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

by Roger Lowenstein

In April, Sandy Weill, still trying to digest his ill-considered acquisition of Salomon, announced the biggest financial merger in history: Travelers and Citicorp. The deal was emblematic of the Street’s Panglossian mood. Thirty-year Treasury yields had dipped below 6 percent, reminiscent of the stable and innocent bond markets of Meriwether’s youth. The belief in a brighter tomorrow, coupled with the general willingness to lend, pushed down rates for even the least creditworthy of borrowers. Spreads fell to their lowest levels in years. A-rated bonds fell to 60 points (down from 75 at the start of the year). The shrinking spreads worked like a tonic on Long-Term’s profit-and-loss statement. Having been flat in the first quarter, the fund earned almost 3 percent in April. The end of April, approximately, was the low point for spreads, the high point for confidence, and the high point for Long-Term Capital, which boasted $134 billion in assets. In just over four years, an investment in the fund had quadrupled, before accounting for the partners’ fees. After deducting this tithe, the value of a single dollar invested at the start had risen to $2.85—a phenomenal 185 percent profit in barely fifty months.