July 2006


It’s one of the popular finance books that Gong Rui introduced to me. Before it I read Monkey Business, where two ex-I-bankers tell the tales of the life of associates in an I-bank. And then I only read a few pages of Liar’s Poker because the style is too similar to Monkey Business, and I was too busy reading Paris tourbooks.

The book is about the rise and fall of Long Term Capital Management. I like it because it’s a lot like a technical report: straightforward and in a matter-of-fact tone. I first heard of LTCM from Zhang Zhiwei, who must have read the same book because the way he told the story was exactly the same as the book’s opening chapter, and back then I thought wow this guy knows a lot about Wall Street. It’s quite an amazing story, that how a group of math/finance/economics wiz, together with Scholes and Merton (who got their Nobel Prize while there) and Fed’s No. 2 David Mullins as partners, growing their asset to more than $100 billion (yes 100, mostly borrowed) from $1.25 billion in 4 years, only to crash spetacularly when Russia defaulted, almost bringing down the whole financial system with them.

LTCM’s main strategy is convergence arbitrage, which is to bet on bond spread to decrease, but it also did other crazy stuff like risk arb (bet on M&A to go/fall thru) and equity spread (pair of stocks). It uses very big leverage (more than 20, as much as 100) with huge position (hundred mils to bil). It believes blindly in market efficiency and predictability and constant volatility (which is one basic assumption of Black-Scholes). The Russian default isn’t the direct cause of its demise, rather the global risk-aversion sell off triggered by the default, which increased bond spread and market vol to “unreasonable” heights for “unreasonable” long time.

It’s fascinating to learn how LTCM strongarmed so many banks to give them credit at zero or almost zero margin, and how derivatives like swaps weave a tighter and tighter web encompassing the whole financial industry around the world, so perturbation in one market segment can easily wripple through the world, magnifying by chain reactions and copycat traders.

The second half of the book is like a top rate thriller, for which I could hardly put down the book (also it’s overdue). Within a few months, mostly in August and September of 1998, LTCM’s capitol went down from more than $4 bil to only a few hundred mil, hanging on the brink of bankruptcy. The Fed is afraid of a “systemic risk” that brings down the whole system, so it calls all Wall Street banks together for a bail out. After a week of crazy negotiation, 14 banks together provided almost $4 bil credit and saved the day.

The only thing I don’t like the book is the self-fulfilling prophecy tone. Sure LTCM was overboard arrogant and confident to fully believe in the power of their models, but who wouldn’t? The author made it seem like they’re doomed from the very first day, which is somewhat true, but they failed only after earning billions of profit in the first 4 years. They failed mostly for not hedging enough and keeping positions too long. Of course the real lesson learned is the same everywhere: there’s no silver bullet. You’re dealing with people, community, societies, and countries. All are inherently messy and illogic. You have to expect the unexpected.

I remember reading a Time magazine issue in 1999 where the cover showed Greenspan, then Treasury Secretary Robert Rubin (former Goldman chairman), and then Deputy Treasury Secretary Larry Summers, titled “The Committee to Save the World”. Lowerstein probably sneered at the cover a lot since he thinks Greenspan was oblivious to the perils of heavy derivatives trading (instead he lauded and fostered it to provide more “liquidity”), and Rubin’s bailing out of Mexico gave people a false sense of safety that some white knight would always arrive at the last moment to save the day, which was indeed the case with LTCM.

On a side note, it’s interesting to see then Goldman CEO Jon Corzine in the LTCM bailout (he almost arranged a buyout by Warren Buffet, Goldman, and AIG), who was just elected governor of our beloved New Jersey after being kiced out of Goldman by a boardroom coup, only to herald a state budget impasse that resulted in a week of state government shutdown, even forcing the Atlantic City casinos to close. And let’s see what Hank Paulson, Corzine’s Goldman successor, can do as the new Treasury Secretary, working with the new Fed chairman Bernankee. Mullins might have become Greenspan’s successor instead if not for LTCM. Are we better off?

