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

by Roger Lowenstein

In retrospect, the outside investors’ pleas to stay in the fund would seem ironic, and the forced redemption of their money would come to seem a godsend. It was the partners who would suffer the most. But without the benefit of hindsight, the partners’ obsessive pursuit of wealth carried more than a whiff of greed. Now that they had the scale to operate worldwide, they had no interest in managing money for others and largely froze them out. They added an unusually self-serving touch, tacking on fees, for the first time, to the bonus money invested by some of their own employees! The partners justified the forced redemption as a sensible response to diminished prospects. Myron Scholes said it was ironic that Long-Term was giving money back at the same time that newcomers were piling into the field.23 The implication was that Long-Term was prudently scaling back in the face of shrinking spreads. Yet the fund was not going to shrink by one iota. Returning capital only reduced the equity supporting its assets, which weren’t, in fact, shrinking at all. Indeed, at a time when opportunities were drying up and the portfolio was bloated with 7,600 positions, the fund was defiantly and ill-advisedly leveraging itself further, like an Icarus chasing the sun.24 Moreover, by forcing outsiders to sell, the partners were, once again, increasing their personal leverage in the fund. The personal debt, on top of the leverage in the management company and the debt in the fund itself, made fo...