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

by Roger Lowenstein

“You take Monica Lewinsky, who walks into Clinton’s office with a pizza. You have no idea where that’s going to go,” Conseco’s Max Bublitz, who had declined to invest in Long-Term, noted. “Yet if you apply math to it, you come up with a thirty-eight percent chance she’s going to go down on him. It looks great, but it’s all a guess.”

A central tenet of the partners’ philosophy was that markets were steadily getting more efficient, more liquid, more “continuous”—

Markets can remain irrational longer than you can remain solvent.

As he explained it, “The idea that you have a bell-shape curve is false. You have outlying phenomena that you can’t anticipate on the basis of previous experience.”

The professors had ignored the truism—of which they were well aware—that in markets, the tails are always fat.

The once-in-a-century flood had struck twice in two years.