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

by Roger Lowenstein

J.M.’s design was staggeringly ambitious. He wanted nothing less than to replicate the Arbitrage Group, with its global reach and ability to take huge positions, but without the backing of Salomon’s billions in capital, credit lines, information network, and seven thousand employees. Having done so much for Salomon, he was bitter about having been forced into exile under a cloud and eager to be vindicated, perhaps by creating something better. And Meriwether wanted to raise a colossal sum, $2.5 billion. (The typical fund starts with perhaps 1 percent as much.) Indeed, everything about Long-Term was ambitious. Its fees would be considerably higher than average. J.M. and his partners would rake in 25 percent of the profits, in addition to a yearly 2 percent charge on assets. (Most funds took only 20 percent of profits and 1 percent on assets.) Such fees, J.M. felt, were needed to sustain a global operation—but this only pointed to the far-reaching nature of his aspirations.