You don’t need to be a genius to read this book or understand how Long Term Capital Management managed to squander $4.5bln in just 5 weeks in the summer of 1998. Yes 5 weeks !!!
John Maynard Keynes said that the market can stay rational longer than you can remain solvent. If there was ever a case to prove his point LTCM is it. From Meriwether’s insipid leadership to the main traders Hillbrand Haghani believing their own invincibility and their market model, the book is an amazing insight into the rise, fall and eventual bail out by Wall St of this overexposed Hedge Fund.
What made me a little irritated reading this book was the fact that it was the complex derivative trades that LTCM took out that undone them. Not the trades per se but the fact the Fed and other banks had no idea what LTCM were playing at and that major Wall St banks and UBS were all hedged against each other without knowing that LTCM were at some points leveraged 100:1! Does any of this sound familiar ? Greenspan said after LTCM were saved that the Fed should have let LTCM die in order to bring some discipline into the market. Banks and Major funds need to know that there isn’t always a bail out.
No suprise then that 10 yrs later when Lehman and Bear Stearns faced problems; they were hung out to dry.
Lowenstein research is thorough and I imagine this is the authoritative account of LTCM’s demise. Worth a read and wonder how on earth the world’s banks managed to get themselves into the same position just 10 yrs later.