Home > Work > When Genius Failed: The Rise and Fall of Long-Term Capital Management
1 " If Wall Street is to learn just one lesson from the Long-Term debacle, it should be that. The next time a Merton proposes an elegant model to manage risks and foretell odds, the next time a computer with a perfect memory of the past is said to quantify risks in the future, investors should run—and quickly—the other way. On Wall Street, though, few lessons remain learned. "
― Roger Lowenstein , When Genius Failed: The Rise and Fall of Long-Term Capital Management
2 " As Keyes noted, one bet soundly considered is preferable to many poorly understood. "
3 " As Fama put it, “Life always has a fat tail. "
4 " With traders scrambling to pay back debts, Neal Soss, an economist at Credit Suisse First Boston, explained to the Journal, "You don't sell what you should. You sell what you can." By leveraging one security, investors had potentially given up control of all of their others. This verity is well worth remembering: the securities may be unrelated, but the same investors owned them, implicitly linking them in times of stress. And when armies of financial soldiers were involved in the same securities, borders shrank. The very concept of safety through diversification - the basis of Long-Term's own security - would merit rethinking. "
5 " As Keynes observed, there cannot be "liquidity" for the community as a whole. The mistake is in thinking that markets have a duty to stay liquid or that buyers will always be present to accommodate sellers. The real culprit in 1994 was leverage. If you aren't in debt, you can't go broke and can't be made to sell, in which case "liquidity" is irrelevant. But a leveraged firm may be forced to sell, lest fast-accumulating losses put it out of business. Leverage always gives rise to this same brutal dynamic, and its dangers cannot be stressed too often. "
6 " As the English essayist G. K. Chesterton wrote, life is "a trap for logicians" because it is almost reasonable but not quite; it is usually sensible but occasionally otherwise: "It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait "
7 " Lawrence Summers, now the U.S. Treasury secretary , told The Wall Street Journal after the crash, "The efficient market hypothesis is the most remarkable error in the history of economic theory. "
8 " But after Kapor took Merton's finance course, he decided that quantitative finance was less a science than a faith - a doctrine for ideologues "blinded by the power of the model." It appealed to intellectuals who craved a sense of order but could lead them disastrously astray if markets moved outside the model. "
9 " Finance is often poetically just; it punishes the reckless with special fervor. "
10 " A regulator is part protector, part godfather. He dislikes a public spectacle; he is most effective when he can wield his power discreetly, by merely threatening to act or by cajoling others to do his bidding. "
11 " No stigma was attached; second acts on Wall Street are as common as they are in politics. Perhaps one cycle, be it an election cycle or an economic cycle, is the extent of the public's memory. "
12 " While a losing trade may well turn around eventually (assuming, of course, that it was properly conceived to begin with), the turn could arrive too late to do the trader any good - meaning, of course, that he might go broke in the interim. "
13 " Backed by their models, they felt more certain than others did - almost invincible. Given enough time, given enough capital, the young geniuses from academe felt they could do no wrong "
14 " Prophesy as much as you like, but always hedge. - Oliver Wendell Holmes, 1861 "
15 " Investors long for steady waters, but paradoxically, the opportunities are richest when markets turn turbulent. "
16 " As Peter Bernstein has written, nature's pattern emerges only from the chaotic disorder of many random events. "
17 " For men who prided themselves on being disciples of reason, their drive to live on the edge seemd inexplicable, unless they believed that becoming the richest would certify them as also being the smartest. "
18 " Once a typhoon breaks loose in markets, there is no telling where it will go. "
19 " Merton ... humbly warned, however, "It's a wrong perception to believe that you can eliminate risk just because you can measure it. "
20 " When you need money, Wall Street is a heartless place. "