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

by Roger Lowenstein

However, Long-Term’s approach was so mathematical, it’s doubtful that all this intelligence made much difference. Its models said simply that Italy was “cheap” relative to historical patterns and anticipated risks. The partners assumed that, all else being equal, the future would look like the past. Therefore, in they went. Moreover, its models were hardly a secret. “You could pick up a Journal of Finance and see where someone was applying models,” a London-based trader at Salomon Brothers noted with respect to the Italy trade. “Anyone who had done first-year math at university could do it.” In truth, traders at other firms had been doing similar trades for years. By the time Long-Term started to trade, spreads in Italy had begun to narrow; rival firms were bidding arrivederci. Haghani got his first billion dollars’ worth or so of Italian bonds from Salomon, which wanted out. The common notion that Long-Term had a unique black box was a myth. Other Wall Street firms had also found their way to MIT, and most of the big banks were employing similar models—and, what’s more, were applying them to the same couple of dozen spreads in bond markets.