Roger Lowenstein - When Genius Failed - The Rise and Fall of Long Term Capital Management

Fourth Estate

An imprint of HarperCollinsPublishers

1 London Bridge Street

London SE1 9GF

www.harpercollins.co.uk

First published in Great Britain by Fourth Estate in 2001

Copyright © Roger Lowenstein 2001

Roger Lowenstein asserts the moral right to be identified as the author of this work

A catalogue record for this book is available from the British Library

All rights reserved under International and Pan-American Copyright Conventions. By payment of the required fees, you have been granted the non-exclusive, non-transferable right to access and read the text of this e-book on-screen. No part of this text may be reproduced, transmitted, down-loaded, decompiled, reverse engineered, or stored in or introduced into any information storage and retrieval system, in any form or by any means, whether electronic or mechanical, now known or hereinafter invented, without the express written permission of HarperCollins

HarperCollins Publishers has made every reasonable effort to ensure that any picture content and written content in this ebook has been included or removed in accordance with the contractual and technological constraints in operation at the time of publication

Source ISBN: 9781841155043

Ebook Edition © DECEMBER 2013 ISBN: 9780007375790

Version: 2018-07-31

To Maury Lasky and Jane Ruth Mairs

Past may be prologue, but which past?

–HENRY HU

Cover

Title Page ROGER LOWENSTEIN WHEN GENIUS FAILED The Rise and Fall of Long-Term Capital Management

Copyright Copyright Contents Cover Title Page Copyright Dedication Epigraph Introduction THE RISE OF LONG-TERM CAPITAL MANAGEMENT 1 Meriwether 2 Hedge Fund 3 On the Run 4 Dear Investors 5 Tug-of-War 6 A Nobel Prize THE FALL OF LONG-TERM CAPITAL MANAGEMENT 7 Bank of Volatility 8 The Fall 9 The Human Factor 10 At the Fed Epilogue Notes Index Author’s Note and Acknowledgments About the Author Other Works About the Publisher Fourth Estate An imprint of HarperCollinsPublishers 1 London Bridge Street London SE1 9GF www.harpercollins.co.uk First published in Great Britain by Fourth Estate in 2001 Copyright © Roger Lowenstein 2001 Roger Lowenstein asserts the moral right to be identified as the author of this work A catalogue record for this book is available from the British Library All rights reserved under International and Pan-American Copyright Conventions. By payment of the required fees, you have been granted the non-exclusive, non-transferable right to access and read the text of this e-book on-screen. No part of this text may be reproduced, transmitted, down-loaded, decompiled, reverse engineered, or stored in or introduced into any information storage and retrieval system, in any form or by any means, whether electronic or mechanical, now known or hereinafter invented, without the express written permission of HarperCollins HarperCollins Publishers has made every reasonable effort to ensure that any picture content and written content in this ebook has been included or removed in accordance with the contractual and technological constraints in operation at the time of publication Source ISBN: 9781841155043 Ebook Edition © DECEMBER 2013 ISBN: 9780007375790 Version: 2018-07-31

Dedication Dedication Contents Cover Title Page Copyright Dedication Epigraph Introduction THE RISE OF LONG-TERM CAPITAL MANAGEMENT 1 Meriwether 2 Hedge Fund 3 On the Run 4 Dear Investors 5 Tug-of-War 6 A Nobel Prize THE FALL OF LONG-TERM CAPITAL MANAGEMENT 7 Bank of Volatility 8 The Fall 9 The Human Factor 10 At the Fed Epilogue Notes Index Author’s Note and Acknowledgments About the Author Other Works About the Publisher To Maury Lasky and Jane Ruth Mairs

Epigraph Epigraph Contents Cover Title Page Copyright Dedication Epigraph Introduction THE RISE OF LONG-TERM CAPITAL MANAGEMENT 1 Meriwether 2 Hedge Fund 3 On the Run 4 Dear Investors 5 Tug-of-War 6 A Nobel Prize THE FALL OF LONG-TERM CAPITAL MANAGEMENT 7 Bank of Volatility 8 The Fall 9 The Human Factor 10 At the Fed Epilogue Notes Index Author’s Note and Acknowledgments About the Author Other Works About the Publisher Past may be prologue, but which past? –HENRY HU

Introduction

THE RISE OF LONG-TERM CAPITAL MANAGEMENT THE RISE OF LONG-TERM CAPITAL MANAGEMENT

1 Meriwether

2 Hedge Fund

3 On the Run

4 Dear Investors

5 Tug-of-War

6 A Nobel Prize

THE FALL OF LONG-TERM CAPITAL MANAGEMENT

7 Bank of Volatility

8 The Fall

9 The Human Factor

10 At the Fed

Epilogue

Notes

Index

Author’s Note and Acknowledgments

About the Author

Other Works

About the Publisher

The Federal Reserve Bank of New York is perched in a gray sandstone slab in the heart of Wall Street. Though a city landmark building constructed in 1924, the bank is a muted, almost unseen presence among its lively, entrepreneurial neighbors. The area is dotted with discount stores and luncheonettes—and, almost everywhere, brokerage firms and banks. The Fed’s immediate neighbors include a shoe repair stand and a teriyaki house, and also Chase Manhattan Bank; J. P. Morgan is a few blocks away. A bit farther to the west, Merrill Lynch, the people’s brokerage, gazes at the Hudson River, across which lie the rest of America and most of Merrill’s customers. The bank skyscrapers project an open, accommodative air, but the Fed building, a Florentine Renaissance showpiece, is distinctly forbidding. Its arched windows are encased in metal grille, and its main entrance, on Liberty Street, is guarded by a row of black cast-iron sentries.

The New York Fed is only a spoke, though the most important spoke, in the U.S. Federal Reserve System, America’s central bank. Because of the New York Fed’s proximity to Wall Street, it acts as the eyes and ears into markets for the bank’s governing board, in Washington, which is run by the oracular Alan Greenspan. William J. McDonough, the beefy president of the New York Fed, talks to bankers and traders often. McDonough wants to be kept abreast of the gossip that traders share with one another. He especially wants to hear about anything that might upset markets or, in the extreme, the financial system. But McDonough tries to stay in the background. The Fed has always been a controversial regulator—a servant of the people that is elbow to elbow with Wall Street, a cloistered agency amid the democratic chaos of markets. For McDonough to intervene, even in a small way, would take a crisis, perhaps a war. And in the first days of the autumn of 1998, McDonough did intervene—and not in a small way.