Another cautionary tale unfolds about those who grossly overestimate themselves and engage in the unthinkable, only to have it all come crashing down around them.

A notional exposure of a staggering $1T is based on a capital of just a few billion. These individuals believed it was safe simply because their models told them so. It's a classic error committed by those with a more scientific bent, but in this case, taken to an extreme.

The book has also made me reflect on the documentary "The Smartest Guys In The Room", which curiously only emerged several years later.

I'm quite impressed by the extensive amount of research the author has conducted and the remarkable way he has explained some of the more complex financial transactions. It provides a fascinating and eye-opening look into the world of high finance and the perils that can lurk within.

A good expose of LTCM and its backstory has been presented. I was already familiar with the story, but I didn't fully appreciate the arrogance of these individuals. They made fundamental business mistakes that are applicable to any business, not just the financial markets. For instance, they strayed from their core competency, which is a basic principle in MBA 101. They ventured into areas where they had no expertise or experience. It's analogous to a dry cleaners deciding to enter the food service business. Although it might seem like a good idea on the surface, it's not their area of specialization. LTCM got involved in other aspects of the financial markets where they really didn't belong. They made a significant amount of money and, due to their greed, wanted more. As a result, they transitioned from a specialized bond hedge fund to a general hedge fund that claimed to do everything. They believed they were so intelligent that their academic models could accurately predict the markets and that the markets would conform to their models. Maybe that was the case to some extent, but with their enormous leverage, they could be right 360 out of 365 days of the year and still face disaster because of their absurd leverage.

Told by my boss to read, this piece turned out to be better than I expected. At first, I was a bit reluctant, but as I delved into it, I found myself getting more and more engaged.

The ending was particularly interesting. It was when everything started to go horribly wrong that the story really took off. The author's reflections on the moral hazard of the Fed's involvement were quite thought-provoking. In a way, it seemed somewhat prophetic, as if the author had a premonition of what was to come.

I found myself pondering these ideas long after I had finished reading. It made me realize the importance of understanding the potential consequences of our actions, especially when it comes to matters of such significance. Overall, I'm glad my boss recommended this read, as it has given me a lot to think about.

I would simply not bet the house on never being wrong.

Making such a bet implies an absolute certainty that one will never make a mistake, which is an extremely bold and perhaps even foolhardy stance.

In life, we are all prone to errors and misjudgments. No matter how intelligent, experienced, or cautious we may be, there are always unforeseen circumstances, new information, or moments of human fallibility that can lead to mistakes.

Betting the house on never being wrong not only shows a lack of humility but also exposes one to significant risks. If we are too confident in our own infallibility, we may become closed-minded, resistant to new ideas, and less likely to learn from our mistakes.

It is much wiser to approach life with a degree of openness and flexibility,承认 that we may make mistakes from time to time, and be willing to learn and grow from them. This way, we can better navigate the uncertainties and challenges that come our way and avoid the potentially disastrous consequences of betting the house on an impossible guarantee.

3.5

This is a pretty good read.

I gave it a 3.5 rating. The reason for this is that I didn't understand a significant portion of it. However, it's important to note that this is more due to my own capabilities rather than the book being of poor quality.

I had put off reading this book for an extremely long time. I didn't think I would ever get around to it. But, in the end, I'm truly glad that I finally cracked it open.

From reading this book, I have learned a great deal. It has provided me with valuable knowledge and insights that I otherwise would not have had.

Despite the parts that I didn't fully understand, the overall experience of reading this book has been quite rewarding. I would recommend it to others, especially those who are willing to put in the effort to understand its contents.

I look forward to exploring more books like this in the future.

Takeaways:

1) Leverage is extremely dangerous. It can magnify both gains and losses, often leading to disastrous consequences.

2) No one has the ability to accurately predict the future. The financial markets are highly volatile and unpredictable, making it impossible to know what will happen next.

3) Psychology plays a significant role in our decision-making. It can trick us into taking bigger and bigger risks, especially when we are influenced by emotions such as greed and fear.

4) Due diligence meetings are mostly ineffective. They often fail to uncover the true risks and potential problems associated with an investment.

5) Wall Street has a notoriously short memory. It seems to forget the lessons of past crises and repeats the same mistakes over and over again.

In conclusion, it is essential to be aware of these takeaways when dealing with financial matters. We should approach investments with caution, do our own research, and not be swayed by emotions or the opinions of others.

Can't believe this is my first book for 2020

This is a truly great read. I thoroughly enjoyed Lowenstein's detailed account of LTCM's downfall.

It is important to note that this book definitely assumes a certain level of financial literacy on the part of the reader. Even I, with my background in finance, didn't fully understand the complex type of spread trading and arbitrage strategies that LTCM employed.

However, despite this lack of complete understanding, I definitely gained a profound appreciation for the extreme dangers of leverage. The story of LTCM serves as a powerful reminder of how quickly things can go wrong when too much leverage is involved.

Overall, this book is a must-read for anyone interested in finance, risk management, or the history of the financial markets. It provides valuable insights and lessons that are applicable not only to the world of finance but also to our daily lives.

Thrilling! It's a story that's hard to put down.

