The book tells the story of Long-Term Capital Management (LTCM), an American hedge fund which commanded more than $100 billion in assets at its height. Among LTCM's principals were several former university professors, including two Nobel Prize-winning economists. The book is separated into two sections: the rise and the fall. Chapters 1-6 correspond to the first section and chapters 7-10 the second.
Between 1994 and 1998, the fund showed a return on investment of more than 40% per annum. However, its enormously leveraged gamble with various forms of arbitrage involving more than $1 trillion went bad, and in one month, LTCM lost $1.9 billion. On the precipice of not only an American financial disaster, the fund's imminent collapse had significant international monetary implications, jeopardizing the financial system itself. Prompted by deep concerns about LTCM's thousands of derivative contracts, in order to avoid a panic by banks and investors worldwide, the Federal Reserve Bank of New York stepped in to organize a bailout with the various major banks at risk.
"Following the success of his first foray into the financial markets with a biography of Warren Buffett (entitled ""Buffett: The Making of an American Capitalist""), Roger Lowenstein strikes once again in 2000 with the publication of his second book on the financial markets entitled ""When Genius Failed: The Rise and Fall of Long-Term Capital Management"" - a short biography and chronology of the infamous hedge fund (Long-Term Capital Management) that nearly collapsed the world's financial system, along with its many founders and advisors, including John Meriwether, David Mullins (former Vice Chairman of the Federal Reserve), Robert Merton and Myron Scholes (two academic heavyweights in finance who would go on to win the Nobel price in economics in 1997).
Lowenstein's ability to come up with a concise, coherent story and his experience in financial journalism is strongly evident in this book. Not only can Lowenstein weave together and tell a great story (this author felt he was being led through the history of the fund and its characters by one of its inner partners while reading through this book), he also pays attention to details whenever it is needed - and he succeeds greatly by catching many important subtleties (such as in the beginning of Chapter one when he used one of those ""subtleties"" in Meriwether's early career to explain the basis of LTCM's core business model and the subtle, but gradual ""style drift"" that brought down the hedge fund afterwards) as well as making many interesting observations along the way (such as the fatal flaw LTCM committed when it started engaging in stocks arbitrage as opposed to sticking to bond arbitrage).
Roger Lowenstein, author of the bestselling Buffett: The Making of an American Capitalist and When Genius Failed: The Rise and Fall of Long-term Capital Management, reported for the Wall Street Journal for more than a decade and wrote the Journal's stock market column "Heard on the Street" and also its "Intrinsic Value" column. He now contributes articles and reviews to the Journal and the New York Times Magazine and is a columnist for SmartMoney Magazine.