at a breathtaking pace。I guess the saying 'no fiction is more twisted than reality' perfectly suits the case of LTCM。 Roger Lowenstein is a John Grisham on steroids。 It's nothing Short of any first grade thriller。 Starts slowly then sprints towards the end at a breathtaking pace。I guess the saying 'no fiction is more twisted than reality' perfectly suits the case of LTCM。 。。。more
TK
，
I think all investors and traders should read this book。 It gives an insight into Wall Street and also the Fed。Summary:It is a fascinating story of how Long Term Capital Management （LTCM）， a hedge fund comprising of Nobel prize-winning/professorial arbitrageurs amassed spectacular success for several years with almost not a single negative return month and became the envy of Wall Street and all over the world。 As they became more successful， extreme greed got to them and they put on extreme leve I think all investors and traders should read this book。 It gives an insight into Wall Street and also the Fed。Summary:It is a fascinating story of how Long Term Capital Management （LTCM）， a hedge fund comprising of Nobel prize-winning/professorial arbitrageurs amassed spectacular success for several years with almost not a single negative return month and became the envy of Wall Street and all over the world。 As they became more successful， extreme greed got to them and they put on extreme leveraged trades （30:1） at the worst time when opportunity was dwindling， which eventually resulted in an insane blow up in the late 90s when the unthinkable happened （Russia defaulted）。 The loss was so catastrophic that the Fed feared this fund （that most general public never even heard of） might have caused the entire global financial markets to collapse。Key details- The “new” shiny theory at the time was the Efficient Market Theory。 Markets are rational and can be explained by mathematical formulaes。 You can calculate risks based on previous prices and volatility。 For example， the most liquid and less liquid 30-yr treasury bills that were issued only months apart should in theory have identical prices。 When prices diverge， LTCM would bet that the prices will converge back。 Other example includes stocks of Shell traded in two different countries should be identical。 Any differences in prices are irrational and traders would bet that prices will always converge。 - The price differences are usually small so in order to profit， LTCM would leverage 10-30 fold to make that big money。 They became so convincing that banks would lend them money to trade with zero margin。 That’s crazy！ Ever since the firm started operating， for the first 3 years， their bets always paid off even when the prices diverge further at first， they always come back。 LTC would even double down on their bets if the prices diverge further。 In a way， even the geniuses fell into confirmation bias fallacy: all their trades made money， therefore， they can never lose。- As LTC became more popular， other banks and hedge funds were mimicking their trades。 Opportunities became scarcer。 LTCM felt they had to venture off to new territories， where they have NO expertise in e。g。 stocks merger deal， outright betting on direction of bond prices in emerging markets like Russia。 Basically， this means that LTCM were trading completely outside their expertise in areas they have no edge on， whilst leveraging to the hilt。 - Part of the problem was lack of oversight by regulator or rather denial that there was any problem in the derivatives market by Greenspan。 Greenspan even put out a speech that hedge funds were being watched carefully by the banks who lent them money。 This cannot be further from the truth because LTCM portfolio was kept ultra secretive as the partners would not let any banks know any of their holdings。 Banks were still willing to lend to LTCM because the very people that Greenspan expects to be the police were still humans。 Bankers are also greedy and want in on the business with LTCM。Take-home lessons- “Markets can stay irrational longer than you stay solvent。” This LTCM blow up is a perfect example of this saying。 When you are extremely overleveraged， once the markets turn against you， you have no hope to get out alive even when you know that eventually markets will normalise again。 It’s a key lesson in risk management。 - Life always has a fat tail。 Fama noted that For every DJI stock， there were many more days of extreme price movement than would occur in a normal distribution。 LTCM professor blamed their failing on “bad luck”， calling the Russian default as a one in a million year event。 This is pure idiocy。 Looking back at history in the last 100 years， there is a financial crisis almost every year somewhere in the world。 All markets eventually crash when greed runs too high。 - in times of trouble， markets become more closely linked and seemingly unrelated assets rise and fall in tandem。 When shit hits the fan， Correlation always turns to one。 Just think of Covid crash， all assets become one trade。- The Fed is always monitoring the financial markets。 Orchestrating bail out of LTCM likely created moral hazard， probably contributing and worsening the Dotcom bubble。 Same thing happened over and over again like in 1987， 1998， 2001， 2008， 2020。 。。。more
