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

by Roger Lowenstein

mood at Long-Term was relaxed, too. Though the fund’s leverage was up, and though the partners had taken out huge personal loans, their exposure seemed tolerable. According to one estimate, Hilibrand alone was worth half a billion dollars and Meriwether was in the low hundreds of millions. And the partners had seemingly tailored the fund’s portfolio to control the risk. According to their models, the maximum that they were likely to lose on any single trading day was $45 million—certainly tolerable for a firm with a hundred times as much in capital.2 According to these same models, the odds against the firm’s suffering a sustained run of bad luck—say, losing 40 percent of its capital in a single month—were unthinkably high. (So far, in their worst month, they had a lost a mere 2.9 percent.) Indeed, the figures implied that it would take a so-called ten-sigma event—that is, a statistical freak occurring one in every ten to the twenty-fourth power times—for the firm to lose all of its capital within one year.