It serves as a sober reminder that even the giants of modern finance, those whose equations we encounter in textbooks, are not infallible. It vividly demonstrates just how difficult it is to measure and quantify risk. For a long time, volatility was used as a proxy for risk. Long Term's typical strategies were based on the idea that markets would become more efficient over time, which in turn would lead to lower volatilities and shorter spreads between treasuries and other riskier bonds. So, Long Term was typically short on treasuries and long on riskier bonds in various geographies.

However, when things get jittery, everyone rushes to safety and flocks to treasuries. The trigger for the jump in volatilities was the Asian crisis, while the major spark was the Russian default. (A nuclear power defaulting is a truly terrifying and fascinating proposition. Yields on ruble-denominated bonds skyrocketed to 200%! The stock market plummeted by 80%, and the ruble lost two-thirds of its value just two weeks after becoming free floating.) The fund, which had calculated that it was unlikely to lose more than $35 million a day, ended up losing $553 million after Russia's default.

There are several important lessons to be learned from this. First, don't lose money! Know what the maximum downside is. Second, life always has fat tails, and a normal curve isn't always a realistic representation. Third, especially in finance, history is not the only indication of the future, and the world might not be logical all the time. When people get jittery, everyone flocks to safety. You might be right in the long run, but you could still get burned in the short run.

As the quote goes, "Life is a trap for logicians because it is almost reasonable but not quite; it is unusually sensible but occasionally otherwise. Its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait."

The book I read was like a Michael Lewis book but without the sex. It was so confusing that I was left wondering what the fuck was going on at all times. The writing style was engaging, but the lack of clarity in the content made it a frustrating read. I found myself constantly flipping back and forth through the pages, trying to make sense of what the author was trying to convey.

The epilogue was somewhat clear, but it was not enough to save the book. It felt like a rushed attempt to tie up loose ends and provide some sort of conclusion. By the time I reached the end, I was already so disappointed that I didn't really care anymore.

In my opinion, financial reporting needs to do better. It should be presented in a way that is easy to understand and accessible to the general public. There is no excuse for such a lack of clarity in a book that is supposed to be about finance. I hope that future authors will take this into account and strive to make their writing more understandable and engaging.

Lowenstein's book, penned shortly after the downfall of Long-Term Capital Management (LTCM), seems to presage the 2007 - 2008 financial crisis. Sadly, many Americans had and still have no knowledge of this hedge fund. Its odd name didn't prevent it from collapsing within 5 years, dragged down by a complex web of derivatives transactions and excessive leverage, all stoked by Wall Street broker hubris. In 1998, the derivatives that sank LTCM were "equity volatility", while in 2008, it was "collateralized debt obligations". The name almost doesn't matter as the more esoteric the financial instrument, the more problematic it is, being so detached from real life that the average person can't understand its risk profile. And perhaps that's the point.

You might think that after injecting $3.5B to save LTCM in 1998 and organizing an orderly liquidation, the consortium of top-tier banks would have learned their lesson. Clearly, they didn't. It's ironic that several of the firms that came to the rescue themselves imploded a decade later, like Bear Stearns, Merrill Lynch, Lehman Brothers, AIG, and many others. In LTCM's case, Lowenstein blames the US Federal Reserve. By begging and cajoling the bankers into throwing LTCM a lifeline, the banks learned not "we should avoid doing that again", but that the Fed would always be a backstop for "too big to fail" organizations. The banks were complicit in making LTCM what it was, extending credit on generous terms and being sucked in by prestigious names in finance like Merton Miller and Scholes. They were all too eager to be duped again in the lead-up to the later financial crisis, using almost exactly the same playbook. And in some cases, with the exact same players, like Jon Corzine, Dick Fuld, and others!

Aside from severe regulatory failures (which persist to this day), there are two obvious lessons in finance from this book. First, past performance is no predictor of future performance because markets aren't random normal distributions. They may resemble them in most cases, but it's in the tails where you really get hurt, and "black swan" events are more frequent than mathematicians would have you believe. Second, yes, eventually markets always rebound, but you may be bankrupt by then. I'm sure bond spreads eventually returned to historical norms, and if LTCM had had time and capital, it would have made a handsome return on its bets. But neither time nor capital is infinite, something the so-called geniuses in Greenwich, CT didn't consider. As disciples of "efficient markets" theory and neoliberalism, they probably didn't pay much attention to Keynes' observation, "Markets can remain irrational longer than you can remain solvent", and that was their undoing.

One final note. It's been twenty years since LTCM blew up and ten years or so since the last financial crisis. In the midst of a pandemic-induced recession, the stock market is irrationally at an all-time high, having recouped all its losses in 2020. What outrageous, derivative-backed bets is Wall Street making right now that will soon torpedo the market?

Lowenstein showcases truly remarkable prescience.

"When Genius Failed" is not just an excellent read; it accurately anticipates the "weapons of mass destruction" risks, as Warren Buffett put it, which would ultimately result in the subprime meltdown and the Great Recession.

Reading this book, in conjunction with Kindleberger's "Manias, Panics, and Crashes," enabled me to foresee the Great Recession, stay away from it, and avoid any potential damage.

Moreover, it has been extremely beneficial in helping me to better understand the booms and busts that I will be exploring in my own forthcoming book, "Cleantech Con Artists."

This knowledge has given me a deeper perspective on the cyclical nature of economic events and has influenced the way I approach the subject matter in my work.

I am grateful for the insights provided by these two books and look forward to sharing my own understanding with readers through "Cleantech Con Artists."