In 1998, where were we? Most likely, we were taking part in some combination of cashing in on the dot-com bubble, following the McGwire-Sosa home run race, and wondering by what margin the Bulls would win their sixth title.
Underneath all that though, few people realized that the conditions were almost perfect for the Great Recession to start ten years early. And it required only a spark. That spark was Long-Term Capital Management.
Another book routinely ranked in the top 10 Wall Street reads, Roger Lowenstein’s “When Genius Failed” tells the story of that famous quant fund headed by John Meriwether of Salomon Brothers and led by head traders Larry Hillibrand and Victor Haghani.
If you invested $1 in LTCM at its founding in March 1994 and cashed out in April 1998, you would have received $4.08 before fees. If you waited until October of that year, you would have gotten about $.30.
If you’re looking for fun tales of late-90’s Wall Street ballertude, you’ll probably be disappointed. However, if you’re interested in the heavily quant-oriented world of bond trading, this book is a must. Mr. Lowenstein takes you through the strategies that resulted in those eye-popping returns, including a 59% growth for FY1995—still one of the best starts by any fund, ever. One of those strategies was “snap trades,” profiting on the narrowing of spreads between “on-the-run” Treasuries and “off-the-run” Treasuries, all backed with massive amounts of leverage. It proved very successful in Italy, where Mr. Haghani engineered a position on the two types of Italian government debt among the chaos of the coming monetary union. It made LTCM $600 million in one year.
Of course, all good things must come to an end, and the quants and professors found themselves in a macroeconomic environment that, try as they might, they couldn’t model themselves out of. The New York Fed ordered all the major US investment banks to “voluntarily” prop up the fund. The final chapter in the book revisits that intense boardroom meeting, which was almost derailed at the last minute by, surprise surprise, Goldman Sachs (I can hear you cackling, Midas).
Bailout was supposedly needed since LTCM’s tanking would have destroyed the balance sheets of all the financial institutions who had invested with them (which at that point was pretty much everyone).
More quantitative and less of an easy read than “Monkey Business” or “Liar’s Poker,” but definitely well-researched and relevant the Wall Street student. What might have happened if there was no bailout? Could it have been prevented? Would you trust John Meriwether with your money after that? SB to the first one who finds out what he’s doing now…
Read up, monkeys!
Monkey’s Review 1: Barbarians At the Gate
Monkey’s Review 2: The Financier
Monkey’s Review 3: Decision Points
Monkey’s Review 4: Debunkery
Monkey’s Review 5: When Genius Failed
Monkey’s Review 6: Monkey Business
Monkey’s Review 7: Death Of The Banker
Monkey’s Review 8: A Journey
Monkey’s Review 9: Damn It Feels Good To Be A Banker
Monkey’s Review 10: The Quants
Monkey’s Review 11: All About Hedge Funds
Monkey’s Review 12: The Unlikely Disciple
Monkey’s Review 13: Adventure Capitalist
Monkey’s Review 14: The Hedge Fund Book
Monkey’s Review 15: Investing In Hedge Fund of Funds
Monkey’s Review 16: Hilarity Ensues
Monkey’s Review 17: The Prince
Monkey’s Review 18: Markets Never Forget (But People Do)
Monkey’s Review 19: The Money Culture
Started his third hedge fund: JM Advisors Macro Offshore Fund, Ltd. Pretty much now seen as an average hedge fund guy after his losses in 08-09
Checked out his SEC filings and the company appears to still be operational. : http://us1.irabankratings.com/sec/SEC_DOC.asp?doc=edgar/data/1489599/00…
This is indeed a good book. Hillibrand reminds me of Sheldon Cooper from the Big Bang Theory.
This is a great read - really drives home the lesson it promotes, setting up LTCM and its strategies and then explaining the error in its ways. highly recommend.
The book never really describes JM trading. I assume he was more like a coach: he had some good players that played well in his system and as a result got a lot of credit. When the fund (team) started to tumble, he of course got grilled like any coach would had if he produced 4 winning seasons and then got the worst record in the league.
I believe in Liar's Poker JM is mentioned as the most successful bond trader at Salomon Brothers before he left. He was probably not quanty enough to understand all the nitty details that was being done at LTCM but wouldn't be surprised if a lot of ideas were his.
JM is barely mentioned in Liar's Poker; he is talked about in the first chapter in regards to a $1M game of liar's poker and that's pretty much it. I'm quite sure the main Salomon characters from the book were Gutfreund and Ranieri.
Actually, one of the first things mentioned in "When Genius Failed" is the author's strong suspicion about the famous story about JM in Liar's Poker about the million-dollar challenge with John Gutfreund, didn't actually happen. Lowenstein claims that was totally inconsistent with his character and not-so-subtly implied that Lewis made that story up to get people talking.
Glad everyone's enjoying these! I plan to keep them going.
Yea John Meriweather is on bloomberg and he runs his fund JM Advisors LLC. Which as the poser above said is his third fund I believe.
I tried to message him once but got no response.
great review. Thanks In The Flesh.
I really like the reviews by and for monkeys on WSO. Thanks In The Flesh, keep them coming.
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