This is an outstanding book that meticulously details one of the most significant debacles in financial history, the fall of LTCM.

I had previously studied the case related to this, but this book makes the background and the involvement of almost every investment bank crystal clear.

Some of the details regarding how the fund was floated are perhaps a bit dull. However, overall, it unfolds just like a thrilling crime novel and manages to keep one's interest piqued.

As an individual working in the financial services industry, I would highly recommend this book to those who are interested in this field.

Many of the current risk management practices have their roots in this very case. It provides valuable insights and lessons that are applicable even today.

Whether you are a professional in the financial sector or simply someone with a keen interest in finance, this book is definitely worth a read.

It offers a comprehensive and in-depth look at a major event that had a profound impact on the financial world.

One of my all-time favorite books is one that I have re-read at least once, if not twice.

It provides an extremely prescient account of the failure of LTCM in the 90s. Interestingly, it includes many of the key players who were also involved in the GFC of 2008, and there are many similar themes.

This book serves as a warning against overconfidence in one's own models and assumptions, and also about failing to recognize when you're the only one in a market.

I often find myself thinking about it during other periods of financial institution failure or trouble.

Perhaps 10 years from now, someone will end up writing a similar book about synthetic risk transfers, private credit, or the byzantine ways that PE funds seek to ensure returns to investors.

It makes me wonder what new financial challenges and failures will emerge in the future and if we will learn from the mistakes of the past.

The book really makes you think about the complexity and instability of the financial world and the importance of being cautious and aware of potential risks.

Long Term Capital Management was a hedge fund composed of a group of former outstanding bond traders from Solomon Bros., along with some highly influential financial academics (including two Nobel prize winners), and one former central banker. They were the brightest stars in the business, brimming with arrogance and greed beyond imagination. They also appeared to be as excellent as they believed themselves to be. In just five years, they turned a billion dollars into 4.5 billion dollars. However, in a few short months, they lost it all and nearly brought down the financial sector in the process.

It's a remarkable story, and Lowenstein tells it masterfully. He simplifies the complex trading structures, making them relatively easy to understand. For instance, he does a great job of explaining how a fund could take long or short positions on equity volatility. And I won't attempt to repeat that here.

There are two main themes. First, there is the arrogance and greed involved. This led LTCM to trade with a leverage of 30:1, and even higher as they began to collapse. That means they were controlling approximately 120 billion dollars in assets with just 4 billion in equity in the fund. And that didn't include their risks in more complex derivatives. I'm not sure anyone knows what their exposure was there. The second main theme is the over-reliance on mathematical models. These models are derived from the Black-Scholes method for pricing options (indeed, Scholes was a partner in LTCM). And these, in turn, stem from the efficient market hypothesis and the random walk theory associated with it. In essence, these theories state that the current price always reflects all known information, and future price movements are randomly distributed according to a bell curve.

There are several ironies. LTCM, which firmly believed in the efficient market, did everything possible to secure better deals with the banks that financed them and with their clearing bank. In other words, they didn't simply accept the prevailing price. One tactic they used was to ingratiate themselves with these people by inviting them to a luxurious golf club in Ireland owned by one of the partners. When dealing with their bankers, at least, they felt there was some room for market inefficiency.

Worse still, for the first four years, the fund performed incredibly well. During that entire period, their worst month was a 2.9% decline. The partners saw this as a conclusive validation of their method and their own genius. And they used this success as a justification for increasing leverage even further. But no one, not even the book, seems to realize that the early success was already a warning sign that their models didn't work. The success they achieved was not something that their models would have predicted. The event that wiped out the company, according to their own models, was a 10 sigma event: something that might occur once in several lifetimes of the universe, but probably not. (It's worth noting that this 10 sigma event happened again the year after the company collapsed. So instead of once in forever, the event happened twice in just over a year.) But no one has said how unlikely their success was according to their own models. It may not have been as unlikely as the collapse, but it was far from what anyone, including the partners, initially expected. In short, the firm experienced two black swan events. The first worked in their favor as volatility continuously decreased without a hitch for four years. And the second blew up the firm. My point is that they should have also paid attention to the first black swan event.

