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

by Roger Lowenstein

By 1995, when Meriwether’s traders were happily ensconced at Long-Term, the group had a total derivative book worth $650 billion. Within two years, the total doubled, to an astounding $1.25 trillion. Given the opaque nature of Long-Term’s (and everyone else’s) disclosures, it was impossible to pinpoint the fund’s derivative risks according to specific trades. And since many of its contracts were hedges that tended to cancel each other out, it was impossible to calculate Long-Term’s true economic exposure. One could say only that it appeared to be growing very quickly—as were exposures up and down Wall Street. Almost imperceptibly, the Street had bought into a massive faith game, in which each bank had become knitted to its neighbor through a web of contractual obligations requiring little or no down payment.