The hedge fund or family office—in this case, Archegos—posts liquid collateral as initial margin with the dealer. if you enjoyed the book „Inventing Money“ consider this that books sister – not twin – whereas Inventing Money is very heavy on financial modelling, this book is very heavy on the personalities that invented convergence arbitrage. And of course, when the big bankers realized they’d been had, they were vengeful. Lowenstein traces the unraveling of LTCM, and darkly hints that Goldman Sachs undermined the firm deliberately by selling identical positions while it was reviewing LTCMs books, driving up losses and making the firm easier to acquire. Only an effective intervention by a low-paid bureaucrat–Peter Fisher of the New York Federal Reserve–kept the banks together long enough to cobble together an orderly liquidation in the autumn of 1998. A few weeks after the debacle, I debated a Finance Department colleague in Texas on LTCM.

“Long-Term was so self-certain as to believe that the markets would never—not even for a wild swing some August and September—stray so far from its predictions.” Their decline occurred because human and market behavior isn’t always rational and predictable. eur is the cautionary financial tale of our time, the gripping saga of what happened when an elite group of investors believed they could actually deconstruct risk and use virtually limitless leverage to create limitless wealth. In Roger Lowenstein’s hands, it is a brilliant tale peppered with fast money, vivid characters, and high drama. John Meriwether, a famously successful Wall Street trader, spent the 1980s as a partner at Salomon Brothers, establishing the best–and the brainiest–bond arbitrage group in the world. A mysterious and shy midwesterner, he knitted together a group of Ph.D.-certified arbitrageurs who rewarded him with filial devotion and fabulous profits. Then, in 1991, in the wake of a scandal involving one of his traders, Meriwether abruptly resigned.

• Still, Meriwether, his ultra private partners, and Nobel Prize winner mathematicians could not have foreseen the world events that transpired in the later part of the 1990’s which had a negative effect on their investments.
• 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.
• In his new Afterword, Lowenstein shows that LTCM’s implosion should be seen not as a one-off drama but as a template for market meltdowns in an age of instability–and as a wake-up call that Wall Street and government alike tragically ignored.
• VW skyrocketed in value over 350% in two days as Porsche announced it was amassing a 75% stake in the company crushing short sellers.
• It’s always fascinating to here about the maladaptive and weird personalities of these chess masters or math minds.
• Indices do not incur costs including the payment of transaction costs, fees and other expenses.

Being one to adapt to a situation he found a niche for himself working within a division of Solomon and with other egghead intellectuals or quants, if you will. The quants, using quantitative methods , historic data and computer models, played the market to their advantage. Meriwether soon left his division of Solomon to create his own firm, Long Term Capital Management. By using an increasingly large amount of leverage to purchase Foreign exchange autotrading bonds and work the spread Long Term became quite a significant power on Wall Street in just a short period of time. Still, Meriwether, his ultra private partners, and Nobel Prize winner mathematicians could not have foreseen the world events that transpired in the later part of the 1990’s which had a negative effect on their investments. This book could have been just another rehashing of Wall Street greed but it is more than that.

For over 30 years, we have partnered with authors, publishers, and businesses to get books to speaking and training events, business conferences, and into company book clubs and reading lists—moving books and ideas into the business world every single forex day. Four years later, when a default in Russia set off a global storm that Long-Term’s models hadn’t anticipated, its supposedly safe portfolios imploded. In five weeks, the professors went from mega-rich geniuses to discredited failures.

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Author Roger Lowenstein joins MoneyBeat’s book-club round table to talk „When Genius Failed,“ which chronicles the rise and fall of what was considered the best and largest global hedge fund, Long Term Capital Management. By the spring of 1996, Long-Term had an astounding $140 billion in assets, thirty times its underlying capital.

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.

Lowenstein, Roger

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 when genius failed 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.

