The book When genius failed: the rise and fall of long-term capital management created by Roger Lowenstein, popular financial journalist, helps reader to understand the general reasons of economic crisis. It is important to mention that the author had gained great experience in the sphere of fund market analysis before he wrote the book to be discussed. He worked for "Wall Street Journal" and wrote article for well-known magazines and newspapers initiating reports on finance. The analysis of LTCM was conducted by the author. This company had a great impact within the financial market that is why Lowenstein accepted the challenge to find out reasons for its failure.
Long-Term Capital Management occurred proved the fact that the market was non-effective as the result of its vulnerable nature. It specialized in the transactions with particular derivatives or securities of high risk. The Nobel Prize winner Merton Schouls was employed by the company. By the way of application the most complicated mathematical models the company has been really profitable. But one day LTCM went bankrupt due to some vital mistakes made by economic genius.
Throughout the story of LTCM the author presents to the reader the important features of the modern market pointing out the possible revision of such failures. At the same time it seems to me that some important facts such as statistic data were omitted by Lowenstein. This fact makes the book rather artistic story than well-grounded report. Nevertheless this trick simplifies the perception by target customers and makes it easier for understanding for readers without economic or financial background.
The book may be described as logic and coherent due to the way of language and narrative style that were chosen by the author. The ideas stated in the book are applicable to assessment of other similar events. Lowenstein provides the bibliography outlines for better understanding of the actions of the main players on the financial market. It also contributes a lot to finding out psychological reasons for models applied and decisions taken by different actors. It occurred that conclusions considering the market were the result of psychological reasons despite deep analytical and estimation processes. The author thoroughly describes life circumstances of the corporate players in order to understand the influence of the personal life experience on the decisions that was taken while working for LTCM.
The main value of this book is to point out the practical solution as the result of deep analysis of the prerequisites of the failure of LTCM. The currently applied theories of the risk management were heavily criticized by the author as their inefficiency was proven by that crisis. Furthermore the thesis of the market efficiency has been analyzed. The adoption of high leverage was one of the reasons for the failure of LTCM.
The book may be useful for the vast number of people who are interested in finance. Nevertheless it has some disadvantages such as little statistic data concerning the topic as to my mind. In general the book is informative enough and may be considered as scientifically based. Some effective practical solutions are proposed. The author has written the book in journalistic level with highest level of analytical reflection.
The basic component of the book may be described as interesting vision of the internal functioning of the company. The following factors are considered to have influenced and even invoked the failure of the company. They may be formulated as following:
Inefficient monitoring of value at risk
High leverage
Covering of leverage by the repo transaction
Overconfidence of the managers
Wrong market perception
Despite the evident fact that the strategy of the company was successful for the first period of time the main mistake lies within the initial strategy that was inadequate to the fund market reality. Furthermore it is impossible to always beat the market due to its nature. It can be beat consequently for a few times. But it is rather big luck when someone beat the market in a raw for long period of time. Such as game may be defined as high risk operations and requires extreme caution and strong self-discipline.
Another advantage of the book is description of complex economic terminology simple words to make it understandable for the large target audience. Reading the book is important for different individuals interesting in the ways of functioning of the market. At the same time critical analysis of the book is required to get accurate vision. Nevertheless some simplifications made by the author may have negative impact on the overall vision received by the author.
Conclusions
The book written by Roger Lowenstein conducts thorough analysis of the problems which caused failure of the Long Term Capital Management, one of the most successful hedge funds of that time, whose managers were Nobel Prize winners. This book may be recommended to everyone who is interested in topic of fund market.
Works cited
Roger, Lowenstein. When Genius Failed: The Rise and Fall of Long-Term Capital Management. New York: Random House, 2000. Print.
