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When Genius Failed

The Rise and Fall of Long-Term Capital Management
by Roger Lowenstein

Published in 2000 — the definitive account of Long-Term Capital Management, the hedge fund run by Wall Street's most celebrated traders and two Nobel laureates, whose collapse in 1998 nearly took the global financial system with it.

Start Reading — Chapter 1 →
Why this book

This Book Club's The Black Swan makes the abstract, philosophical case that sophisticated risk models can create dangerous false confidence. LTCM is the concrete, blow-by-blow historical case study of exactly that failure mode playing out at the highest possible level of quantitative sophistication — a fund built and run by people who, on paper, understood risk modeling better than almost anyone alive at the time.

This course covers the book in four parts: the extraordinary pedigree and initial strategy that made LTCM look like a sure thing, how leverage transformed reasonable trades into existential risk, the 1998 crisis that unwound the fund in a matter of weeks, and the lasting lessons about leverage, correlation, and systemic risk the collapse left behind.

Table of Contents
The Rise
1
The Smartest Guys on Wall Street
2 min
LTCM's extraordinary founding team — John Meriwether's star Salomon Brothers traders plus two Nobel Prize-winning economists — and why it looked like an unbeatable combination.
The Strategy
2
Convergence Trades and Relative-Value Arbitrage
2 min
The core strategy LTCM traded: betting that small, temporary pricing gaps between closely related securities would converge back together.
3
The Mathematics of Leverage
2 min
How LTCM turned tiny, reliable-looking price gaps into enormous returns — and enormous risk — through extreme balance-sheet leverage.
The Rise
4
The Golden Years
1 min
LTCM's remarkable early performance and how success reinforced confidence in the model — and appetite for still more leverage.
The Fall
5
Cracks Begin to Show
2 min
Early 1998 warning signs — shrinking spreads, growing imitators, and a fund that had grown too large for its own strategy.
6
The Russian Default
2 min
The August 1998 Russian government debt default — the specific trigger that turned LTCM's shrinking edge into an unraveling crisis.
7
The Death Spiral
2 min
How mounting losses, forced deleveraging, and market panic fed on each other in the weeks that destroyed LTCM's capital base.
8
The Fed-Orchestrated Bailout
2 min
Why the New York Fed intervened to organize a private-sector rescue — not with public money, but by pressuring LTCM's own creditor banks.
Lessons
9
Lessons on Leverage and Model Risk
2 min
The book's core analytical lessons: how sound trades became existential risk through leverage, and how good models still failed to capture true tail risk.
10
The Recurring Shadow of LTCM
2 min
Why LTCM's specific failure pattern — genius, leverage, correlation breakdown — has recurred repeatedly in the decades since, despite being thoroughly documented.