The rare Long-Term man with Renaissance interests, Modest, who was raised in Boston, loved the arts, literature, and opera. His interest in finance was more academic than entrepreneurial; he had never liked the senior partners’ autocratic reign and control over his time and had been thinking of bolting until 1998, when he had been made a junior partner. Although pricing a bond can largely be reduced to math, valuing a stock is far more subjective. “He took a bunch of guys who in the corporate world were considered freaks,” noted Jay Higgins, then an investment banker at Salomon. Meriwether created a safe, self-contained place for them to develop their skills; he adoringly made Arbitrage into a world apart. Because of Meriwether, the traders fraternized with one another, and they didn’t feel the need to fraternize with anyone else. The classic image of a Wall Street market trader is someone, usually a man, on the trading floor, shouting buy and sell orders, clutching a sheaf of trading tickets.

But derivatives most certainly increased Long-Term’s exposure. (Whether you buy a bond or simply bet on its price, you are exposed to the same potential gain or loss.) And these off-balance-sheet trades most definitely increased Long-Term’s riskiness. This book examines the history of Long Term Capital Management, a firm that failed during the 1998 financial crisis, and explains how the firm was built and constructed, and why it collapsed. Pretty vivid writing (my copy was annotated by a previous owner with many „!“), though the snark and schadenfreude levels tend to put one off a little bit. No one in the book comes off particularly well; Merrill Lynch probably the least badly off, and Goldman, Sachs comes across as a greedy villain, almost as bad as the protagonists. The explanation for why LTCM failed does seem to me to make sense, but as I say, the schadenfreude level is a bit off-putting. I am not especially interested in hedge funds or Wall Street.

About The Author

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.

In this business classic—now with a new Afterword in which the author draws parallels to the recent financial crisis—Roger Lowenstein captures the gripping roller-coaster ride of Long-Term Capital Management. When it was founded in 1993, Long-Term was hailed as the most impressive hedge fund in history. But after four years in which the firm dazzled Wall Street as a $100 billion moneymaking juggernaut, it suddenly suffered catastrophic losses that jeopardized not only the biggest banks on Wall Street but the stability of the financial system itself. The dramatic story of Long-Term’s fall is now a chilling harbinger of the crisis that would strike all of Wall Street, from Lehman Brothers to AIG, a decade later. In his new Afterword, Lowenstein shows that LTCM’s implosion should be seen not as a one-off drama but as a template for market meltdowns in an age of instability—and as a wake-up call that Wall Street and government alike tragically ignored.

VW skyrocketed in value over 350% in two days as Porsche announced it was amassing a 75% stake in the company crushing short sellers. Between 1994 and 1998, the fund showed a return on investment of more than 40% per annum. However, its enormously leveraged gamble with various forms of arbitrage involving more than $1 trillion went bad, and in one month, LTCM lost $1.9 billion. On the precipice of not only an American financial disaster, the fund’s imminent collapse had significant international monetary implications, jeopardizing the financial system itself.

Chicago (author

The source of the trouble seemed so small, so laughably remote, as to be insignificant. A load of tea is dumped into a harbor, an archduke is shot, and suddenly a tinderbox is lit, a crisis erupts, and the world is different. 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. Meriwether was one of the top bond traders at Salomon Brothers and later became head of the fixed income securities department . Meriwether was one of the first people on Wall Street to recruit mathematicians and physicists from schools like MIT and Cal. Meriwether was a harbinger of the conjunction between Wall Street and the Ivory Tower.

It appears that Credit Suisse and Nomura were left holding the bag and took the majority of the losses associated with Hwang’s Archegos. Based on the Archegos desire and the dealer’s assessment of counterparty risk with Archegos, the amount of leverage is decided upon. An example of leverage would be doing a Total Return Swap on 100 million shares of Viacom, where Archegos would post as margin the value of ten million shares of Viacom; the other 90 million shares are borrowed. A helpful and/or enlightening book, in spite of its obvious shortcomings. For instance, it may offer decent advice in some areas while being repetitive or unremarkable in others.

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For two years, his fiercely loyal team–convinced that the chief had been unfairly victimized–plotted their boss’s return. He gathered together his former disciples and a handful of supereconomists from academia and proposed that they become partners in a new hedge fund different from any Wall Street had ever seen. That doesn’t exactly sound like the guy you want to literally bet the bank on. His investors were quite upset to find that Hwang had gotten them into what was the “GameStop” short squeeze of the 2000s, Volkswagen, which ended in disaster.