When Genius Failed offers a captivating account of the journey of a hedge fund. This fund believed it had cracked the code to outperform the market by leveraging math, computers, and the minds of several literal geniuses. However, the flaw in their strategy was the excessive overleveraging of their company, reaching a staggering 30x leverage. Moreover, they failed to fully anticipate the intricate web of interrelationships in world affairs. As a consequence, the company's holdings' value plummeted, causing it to shift from turning away potential investors to narrowly escaping complete collapse.

I would recommend When Genius Failed to two distinct types of readers. Firstly, for those who delight in corporate schadenfreude, similar to fans of books like Bad Blood and Billion Dollar Loser. Secondly, it is also relevant for individuals who rely on quantitative models to describe human activity. This book provides valuable insights and lessons for both these groups, making it a worthwhile read.

Models are often seen as the epitome of beauty and success, but the truth is that they can have a negative impact on society.

Firstly, the unrealistic body standards that models represent can lead to body dissatisfaction and eating disorders among young people. Many models are extremely thin, and their images are often airbrushed and enhanced to make them look even more perfect. This can make people feel that they are not good enough and lead them to engage in unhealthy behaviors in an attempt to achieve the same look.

Secondly, the fashion industry that models are a part of can be very wasteful and environmentally damaging. The constant production of new clothes and the use of cheap, disposable materials contribute to pollution and waste.

In conclusion, while models may seem glamorous and desirable, we need to be aware of the negative impact that they can have on our society. We should strive to promote a more realistic and healthy body image, and encourage the fashion industry to be more sustainable and responsible.

Magnífico. The construction of history by Lowenstein is truly incredible. It is a remarkable feat that he has accomplished.

The exhibition of the protagonists' motivations, including their arrogance in attempting to mold the world, is both fascinating and thought-provoking. It makes us stop and reflect on the profound consequences that these dynamics have had and will continue to have in the future crises of the global financial system.

We are left to wonder how such hubris could lead to such far-reaching and potentially disastrous outcomes. It serves as a stark reminder of the importance of understanding the complex forces at play in the financial world and the need for greater caution and wisdom in our actions.

The professors failed to take into account the fact that people, including traders, are not always rational. This is the real lesson from the downfall of Long-Term.

Regardless of what the models might suggest, traders are not mere machines controlled by silicon chips. Instead, they are highly impressionable and tend to imitate others.

They have a tendency to act in herds, following the actions of the group. When things go well, they flock together, and when faced with difficulties or uncertainties, they retreat in large numbers.

This behavior can lead to market inefficiencies and extreme fluctuations. Understanding this human aspect of trading is crucial for developing more accurate models and strategies.

It is essential to recognize that traders are influenced by emotions, biases, and social factors, which can cause them to deviate from rational decision-making.

By acknowledging and accounting for these factors, we can gain a better understanding of market dynamics and make more informed investment decisions.

Gripping business classic - why did Long-Term Capital Management fail? This is a question that has intrigued many in the business world. The firm seemed to have it all, yet it still collapsed. Why did people give them so much money? Their reputation and the promise of high returns perhaps lured investors in. How did they build the mystique? With their team of brilliant minds and complex investment strategies.

Why did no one manage this group effectively? Maybe there was too much trust in their abilities. Why did no one see the black swan? It could be that they were too focused on the models and not enough on the real-world risks. Didn't anyone pay attention to fundamentals? Apparently not, as they overlooked some crucial aspects. Were they as unpleasant as they all seem? That's a matter of perception, but their actions did have consequences.