Brian Kramp
，
Not highly recommended。 I expected more interesting stories。Long Term Capital Management was founded on the idea that risk was simple to calculate， and that liquidity will rise and solve problems in tough times。 They made 20-50 percent per year for their first few years， 1994-1997。In 1998 they gave money back to investors because they couldn't manage such a big portfolio。 Due to lack of opportunities in their bond rate arbitrage due to their size， the Euro， and competitors， they started placing Not highly recommended。 I expected more interesting stories。Long Term Capital Management was founded on the idea that risk was simple to calculate， and that liquidity will rise and solve problems in tough times。 They made 20-50 percent per year for their first few years， 1994-1997。In 1998 they gave money back to investors because they couldn't manage such a big portfolio。 Due to lack of opportunities in their bond rate arbitrage due to their size， the Euro， and competitors， they started placing unhedged bets on other things， such as that volatility would decrease， and that equity mergers would go through。 They had started with a sense of "do effectively riskless trades"， but eventually when they couldn't find them they just took tons of risk。Later with the Asian debt crisis and Russian default， everyone fled risk to safety， while they assumed that risk would always be managed。 。。。more
Virag Padalkar
，
A truly fascinating read。 No less than any thriller novel in the fiction genre; the book grips you from start to end。 Huge insight into how quick wealth and record returns can seduce you so much as to blind you to obvious risks。 With everyone in cahoots。
Jakub Dovcik
，
Who would not invest in a fund started by a former head of the most profitable department （bond arbitrage） in the most profitable bank of the previous decade （in this case， Solomon Brothers of 1980s）， that would have among its investment executives two professors （and future Nobel Prize winners） that defined a key aspect within the theory of derivatives financial markets？ A fund dominated by people with PhDs from top economics， mathematics， and finance departments in the world， who seemed to be Who would not invest in a fund started by a former head of the most profitable department （bond arbitrage） in the most profitable bank of the previous decade （in this case， Solomon Brothers of 1980s）， that would have among its investment executives two professors （and future Nobel Prize winners） that defined a key aspect within the theory of derivatives financial markets？ A fund dominated by people with PhDs from top economics， mathematics， and finance departments in the world， who seemed to be always one step ahead。Long-Term Capital Management （LTCM） was a monumental study not just in what happens when a lot of smart people sustainably believe they are way smarter than anyone else， but also in the unsuitability of theory based on flawed expectations of human behaviour。 The principal flaw of LTCM was in their extreme level of leverage and exposure all around the world， which was immensely vulnerable to shocks because it was not truly diversified （they just made similar trades based on convergence trading strategies） and based on the understanding of financial actors as "purely rational" beings - Merton and Scholes， the Nobelists， failed to account for the irrationality of human actions， the herd behaviour and willingness to exploit perceived weaknesses by aggressive investors。 The de facto default of Russian debt began the failure of LTCM that was later exacerbated by the front-running of their trades by other hedge funds and banks。 But this was possible because of the recklessness of LTCM traders who overly trusted their abilities and got into trades and areas where they had no experience or expertise， including insane amounts of derivatives。 This was unlike in the case of Renaissance Technologies led by Jim Simons， who never actually claimed to understand the markets themselves， just to be able to use mathematics and machine learning to predict the patterns。 The LTCM partners trusted themselves so much， they reinvested almost all of their profits from the first years when they made ridiculous returns。 This is a remarkably written book that analyses not just the financial aspects of LTCM's rise and fall， but also the human flaws of the partners that contributed to its collapse。 It could be read even by people never interested in finance as a study on how even the formally smartest people can be very wrong if they trust their imperfect models too much。 。。。more
