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

by Roger Lowenstein

With the exception of stocks in America, which are specifically subject to insider trading laws that are enforced as nowhere else, trading on private information goes on all the time. Investment banks that also operate proprietary bond-trading desks, such as Salomon and Goldman, publicly boasted of exploiting their knowledge of the “customer flow.” Translated, this meant that when a Salomon or a Goldman got wind of which way its customers were running, it often ran there too—and fast. This was why Goldman’s previous stewards had refused to get involved in proprietary trading; the possibility of conflicts of interest was just too great. But by 1998, Goldman was known as an aggressive, bare-knuckled trader that had long since abandoned any pretense of being a gentleman banker.