How do such unpleasant people get these kinds of investors? Through their charm and the allure of quick profits. Who needs to earn that kind of crazy money? It seems that many are willing to take the risks. Don't they have any ethics? This is a valid question, as their actions had a significant impact on the financial markets. Overall, this book is good at discussing the fundamentals of investment for laypeople like me and analyzing all the flaws. It's a very accessible and interesting read that provides valuable insights into the world of finance.

The book raises two interesting questions:

Firstly, to what extent can the risk models that use the past to attempt to predict the future be useful in moments of great irrationality in the markets?

Secondly, could the organized rescue by the FED not give room for Moral Hazard in the future?

Well, I think the 2008 crisis gives us some answers to these questions. During the 2008 financial crisis, the traditional risk models failed to accurately predict the magnitude and severity of the crisis. The markets exhibited extreme levels of irrationality, with investors making decisions based on emotions rather than rational analysis. This shows that the risk models that rely on historical data may not be sufficient in times of market turmoil. Additionally, the actions taken by the FED to rescue the financial system did raise concerns about Moral Hazard. The bailouts and stimulus packages provided by the FED may have encouraged banks and other financial institutions to take on excessive risks in the future, knowing that they would be bailed out if things went wrong. However, it is also important to note that the actions taken by the FED were necessary to prevent a complete collapse of the financial system and to avoid a deeper and more prolonged recession.

A well told story of extreme arrogance, greed, recklessness, vanity...

It is a tale that unfolds with characters who seem to be blinded by their own self-importance and insatiable desires. Their actions are driven by a sense of entitlement and a disregard for the consequences that lie ahead.

Lessons learned:

“Life Always has a fat tail” Fema. This statement serves as a reminder that unexpected and extreme events can occur, no matter how well we think we have planned or prepared. We must always be ready for the unforeseen.

“The efficient market hypothesis is the most remarkable error in the history of economic theory” Robert Shiller. Shiller’s words highlight the fallacy of believing that markets are always rational and efficient. In reality, emotions and human behavior often play a significant role in market movements.

“We’re So Rich, We Can Be Dumb” San Francisco Chronicle. This headline encapsulates the dangerous mindset that wealth can lead to complacency and a lack of common sense. We must not let our financial success cloud our judgment and make us vulnerable to making poor decisions.

These lessons serve as a wake-up call, urging us to be more humble, cautious, and aware of the potential pitfalls that lie ahead.

Grrrrrr.

The details here almost seem insignificant. The overall contours of the story will nearly always remain the same. It's about greed and hubris. Alan Greenspan lamented excessive regulation, even as and after things went horribly wrong precisely because there was so little regulation. People paid mere lip service to the concept of risk.

In this specific instance, there were abnormal levels of secrecy. These individuals believed they were exceptionally intelligent (and they were - two of them won the Nobel prize shortly before the fund collapsed) and that their secret formulas and portfolio allocations were extra special.

On the positive side, in the case of LTCM, nothing actually illegal was done, and the government didn't rescue them with taxpayer money (the Fed arranged for a consortium of Wall Street banks to carry out the bailout). As the situation began to deteriorate, many of these individuals transferred assets into their wives' names so they wouldn't lose everything. (Moral: get married?) Even as the terms of the bailout were being negotiated, these individuals insisted that year-end bonuses be included in the deal. Does this sound familiar?

After the bailout, and the public humiliation and disgrace, most of them launched new funds. Isn't America wonderful?

This is a very interesting read that doesn't delve too deeply into the details of the financial products. Instead, it provides a brief explanation, enabling one to gain a basic understanding and continue reading.

However, as someone not from the USA, I had difficulty remembering all the names that were mentioned.

It would have been helpful if there were some additional context or perhaps a glossary to assist in keeping track of the various terms and names.

Despite this minor inconvenience, the overall article was engaging and offered valuable insights into the subject matter.

I look forward to reading more on this topic and learning about the different financial products and their implications.

Perhaps in future articles, the author could provide more in-depth analysis and examples to further enhance the reader's understanding.