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

by Roger Lowenstein

their worst crisis yet, the partners moved $38 million out of the portfolio and into LTCM (which they personally owned) in the form of a loan. This dubious transaction provided the cash to pay salaries through the end of 1998, buying LTCM some time with the employees. The fund’s outside directors approved the loan, reasoning that if LTCM failed, the fund itself could topple. But the loan, even though contractually permissible, was shot through with conflicts of interest. The partners were withdrawing—or, technically, borrowing against—their own investment in the fund without giving the same opportunity to the outside investors for whom they were trusted fiduciaries. It was a sign of rank desperation.