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

by Roger Lowenstein

UBS, Long-Term’s new big investor, also had gambled on equity volatility, and that and other exotic trades were turning into a disaster for the bank. Rumors were circulating of massive losses in the derivatives unit, run (with total autonomy) by Goldstein, who had pocketed an $11.5 million bonus for 1996.35 When toted up, UBS’s losses in 1997 would reach $644 million. Among other bad trades, UBS lost heavily on Japanese convertibles, which Long-Term had understood better. Cabiallavetta, the bank’s chief executive, had long protected Goldstein. Now he finally realized that his pet trader was destroying the bank. In November, Cabiallavetta fired Goldstein. Then, in December, Cabiallavetta admitted that his bank was bereft of leadership and humbly struck a merger with the archrival Swiss Bank. Although Cabiallavetta would stay as chairman and the bank would keep the UBS name, Swiss Bank was clearly the winner. Basel filled most of the important jobs and imposed its more conservative culture on the gunslingers in Zurich. Ironically, by merging with its flamboyant rival, Swiss Bank had become a party to the Long-Term warrant that it previously had spurned.