WHEN GENIUS FAILED: The Rise and Fall of Long-Term Capital Management.

• Author: Galbraith, James K.
• Position: Review

WHEN GENIUS FAILED: The Rise and Fall of Long-Term Capital Management

By Roger Lowenstein Random House, $26.95

Capital Mismanagement

Nobel prizes and billions of dollars don't always equal success

ONE DAY IN THE EARLY FALL OF I975 I SAT in the office of Rep. Henry S. Reuss (D-Wis.), Chairman of the House Banking Committee, for whom I then worked, along with Governor Hugh Carey of New York and Felix Rohatyn, Peter Goldmark, and David Burke of Carey's emergency team. Our purpose was to nail down a legislative plan to prevent the impending bankruptcy of the city of New York.

Toward the end of the meeting, Reuss asked me whether I had anything to add. "What about the windfall problem?" I asked. New York City bonds were wading at 30 cents on the dollar (or so I recall). When the bill went through, they would jump and anyone who bought them as we spoke would make a fortune. Carey turned to Rohatyn, "What about that, Felix?" Rohatyn shrugged, "Well, he's right."

Little did I know. The speculator existed, and his name, as we learn from Roger Lowenstein's genial account of Long-Term Capital Management, When Genius Failed, was John Meriwether. The New York crisis marked the takeoff of Meriwether's career, which went from bailout to bailout over 23 very exciting years.

When Genius Failed is a very good account of LTCM: clear, entertaining, informative, and judicious. The narrative has drama; the fate of the financial world was briefly at stake. It has complexity; there are serious issues of mathematics, statistics, and social science behind this story. Most of all, there is here a haunting portrait of our financial culture, where very ordinary people control extraordinary amounts of money.

Meriwether, pathologically self-effacing, emerges not unsympathetically in Lowenstein's portrait, except of course that he was crazily unsuited to running a financial firm. It is the other partners who fascinate, above all the professors Robert Merton and Myron Scholes, the fund's "philosophical fathers." The professors, we learn here, were peripheral to trading operations (Scholes, a "lesser partner" was "forever angling for more money"), but they were central to the marketing campaign. In this respect, their shared 1997 Nobel Memorial Prize didn't hurt at all.

Long-Term's basic strategy was to bet on the eventual convergence between the prices of extremely similar assets (the archetypal case being 30-year Treasury bonds issued today, "on the run," and the same...