Book Review: When Genius Failed

Sunday, December 07, 2008

When Genius Failed, Roger Lowenstein

Lowenstein's historical account of Long-Term Capital Management's rise and fall is an absolutely amazing study. The hubris of the genius lead to taking insane risks leveraging up the fund 30-to-1, not including the derivatives portfolio in excess of $1 trillion in notional value. These brilliant academics bet, and bet large, with a "reversion to the mean" philosophy actually believing they could accurately predict the statistical chance of loss in any given month. As if the fund's leverage were not enough, and showing the incredible hubris of these men, they further leveraged themselves personally to invest in the fund. Once you have read and digested this book and the manager's actions, you will be appalled. Then, consider what we have seen with our five-largest investments banks in 2008 and you will be further amazed. LTCM's actions shocked market participants in 1998 when their books were revealed. Fast-forward ten years and our investments banks had taken even larger gambles! It is sad to say that LTCM has lost some its shock after least it was actually a hedge fund, not an investment bank. Either way, this book is a must-read for any financial professional!


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