Questions About When Genius Failed: The Rise and Fall of Long-Term Capital Management

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Michael Dobson They failed in two parts, a cause and a catalyst. The cause was that LTCM's models assumed that the financial markets fit a 'normal distribution' of r…moreThey failed in two parts, a cause and a catalyst. The cause was that LTCM's models assumed that the financial markets fit a 'normal distribution' of returns and thus they underestimated the probability of left-tail events. These are extremely negative events that can ruin those caught out like the 2008 crisis or, in this case, the Asian currency crisis and Russian debt crisis which serves as the catalyst. When this happened, LTCM failed spectacularly and Wall Street and the Feds had to find out a way to unwind LCTM's positions while mitigating the damage.

Simply: wrong model that underestimated large negative events --> improper use of leverage. Leverage + left-tail event --> blow up of LTCM(less)

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Did anyone else find this book really interesting to read post-2008 financial crisis? In retrospect you can see some alarm bells already sounding, and the notions of which companies and banks were stable are quite interesting.

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