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

by Roger Lowenstein

Mahathir had some of the right culprits but the wrong crime. Foreigners could hardly be blamed for deserting a listing ship; their sin was having provided the too-easy short-term credit that had launched the ship at flank speed. Comforted by Treasury Secretary Robert Rubin’s bailout of Mexico, Western banks and investors had shoveled money at Asia, fueling speculative investments and underwriting the region’s corrupt behavior. Rubin had paved the way by urging Asian governments to lift controls on capital and thus to allow the money to pour in—despite the area’s appalling lack of corporate disclosure and regulatory oversight. “The simple fact is that very sophisticated banks loaned to Indonesian companies, without any real knowledge of their financial condition,” noted James Wolfensohn, president of the World Bank.21 Though Western investors had repeatedly made the same mistake—today romanticizing the developing world, tomorrow coming to rue their naïveté—the bankers never learned. In 1996, $93 billion of foreign capital had flooded Indonesia, Malaysia, the Philippines, South Korea, and Thailand even as their economies were slowing. Now that same money was draining out, unnerving markets around the world. From Long-Term’s point of view, both Asia’s uphill and downhill slopes were instructive. Easy credit, which hedge funds also enjoyed, had led to ill-advised and excessive investments. Then, when the tables had turned, Greenspan’s much-vaunted liquidity was nowhere to be f...