Elizabeth
，
Swept through this in about 3 days — joins the league of other well paced and accessibly explained finance crisis books （big short， flash boys） etc Fundamentally a story about over leverage and trading specialized derivatives （small markets） which is basically a disaster in any panic selling situation i。e。 “Picking pennies in front of a steamroller”Also liked the post word that was written in 2010 that basically said we clearly have not learned our lesson。
A。 Sacit
，
A well told story of extreme arrogance， greed， recklessness， vanity。。。 Lessons learned: “Life Always has a fat tail” Fema “The efficient market hypothesis is the most remarkable error in the history of economic theory” Robert Shiller “We’re So Rich， We Can Be Dumb” San Francisco Chronicle
Raghav Sharma
，
Bit of a tough read。 Every new page seemed to mention something new like we were already supposed to know it。 Halfway through， I lost track of the people mentioned in the book except Meriwether， Scholes and Merton， and maybe Hilibrand， Haghani and Rosenfeld。 I also think that the explanation of the trades could have been simplified further， but I guess that is appropriate given the subject matter of the book。 It's still a very interesting; however， I think that's just down to the events that unf Bit of a tough read。 Every new page seemed to mention something new like we were already supposed to know it。 Halfway through， I lost track of the people mentioned in the book except Meriwether， Scholes and Merton， and maybe Hilibrand， Haghani and Rosenfeld。 I also think that the explanation of the trades could have been simplified further， but I guess that is appropriate given the subject matter of the book。 It's still a very interesting; however， I think that's just down to the events that unfolded。 。。。more
Mihai Rosca
，
Although most people that were not aware of the financial world thought there was no need to worry， on September 28th 1998， all Wall Street bankers were on their toes。 Long Term Capital Management was about to cause each and everyone of them a huge damage。 And with that came some heavy systemic risks。LTCM held derivatives worth a little over 1 trillion dollars。 If it defaulted， all Wall Street banks would lose。 This had the unseen potential of collapsing the entire financial system。LTCM was form Although most people that were not aware of the financial world thought there was no need to worry， on September 28th 1998， all Wall Street bankers were on their toes。 Long Term Capital Management was about to cause each and everyone of them a huge damage。 And with that came some heavy systemic risks。LTCM held derivatives worth a little over 1 trillion dollars。 If it defaulted， all Wall Street banks would lose。 This had the unseen potential of collapsing the entire financial system。LTCM was formed by John Merriweather。 At Salomon Brothers he formed an arbitrage group and held it closely knitted。 At a time when brokers were not very highly educated and relied on their guts most of the time， the arbitrage group used math to find patterns and seek out opportunity in bond arbitrage。Through arbitrage， the brokers would follow prices between two related investments， such as a 25-year bond issued 3 months before with the same yield as a 25-year old bond issued currently。 The price difference here should be near， if not identical。 When that difference would go up （called the spread）， Meriweather and his arbitrage team would bet the prices would converge。 Of course， the spread could widen， but in the end almost always it would converge。 The key thing was to have the money to endure the widening period， as these transactions would be highly leveraged to make profit。These guys were so confident， that whenever the market went the opposite way， they just doubled their bets and endured。 They won a lot of money that way for Salomon。 Meriweather left Salomon Brothers on account of a scandal， went on to form LTCM and gradually rise its image with the help of the best and brightest economists of that day。The banks had their own arbitrage teams but they were smaller。 Hedge funds doing this were not regulated and they could hence bet more heavily and possibly gain more profit。 Of these hedge funds， the glamour of LTCM was big。 The fund was so secretive about the methods and models used that it had a mystic aura。 Almost all Wall Street banks （and also some in Europe） decided to cut them a slack， give them money and simply wait for profit。