Hedge-Fund Geniuses Failed Again. When Will We Learn?
The ghost of LTCM haunts a Bank for International Settlements report on last month’s bond market upheaval.
Beware of feedback loops.
Photographer: cosmin4000/Getty Images
A few weeks ago, I recommended When Genius Failed, Roger Lowenstein’s masterly narrative of the meltdown and rescue of Long-Term Capital Management in 1998, as one of five books to read in self-isolation. It is a great read, and I suggested it because it covers a crisis that was in many ways a rehearsal for the all-in disaster that would follow 10 years later. The interest rate cuts and coordinated bailout with which the Federal Reserve dealt with LTCM might even be seen as the crucial acts in stoking the moral hazard and over-confidence that gave us 2008.
I must confess that I didn’t recommend it as a description of what was happening currently in the bond market. But it turns out that genius failed again. The Bank for International Settlements has put out a fascinating report on events last month. These are the key takeaways: