When Genius Failed: A Cautionary Tale of Hubris and Financial Disaster

The story of Long-Term Capital Management (LTCM) is a cautionary tale of how even the brightest minds can fail spectacularly. The firm's founders, John Meriwether and Robert Merton, were both geniuses in their field.

Their strategy of using complex mathematical models to predict market movements was revolutionary at the time. This approach allowed them to make huge profits in the early years, but it also set the stage for their eventual downfall.

In 1998, LTCM's losses mounted to $4.6 billion, forcing the Federal Reserve to intervene and prevent a global financial disaster. This event was a stark reminder of the dangers of hubris and the importance of humility in business.

At the heart of the Long-Term Capital Management (LTCM) story were a group of brilliant and ambitious individuals.

John Meriwether, the founder and head of the LTCM arbitrageurs, was the mastermind behind the hedge fund.

Larry Hilibrand, Eric Rosenfeld, Robert C. Merton, Myron Scholes, and Victor Haghani were all partners at LTCM.

Jon Corzine, a former CEO of Goldman Sachs, was also involved with the firm.

Here are some of the key players at LTCM:

The book "When Genius Failed" received numerous accolades, including being chosen by BusinessWeek as among the best business books of 2000.

Publishers Weekly gave the historical coverage a positive review, but also noted that the author obscures his narrative with masses of data and overwritten prose.

Many reviewers praised the author's ability to explain complex financial topics, with Kirkus Reviews dubbing the book an "entertaining and informative history" of LTCM.

Floyd Norris, then chief financial correspondent of the New York Times, reviewed the book positively, highlighting the author's exceptional clarity and insight.

The Wall Street Journal described the book as a story of "hubris and financial peril", while Kirkus noted that the author guides readers through the thickets of high finance with a lucid style and a sense of humor and amusement.

Long-Term Capital Management, or LTCM, was a hedge fund that shone bright for four years before its swift and dramatic fall in 1998. The fund was created by John Meriwether, a Chicago-born mathematician and businessman, who brought his team of academics to Wall Street.

Meriwether's team, including Eric Rosenfeld, Gregory Hawkins, and Lawrence Hilibrand, were all MIT wunderkinder who had been transformed by computer research in the bond market. They were known for their condescending and secretive nature, but their huge profits kept everyone happy.

LTCM's trades went bad in a dizzying succession of events, starting with Russia's declaration of a moratorium on its debt in August 1998. Brazilian and Mexican bonds weakened, and the Asian markets declined, causing all of LTCM's trades to go bad.

The fund lost $553 million on August 21, 1998, alone, a loss that was far beyond what their mathematical model had predicted. In fact, the model had calculated that a loss of more than $35 million in one day was unlikely.

The 14-bank bailout group bickered and backstabbed, but it saved the day, and by December 1999, Meriwether and his old crew were back in business with a fresh $250 million and a new name.

Picking up where Liar's Poker left off, the story of Long-Term Capital Management is a tale of a group of elite investors who believed they could beat the market and create limitless wealth.

Founded by John Meriweather, a notoriously confident bond dealer, the fund was hailed as a new gold standard in investing from the beginning. It was a discreet private investment club limited to those rich enough to pony up millions.

The fund was the banks' own favorite, and it achieved a run of dizzyingly spectacular returns. New investors barged each other aside to get their investment money into LTCM's hands.

As competitors began to mimic Meriweather's fund, he altered strategy to maintain the fund's performance, leveraging capital with credit on a scale not fully understood and never seen before.