UPDATE I was adding cover image to all the books I’ve mentioned, and when searching for “When Genius Failed Roger Lowerstein” I was astounded to see my blog as the VERY FIRST result. I hesitated for a long time whether I should correct it…



It was mentioned in 娜斯’s blog. I used to read her column in 读书 and liked it a lot. She lived (and lives?) in NYC for a long time and really knows what it’s like being a New Yorker.

This novel is funny as hell, like a good New York Post sports column. Like 娜斯 said, you have to be in NYC long enough to fully understand and appreciate the book, but anyone can get some quick laugh. I still don’t quite understand alternate side parking after reading it, but at least now I know what it’s about.

Good planners, people from New Jersey, except for the plan they must have hatched at some point to move to New Jersey.

“I read somewhere that the aggregate value of unexpired time left on meters people drive off from, just in New York alone, is the equivalent of the gross national product of something like 38 different countries.”

… the (subway) system had created as Tepper always thought of as the New York version of the Swedish sauna, offering, instead of an abrupt change from a hot tub to freezing snow, an abrupt change from furnace-like stations to freezing trains and back again.

Saw “The 40 Year Old Virgin” last night on HBO, had some good laugh even though it’s a stupid movie. Steve Carell was funnier in Comedy Central and The Office.

But what a great actress Catherine Keener is! She’s 46, not even pretty, but so likable and real. We watched Capote last week, and had there been some more shots of her, she would’ve won the Oscar. Philip Seymour Hoffman was great, but it’s an “easy” role to win the Oscar: he just needed to act kinky and kept up his voice. I think he’s better in Almost Famous in terms of acting.

Anyway I first saw Keener in Being John Malkovich, arguably the weirdest AND funniest movie I’ve ever seen. Mulholland Drive is weirder, and some movies are funnier, but nothing tops it for these two criteria combined. And what a stunning performance Keener did there! At the beginning I can’t understand why John Cusack would fall for her, but by the end I actually sincerely believed it. Maxine, what a thrilling name, though it was quite common a century ago…

That year she lost to Angelina Jolie in Girl, Interrupted, and this year to Rachel Weisz in The Constant Gardener. Hopefully third time will be her charm…

It’s been on my NY library hold list for a few months. Finally received it, and got some time to watch it last night, between kitchen work, World Cup, and Wimbeldon. What a great movie! George Clooney is not just a pretty face after all.

I wonder if it can be publicly shown in China, and even if it does, if anyone wants to see it. It should be the first thing a journalist student must see. Also reminded me of a Mind Meters blog on NY Times’ editor Rosenthal. Look at today’s TV and internet portals and newspaper and journalism in China, or US for that matter.

Wikipea has lots of Ed Murrow quotes. One from the McCarthy program, which was shown in its entirety in the movie is such an eloquent call against the rule of fear:

We must not confuse dissent with disloyalty. We must remember always that accusation is not proof and that conviction depends upon evidence and due process of law. We will not walk in fear, one of another. We will not be driven by fear into an age of unreason, if we dig deep in our history and our doctrine, and remember that we are not descended from fearful men— not from men who feared to write, to speak, to associate and to defend causes that were, for the moment, unpopular.

Here’s the full text of his speech at the beginning and end of the movie. Some striking words about TV:

We are currently wealthy, fat, comfortable and complacent. We have currently a built-in allergy to unpleasant or disturbing information. Our mass media reflect this. But unless we get up off our fat surpluses and recognize that television in the main is being used to distract, delude, amuse and insulate us, then television and those who finance it, those who look at it and those who work at it, may see a totally different picture too late.

All totalitarian regimes in the history know extremely well about the power of media and propaganda. They use it to their advantage to the fullest, while killing any dissident voice because it is more dangerous than silent disloyalty since it exposes truth and the regime’s weakness. In today’s world of commercialism and consumerism, it’s much easier to “distract, delude, amuse and insulate” the mass by mass media, most notably TV.