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

by Roger Lowenstein

The fund earned 57 percent in 1996 (41 percent after the partners’ fees) thanks to leveraged spread trades on Japanese convertibles, junk bonds, interest rate swaps, and—again—Italian bonds. Also, when French bonds began to trade above German bonds (implying, curiously, that France bore less inflation risk than Germany), the partners cleverly, and successfully, bet on Germany to make a relative comeback. Their total profits in 1996 were an astounding $2.1 billion.15 To put this number into perspective, this small band of traders, analysts, and researchers, unknown to the general public and employed in the most arcane and esoteric of businesses, earned more that year than McDonald’s did selling hamburgers all over the world, more than Merrill Lynch, Disney, Xerox, American Express, Sears, Nike, Lucent, or Gillette—among the best-run companies and best-known brands in American business.