When Genius Failed

"If I could write a book about the Long-Term case, it would be 'When Rich People Do Dumb Things'" - Warren Buffet (get exact quote)

I think that everytime Long-Term Capital Management is brought into discussion, it is incredibly hard to not bring images of the Icarus story to mind. Oh, the great oracles of the markets, the ones who had found the formula to beat it! If only they had not let greed into their hearts, the financial world would be at their hands!

I like to think of another story: the Galáticos. In 2002, Real Madrid had assembled what seemed to be the greatest football squad of all time. Ronaldo Nazário, Zinedine Zidane, Luis Figo, Roberto Carlos, David Beckham, among many others of the world's best players at the time. Given this stellar team, it would be reasonable to assume to football would be a solved game for the next couple of years. Yet, that's not quite what happened. Though they still went on to win a trophy (which one again?) and were a big commercial success, they didn't weren't as ubiquotous as one would expect. Why? Many reasons have been given out, but people usually agree that the issue was a lack of defense awareness. You can have the best attack in the world, but if you can't keep it together when times get tough, your success will be taken from you when you least expect. Long-Term was the Galáticos of the financial world.

2 Nobel laureats, one Federal Reserve vice-president, multiple Ivy League Phds, and a team that accounted for (include number) of the bottom line of one Wall Street's biggest banks. Not only were they going to play the game, but they were the ones that founded its rules. How could a team go wrong? "Derivatives are financial weapons of mass destruction" - Buffet (get quote again)

It is easy to accuse them of being greedy, stupid and imprudent. We have all watched The Big Short, we know how those Wall Street folks walk. The curious thing is that when you actually start reading about the case, you find out that characterizing LT as such a case becomes a gross oversimplification. Those guys weren't just victims of doing things they could have know better, such as the agents involved in the GFC. They were victims because they were SURE they were doing the best they could. The reason they levered themselves up so much wasn't so much as a degenerate gamble, but because in their world, they didn't view it as a gamble. And I think they were right to do. This is where the book jumps from just being a case study of imprudent risk management, and actually becomes an incredibly valuable lesson in psychology

Those guys were hot stuff. Meriwhether and most of the top traders worked at Solomon Brothers before creating LTCM, and they carried the trading department of the firm on their shoulders. Merton and Scholes had changed the landscape of finance through their paper, and were known as the main figures of financial economics The issue wasn't that they weren't hot stuff; it was because they knew it. They became fascinated by their