Inventing Money - Long-term Capital Management and the Search for Risk-free Profit (Hardcover)

The Washington Post described the collapse of the massive hedge fund Long-Term Capital Management as "one of the biggest financial missteps ever to hit Wall Street." The Wall Street Journal called the fund "one of [Wall Street’s] most aggressive offspring" and the Financial Times described it as "the fund that thought it was too smart to fail". Business Week put the collapse down to the fact that "Long-Term Capital’s rocket science exploded on the launchpad". LTCM was built on genius. Its founding partners included John Meriwether, the once legendary king of bond trading on Wall Street and Robert Merton and Myron Scholes, Nobel laureates in economics who between them (together with the late Fischer Black) all but invented modern finance through their theory on pricing options. Between 1994 and April 1998 LTCM seemed able to turn this genius into staggering profits. At its peak it commanded funds of US$130 billion and a derivatives portfolio with a notional value equivalent to the entire annual budget of the US Government, making fortunes for those who invested in it. Until suddenly it all went very wrong. Incredibly, it was the assumptions buried deep in the small print of Scholes and Merton’s theory on option pricing that had begun to break down, and during that fateful summer of 1998 this breakdown was further aggravated by the regulatory-approved risk management systems designed to avert such a disaster. Based on extensive research and interviews, Inventing Money takes the reader on a fascinating journey. Beginning in Ancient Babylon, Nicholas Dunbar steers a path encompassing the American Civil War, an obscure French mathematician, the chance meeting of Merton and Scholes in the late 1960s, Meriwether’s brilliant bond coup in the 1980s, up to and beyond the dark days of collapse and rescue in September 1998. As the story moves towards its incredible climax, the layers of LTCM’s trading activities are stripped bare to reveal brilliance and controversy. Merton, Scholes and Meriwether are at the con of this captivating story but as it unfolds, the reader is introduced to legendary characters in the world of finance, moments of groundbreaking scientific discovery and a clear explanation of the seemingly complex seeds of ultimate collapse — options, futures and derivatives. Finance