The problem was， LTCM won and won until they thought themselves invincible。 They grew their margins to unheard of numbers， entered markets they did not fully understand and got greedy and smug。 The huge leverage they practiced meant they could potentially lose it all if everyone started to sell most asset classes at the same time。 However， their models told them this was impossible， no market would ever do that as it was irrational and improbable。 The russian sovereign debt crisis in 1998 however had people spooked， especially in the context of an ongoing asian crysis。 With LTCM betting heavily and leveraged on Russia， they were fully exposed。 They could not sell their positions on account on everyone fleeing to safer instruments and by this， they were doomed to lose continuously over increasing spreads。Finally， they were bailed out by Wall Street， but the founders lost it all。 The banks got their money back and then closed the fund that almost wiped out Wall Street。 As they say， life does not follow a bell curve。 It always has a "fat tail"。。 。。。more
Ryan Goodyear
，
Incredible story of hubris。 One gets the impression that the 2008 crisis could have come 10 years earlier if not for the intervention that took place。 （I read the first edition that doesn't have the added note about 2008。） I had somehow never heard about this， and the book touches on the fact that the average citizen didn't know about this as it happened， thanks in part to the timing concurrent with the Clinton/Lewinsky scandal。 A great warning about the dangers of overconfidence。 Incredible story of hubris。 One gets the impression that the 2008 crisis could have come 10 years earlier if not for the intervention that took place。 （I read the first edition that doesn't have the added note about 2008。） I had somehow never heard about this， and the book touches on the fact that the average citizen didn't know about this as it happened， thanks in part to the timing concurrent with the Clinton/Lewinsky scandal。 A great warning about the dangers of overconfidence。 。。。more
Adam
，
Maybe not as exciting as Liar's Poker but still an important story。 The sale deliberation at the end was especially thrilling， I wish there was more technical description in this book and more on the Russian crisis but it was a good overview。 Maybe not as exciting as Liar's Poker but still an important story。 The sale deliberation at the end was especially thrilling， I wish there was more technical description in this book and more on the Russian crisis but it was a good overview。 。。。more
Michael Giuliano
，
Fast-paced， expansive， and crafted to offer both character-specific and big picture insights。 The ‘08 foreshadowing was eerie， especially given the book’s focus on the deceivingly mathematical facade of fixed income markets。 Though Lowenstein was balanced in his assessments of both quants and old school investors， it was natural to come down harder on the quants trusting blindly to their fallible models。 Probably my biggest takeaway， though， was just how many stakeholders with totally different Fast-paced， expansive， and crafted to offer both character-specific and big picture insights。 The ‘08 foreshadowing was eerie， especially given the book’s focus on the deceivingly mathematical facade of fixed income markets。 Though Lowenstein was balanced in his assessments of both quants and old school investors， it was natural to come down harder on the quants trusting blindly to their fallible models。 Probably my biggest takeaway， though， was just how many stakeholders with totally different motivations are willing to bankroll such an obviously flawed venture if the money is rich enough。 。。。more
Parag Nawani
，
One of the best books I have read！ The story of LTCM has become a legend- to read about it in such details has been an enthralling experience。 Markets can remain irrational for longer than you can remain solvent。 - John Maynard Keynes
Isaac Gill
，
Required reading if you're interested in modern finance。 Writer did a good job making the story interesting and engaging。 Required reading if you're interested in modern finance。 Writer did a good job making the story interesting and engaging。 。。。more
David Radley
，
Very informative and interesting but only if the machinations and mechanisms of high finance are your cup of tea。
Rob
，
The story of Long Term Capital and the collapse of the Russian bond market。 You can practically pinpoint the moment where they stray from their expertise and let hubris took the wheel。
Sasha Nelson
，
