When Genius Failed: The Rise and fall of Long-Term Capital Management By Roger Lowenstein - Book Report/Review Example

? Book report Lecturer Book report: When Genius Failed: The Rise and fall of Long-Term Capital Management: By Roger Lowenstein Roger Lowenstein, an American financial writer and journalist was born in 1955 to Helen and Louis Lowenstein of Larchmont, New York. He studied at and graduated from Cornell University. Roger Lowenstein has reported for the Wall Street Journal for over a decade. He spent two years, 1989 to 1991 writing Heard on the Street column, 1989 to 1991. Roger Lowenstein who is also a director at Sequoia Fund is married to Judith Slovin. Louis Lowenstein, his father was a Columbia University law professor and an attorney who wrote articles and books critical of the American financial industry (Krastyo, 2012). In Roger Lowenstein’s book, When Genius Failed: The Rise and fall of Long-Term Capital Management, he draws to the new Afterword parallels to the recent witnessed financial crisis. I like the way Roger Lowenstein grasps the gripping roller coaster ride of the Long Term Capital Management. It is interesting how the author explains not only how funds were made and lost, but also how the culture of Wall Street itself, the personalities of the partners of the Long Term, and the arrogance of their mathematical certainties contributed to their rise and fall. The characters in this book in my opinion contributed to their own rise and fall just as the author has captured their contributions to the financial crisis. The Roger Lowenstein’s book is a story of the unprecedented move by the New York Fed and the implausible heights that were reached by the Long Term Capital Management, and its ultimate demise (Lowenstein, 2001). Roger Lowenstein's book illustrates the story of Long-Term Capital Management; a remarkable firm that got was set up by a cosmological cast of partners in 1994 in the United States. These partners brought about the skills in arbitrage in a modern finance as well as in upper sections of the finance profession. Robert C. Merton and Myron Scholes, who are among the stellar partners who set up the firm, exemplified the talent quality that was attracted by Long Term for pricing derivatives. The two brought in the smartest minds into Long Term from academic finance. According to Roger Lowenstein's book, the Long Term Capital Management was a hedge fund in which a limited number of partners invest extremely huge amounts of money. Roger Lowenstein explains in his book how Long Term worked incredibly well at the beginning. The book details that Long Term had maintained focus on its vision and avoided speculations. With the minds that the firm had, it directed its focus on arbitrage problem and offered very generous and favorable loans. For the first few years, Roger Lowenstein explains that Long Term worked so well (Lowenstein, 2010). In my own personal tidbit, Long Term was brought up as one of the most impressive hedge fund in the history of Wall Street. However, four years after it was founded in 1993, it suffered so suddenly a catastrophic loss when a firm dazed Wall Street as a $100 billion money juggernaut. This jeopardized not only the historically stable financial system, but also the biggest banks on Wall Street. In my opinion, the Roger Lowenstein’s book is today a chilling herald of the financial crisis that would smack Wall Street in general ranging from AIG to Lehman Brothers a decade later. Roger Lowenstein’s book is actually one of those rare breeds and educational nerds. This is because of the way it tells the compelling financial crisis story without shying away from the engineering and technical details (Lowenstein, 2001). On the other hand, there are some few details I disliked about Roger Lowenstein’s book. He at many instances confused in the understanding of financial models, derivatives, as well as the role of judgment and models in the process of trading in his book. Roger Lowenstein views the Long Term’s failure as evidence that the Scholes and Merton’s mathematical models were wrong. He also suggests that going back to the happy financial world prior to the emergence of the mathematical models is the only way out. I believe the author missed it totally at this score. Although Long Term failed, one of the reasons why it was unsuccessful was that all its competitors embraced the same methods. For example, any other large financial house in the present day has numerous doctorates in economics who work on the exact quantitative trading models and strategy, which according to Roger Lowenstein is the essence behind the Long Term calamity. To some extent, some of the major wrong steps in the story of Long Term occurred when its traders began adopting tentative bets in the conservative model with no fashion. It is however difficult to note how the story of the Long Term supports the view of Roger Lowenstein that the exchange of funds from the profession of a country club to the scientific efforts is inherently flawed (Lowenstein, 2001). General, there is a lot of lessons to learn from the major elements of the book. I personally learned that an operation like the Long Term needs to take a lot of care in order to stay small. For example, a fund with about $0.5 billion in total assets will never experience the challenges that the Long Term had with its $5 billion worth of assets. In addition, I learned that much greater care is needed in leveraging. Any operation should not hesitate to block any sort of trade that comes from the gut. In fact, any form of trade, whether speculation or arbitrage need to be backed up by quantitative models and accorded sufficient scrutiny right from its inception to the actual trade. Summarily, I would say the Long Term’s story is great, but Roger Lowenstein’s book has captured much of its wrongs than good. However, I leave room for my classmates to give their opinions and views on this book (Lowenstein, 2002). In my own personal tidbit, the