Review: When Genius Failed: The Rise and Fall of Long-Term Capital Management

When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein
My rating: 5 of 5 stars

At first, the book did not feel that easy to read: price-to-equity ratios, risk multipliers, derivatives, swap contracts... But the more I read the more it felt like a financial thriller, only more captivating and eye-opening.

The book tells the story of a darling of the Wall Street in the 1990s, the firm that attracted awe of investors, financial regulators, academia and business leaders in general. The firm which was called Long-Term Capital Management was established and ran by the cream of the cream in the U.S. financial industry and financial education. Its investment placements were based on sophisticated mathematical models developed largely by the founders themselves. The partners managed to raise huge amount of investment in a very short time (because everyone else was blindfolded by the partners' credentials) making it one of the most successful start-ups in history. At certain moments, the firm was managing rather astronomical volumes of investments.

And then it all failed. It required an unlikely cooperation of the largest Wall Street banks to avoid a larger financial shock, similar to what happened in 2008 after the fall of Lehman.

There are many lessons to draw from this book:

Financial lessons:
- There is a big difference between investing and gambling. Similarity is that the risk is involved in both.
- Quantifying and estimating risks does not equal avoiding them- one should not mix up these two

Management/business lessons:
- An assembled dream team is the best one can make - it would attract the other dream players, clients and investors alike. Everyone wants to be part of success and it is contagious
- Loyalty and companionship is something that can and shall be fostered
- Risk-taking in a company shall be checked and balanced (to a certain extent)

Personal lessons:
- Greed and hubris have their big limits - you can only go further that much with them

A great example of how a book based on investigative journalism shall be written.