3。5I love a good tale of corporate hubris， and When Genius Failed fits squarely into this genre。 However， as an actual book， it came up a bit short of me。 The "human element" was missing as very few of the key players got any sort of background that made it possible to root for them or at least relate to them， other than Meriwether。 Also， while I'm fairly comfortable with financial jargon， this one was REALLY in the weeds， so I think unless you're very familiar with fixed income trading， yield c 3。5I love a good tale of corporate hubris， and When Genius Failed fits squarely into this genre。 However， as an actual book， it came up a bit short of me。 The "human element" was missing as very few of the key players got any sort of background that made it possible to root for them or at least relate to them， other than Meriwether。 Also， while I'm fairly comfortable with financial jargon， this one was REALLY in the weeds， so I think unless you're very familiar with fixed income trading， yield curves， and derivatives， it's just a bit hard to follow the details around LTC's strategy， other than "the models didn't account for systemic risks。" I think Lowenstein could have done a stronger job of translating the story for a more casual follower of financial tales。 。。。more
Guilherme Menezes Varela de Araújo
，
Repetitive and exhausting，The author chose a unnecessarily prolonged approach towards telling the story of the Hedge Fund's leverage crisis。 Constantly repeating the same information across different parts of the book。 Repetitive and exhausting，The author chose a unnecessarily prolonged approach towards telling the story of the Hedge Fund's leverage crisis。 Constantly repeating the same information across different parts of the book。 。。。more
LT
，
7/6/21 - reading Zero to One; curious what happened to John Meriwether （sounds SO familiar but can't quite place him） 7/6/21 - reading Zero to One; curious what happened to John Meriwether （sounds SO familiar but can't quite place him） 。。。more
Alice
，
3。5
Bru
，
Too spoiled reading Micheal Lewis financial narratives to let this be given 5 stars， but awesome story with some very prevalent lessons。
Aaron Fidler
，
I liked it， but it wasn’t the fastest read。 The best part， in my opinion， was the last chapter and then the epilogue where the author writes about how the government hasn’t done enough to regulate new financial instruments like derivatives。 How true that turned out to be！
Vikas Suresh
，
Been wanting to read for a while。 It’s very well， I had some wrong perceptions about LTCM based on things I have heard （folklore of sorts） from people in my industry。 This book sets record straight things and gives a very important lesson that is not to trust statical models blindly or to find comfort in them。
Ayuko
，
Can a tightening of regulation prevent the next LTCM？ Possibly， but complex financial products keep coming up in the name of derivatives。 Esoteric financial models， such as Black–Scholes model， are useful in many industries that wish to hedge risks。 My take from this detailed account of the LTCM debacle is that when genius failed， there were limited consequences。 Wall Street can take risks because even the disgraced boys can move on with their lives and have another go at an adventure that may c Can a tightening of regulation prevent the next LTCM？ Possibly， but complex financial products keep coming up in the name of derivatives。 Esoteric financial models， such as Black–Scholes model， are useful in many industries that wish to hedge risks。 My take from this detailed account of the LTCM debacle is that when genius failed， there were limited consequences。 Wall Street can take risks because even the disgraced boys can move on with their lives and have another go at an adventure that may cause havoc to the rest of the world。 。。。more
Chaht Kumar
，
Theory and reality are not always the same。 Real world conditions can not be accounted for in theory。 This book shows a lot about the human condition- the ways in which greed and arrogance can consume the smartest of individuals， the ways in which emotions are volatile during times of uncertainty， and as mentioned before that our perception is not always reality。 Financial booms and crashes continue to happen even though there are more and more well-proven theories developed everyday。 Markets an Theory and reality are not always the same。 Real world conditions can not be accounted for in theory。 This book shows a lot about the human condition- the ways in which greed and arrogance can consume the smartest of individuals， the ways in which emotions are volatile during times of uncertainty， and as mentioned before that our perception is not always reality。 Financial booms and crashes continue to happen even though there are more and more well-proven theories developed everyday。 Markets and people can remain irrational longer than you can stay solvent。 Sorry for the word dump :） 。。。more
Andrew Breza
，