id="u652d49f1-4a2d-5798-842c-9cb271eb7696">
ROGER LOWENSTEIN
WHEN GENIUS FAILED
The Rise and Fall of Long-Term Capital Management
Fourth Estate
An imprint of HarperCollinsPublishers 1 London Bridge Street London SE1 9GF www.harpercollins.co.uk
First published in Great Britain by Fourth Estate in 2001
Copyright © Roger Lowenstein 2001
Roger Lowenstein asserts the moral right to be identified as the author of this work
A catalogue record for this book is available from the British Library
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Source ISBN: 9781841155043
Ebook Edition © DECEMBER 2013 ISBN: 9780007375790 Version: 2018-07-31
To Maury Lasky and Jane Ruth Mairs
Past may be prologue, but which past?
–HENRY HU
Contents
THE RISE OF LONG-TERM CAPITAL MANAGEMENT
THE FALL OF LONG-TERM CAPITAL MANAGEMENT
Author’s Note and Acknowledgments
The Federal Reserve Bank of New York is perched in a gray sandstone slab in the heart of Wall Street. Though a city landmark building constructed in 1924, the bank is a muted, almost unseen presence among its lively, entrepreneurial neighbors. The area is dotted with discount stores and luncheonettes—and, almost everywhere, brokerage firms and banks. The Fed’s immediate neighbors include a shoe repair stand and a teriyaki house, and also Chase Manhattan Bank; J. P. Morgan is a few blocks away. A bit farther to the west, Merrill Lynch, the people’s brokerage, gazes at the Hudson River, across which lie the rest of America and most of Merrill’s customers. The bank skyscrapers project an open, accommodative air, but the Fed building, a Florentine Renaissance showpiece, is distinctly forbidding. Its arched windows are encased in metal grille, and its main entrance, on Liberty Street, is guarded by a row of black cast-iron sentries.
The New York Fed is only a spoke, though the most important spoke, in the U.S. Federal Reserve System, America’s central bank. Because of the New York Fed’s proximity to Wall Street, it acts as the eyes and ears into markets for the bank’s governing board, in Washington, which is run by the oracular Alan Greenspan. William J. McDonough, the beefy president of the New York Fed, talks to bankers and traders often. McDonough wants to be kept abreast of the gossip that traders share with one another. He especially wants to hear about anything that might upset markets or, in the extreme, the financial system. But McDonough tries to stay in the background. The Fed has always been a controversial regulator—a servant of the people that is elbow to elbow with Wall Street, a cloistered agency amid the democratic chaos of markets. For McDonough to intervene, even in a small way, would take a crisis, perhaps a war. And in the first days of the autumn of 1998, McDonough did intervene—and not in a small way.
The source of the trouble seemed so small, so laughably remote, as to be insignificant.