Long-Term Capital Management specialized in arbitrage, which generally refers to attempting to root out those locations in which one can obtain something for nothing. In the beginning, the trick of the Long Term Capital Management was to minimize risks by making arbitrage bets in pairs. In this regard, Roger Lowenstein gives a captivating example a security that was constructed wholly from the interest payments of the mortgage and another that was constructed exclusively from the mortgage principal payments. However, when the rates of interest are falling, mortgagees refinance their mortgages by paying off a little bit of more principal than they would in the normal circumstances resulting into a rising price of principal and falling interest. The reverse is true when the rates of interest fall. This has been the order of events in the Long Term Capital Management as detailed in Roger Lowenstein’s book (Lowenstein, 2004). In a greater extent, I agree with Roger Lowenstein in his support for the incredible way in which the Long Term worked well in the first years. In fact, some of the major elements of the book detail that the firm’s record in the first two years was a dollar return for the partners of above 40 per cent in a year, with a near zero risk. Roger Lowenstein states that this kind of return was actually obtained after management expenses and fees were paid summing up to about 10 per cent. This was an incredible return of approximately 50 per cent. However, couple of things went wrong thereafter: Roger Lowenstein’s book documents that the models and ideas that the Long Term used became familiar to everyone in the finance profession. In retaliation, the Long Term capital Management proved the sense to take its new ideas a notch higher. This led to a steady procession by the academic economists who started practicing arbitrage in all the major financial institutions. With a lot of certainty, the competition blunted the edge that was in the possession of Long Term, and resultantly driving down the returns (Lowenstein, 2009). Roger Lowenstein explains that Long Term adopted a strange fashion of handling the competition. The firm was already addicted to the 50 per cent returns; therefore Long Term increased its leverage when the margins shrank in order to maintain the high level of returns. Eventually, Roger Lowenstein asserts that Long Term was roughly leveraged 100 to 1: there was Rs. 1 of the capital from the partners for assets of about Rs. 100. Another wrong doing cited by Roger Lowenstein is that the firm could not afford the returns and lost discipline of the arbitrageur. This led to the beginning of the bare speculative activities; small when the overall position of Long Term was compared to them, but very huge when subjected to comparison with the real assets in the possession of the Long Term management (Lowenstein, 2001). The author highlights that the crises in Russia, Asia, and Brazil also contributed to the failure of the firm by hurting Long Term’s position through drying up the liquidity of the market. This left Long Term stuck with the largest position of illiquid markets in the world. Roger Lowenstein’s book details that these problems were responsible for the Long Term’s crisis. This is because the Long Term’s position was still fundamentally sensible even during August and September 1998 when losses were experienced. However, the leverage dulled the position and the losses became giant requirements as cash for the counterparties. The position of Long Term could not even be sold off because the liquidity dried up worldwide and the position was also too large. This is one part that Roger Lowenstein has documented with a lot of objectivity (Lowenstein, 2013). In summary, Roger Lowenstein has documented with a lot of objectivity. However, in spite of the objectivity, Roger Lowenstein does some poor job in telling the spectacular story of the Long Term Capital Management firm. Lowenstein comes from an old school in which stock picking was the only up to standard kind of investing, and gut feelings were the only permitted source of trading ideas. Roger Lowenstein has imbued his book with much hostility in opposition to derivatives, the use of arbitrage, and mathematical models (Lowenstein, 2001). In fact, in my own opinion, the book is a morality play. Roger Lowenstein says that bringing the academic talent in the fund management profession led to the world’s biggest foul. On the other hand, Roger Lowenstein as a financial journalist and author has done a great job in examining the academic experts, personalities, and the professional relationships in the Long Term Capital Management. He exposes the layers of numbers that are behind in its roller coaster ride with a defined concession of a talented surgeon. He also uncovers the way in which the characters were responsible for their own crisis (Das, 2011). For example, when the Long Term lost discipline of an arbitrageur, the returns took an opposing direction. I however leave room for my classmates to make their own judgment and give their opinions of the book. References Das, S. (2011). Extreme Money: Masters of the Universe and the Cult of Risk, Boston: FT Press Krastyo, M. (2012). Roger Lowenstein, New York: International Book Market Service Limited Lowenstein, R. (2001). When Genius Failed: The Rise and fall of Long-Term Capital Management, New York: Random House Publishing Group Lowenstein, R. (2002). When Genius Failed: The Rise and fall of Long-Term Capital Management: How One Small Bank Created a Trillion-dollar Hole, New York: Fourth Estate Lowenstein, R. (2004). Origins of the Crash: The Great Bubble and Its Undoing, London: Penguin Publishers Lowenstein, R. (2009). While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom As the Next Financial Crisis, New York: Penguin Group (USA) Incorporated Lowenstein, R. (2010). The End of Wall Street, Houston: Penguin Group Lowenstein, R. (2013). 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