When Genius Failed

“When Genius Failed: The Rise and Fall of Long-Term Capital Management” is a book by Roger Lowenstein that explores the fascinating and cautionary tale of Long-Term Capital Management (LTCM), a hedge fund founded by Nobel laureates and financial experts.

The book details how LTCM, led by renowned economists and traders including Myron Scholes and Robert Merton, used sophisticated mathematical models to predict and profit from changes in the financial markets. Initially, LTCM enjoyed tremendous success, achieving extraordinary returns for its investors and attracting investments from major financial institutions.

However, the book delves into how LTCM’s highly leveraged positions and complex trading strategies eventually led to its downfall. When the Russian financial crisis hit in 1998 and markets moved unexpectedly, LTCM suffered massive losses that threatened to destabilize the global financial system. The Federal Reserve, fearing systemic risk, orchestrated a bailout involving major Wall Street banks to prevent LTCM’s collapse.

Lowenstein’s narrative not only provides a gripping account of the rise and fall of LTCM but also serves as a cautionary tale about the risks of excessive leverage, overreliance on mathematical models, and the interconnectedness of global financial markets.

Overall, “When Genius Failed” offers a compelling blend of financial history, human drama, and insights into the psychology of risk and reward in the world of high finance. It underscores the importance of prudent risk management and the potential consequences when financial genius fails to anticipate or mitigate systemic risks.