A Brilliant Meltdownby
WHEN GENIUS FAILED
The Rise and Fall of Long-Term Capital Management
By Roger Lowenstein
Random House -- 246pp -- $26.95
On Aug. 21, John Meriwether appeared simultaneously in The Wall Street Journal and the Financial Times to commit a breathtaking act: He apologized. The overlord of Long-Term Capital Management, the superleveraged hedge fund that brought the financial world to the brink of calamity two years ago, is now overcome with "enormous remorse." Even more amazingly, he now acknowledges that he made mistakes. "Our whole approach was fundamentally flawed," Meriwether told the Journal. "The fundamental philosophy [at LTCM] was flawed," went an intriguingly similar comment, in the FT, from Meriwether's partner, Eric Rosenfeld.
But nowhere in this absurd display of ersatz breast-beating could you find the real reason for Meriwether's public-relations blitz: When Genius Failed is about to hit the stores. And the picture that emerges therein of Meriwether, and the other partners of LTCM, is anything but one of remorse. As told by Roger Lowenstein, author of a well-received biography of Warren E. Buffett, the story of Long-Term Capital Management is a morality tale--one in which the bad guys win. Lowenstein has written a squalid and fascinating tale of world-class greed and, above all, hubris.
Meriwether did not cooperate with Lowenstein in the writing of this book. But the understandable absence of this tight-lipped, enigmatic figure in no way detracts from the effort. And the same can be said for his recent attempt to steal this book's thunder. No amount of ultra-belated, phony contrition can detract from what really happened--and that is all in the numbers. Well, Lowenstein has the numbers, as well as the cooperation of enough of the human participants in the saga, to give his story depth.
The figures are displayed graphically at the beginning of the book--a performance chart of LTCM. One dollar invested in the partnership in March, 1994, grew to more than $4 by 1998. But just six months later, that $4 of LTCM was worth only 50 cents. What happened in the interim has been amply chronicled: The firm made vastly leveraged bets on various forms of arbitrage--wagers that the relationships between various markets and financial instruments would return to historic patterns. But the crisis in Russia fractured the financial world and skewed those patterns. By the time the smoke cleared, it took a private bailout, overseen by the Federal Reserve, to prevent the financial world from being overcome by what looked like a fiscal heart attack. "If there was one article of faith that John Meriwether discovered at Salomon Brothers," Lowenstein writes, "it was to ride your losses until they turned into gains." But that was impossible in 1998. There just wasn't enough liquidity, and the adverse price moves were just too severe. The "geniuses" of Long-Term Capital--including its two Nobel prize winners--hadn't counted on that.
As chronicled by Lowenstein, the founders and top partners of LTCM were very bright men, and they knew it. When they started the fund, the press coverage they received was fawning--and they believed it. When approaching investors, the LTCM people haughtily refused to disclose just what they were planning to do with all that money they were soliciting. "The partners were not arrogant in their mannerisms or even in their speech; it was more deep-seated," Lowenstein writes. Once a LTCM partner even tried to lecture a colleague's wife about molecular biology--her specialty. "`You're full of s---t,' she finally replied," according to Lowenstein.
That phrase, in fact, might serve as LTCM's epitaph. Sure, Meriwether and his partners did well for a while--before their house of cards collapsed. In May, 1994, Meriwether was able to reap a string of profits by engaging in trades pegged to the bond market's unusually high volatility at the time. Lowenstein wades through the arcane world of arbitrage with a sure hand. But unlike a previous, far less satisfactory book on LTCM, Nicholas Dunbar's Inventing Money, Lowenstein does not go into mind-numbing detail. And despite Meriwether's conspicuous nonparticipation, the author shows how the big brains in Greenwich, Conn., lost greenbacks at a far faster rate than they shed their hubris. There's a particularly unflattering portrait of Meriwether's ace trader, Lawrence Hilibrand, who was reduced to tears not by the havoc LTCM caused but by the need to turn over the firm to a consortium of 14 banks.
What When Genius Fails lacks, alas, is a particularly strong point of view. Lowenstein is laudably hard-nosed in his reporting, and his criticism of Fed Chairman Alan Greenspan is on the mark. So is his conclusion that the Fed-sponsored bailout sent the wrong signal to the markets. But considering the amount of sheer factual detail Lowenstein has managed to amass, his book fails to provide much in the way of other insights or opinions. Should hedge funds be regulated? Should leverage be restricted? Lowenstein doesn't provide answers to questions such as these.
Still, we probably won't get a better book about the events that roiled the markets in 1998. Yes, Meriwether may offer his own account of the LTCM disaster someday. But judging from his recent, disingenuous publicity campaign, I doubt that he would have anything very worthwhile to add to the history of the mess he created--and which Lowenstein has ably chronicled without his help.