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

by Roger Lowenstein

THE FEDERAL RESERVE SYSTEM was created, in 1913, for many reasons, but the underlying one was that people no longer trusted private bankers to shepherd the financial markets. Prior to the Fed’s founding, the government had had no effective weapon to temper the country’s economic cycles, nor was there much it could do to ease the periodic crises that afflicted Wall Street. Too often, the government had had to go hat in hand to a private banker for help. By the Progressive Era, with its suspicion of trusts and its faith in regulation, people wanted a bank that would represent the public interest. Ever since, the Fed has been a public servant but one that works in close proximity to private banks and to Wall Street. It is a delicate role, for the Fed is supposed to regulate banking but not to shelter bankers. It must protect the functioning of markets without appearing to be too close—too protective—of the banks it watches over.