Roger Lowenstein, author of the best-selling Buffett: The Making of an American Capitalist, reported for The Wall Street Journal for more than a decade, and wrote the Journal’s stock market column “Heard on the Street” from 1989 to 1991 and the “Intrinsic Value” column from 1995 to 1997. He now writes a column in Start Money magazine, and has written for The New York Times and The New Republic, among other publications.
He has three children and lives in Westfield, New Jersey.
(This interview was conducted by Haym Benaroya, October 2000.)
Summary of When Genius Failed: The rise and fall of Long-Term Capital Management is a tale of financial genius and arrogance. Long-Term took a highly mathematical approach to bond trading as devised by academics, two of the firm’s partners, who won the Nobel Prize in economics before the bottom fell out. In 1996, Long-Term’s profits of $2.1 billion overshadowed those of the most successful corporations. But by the fall of 1998, Long-Term had lost 77 percent of its capital. It was then forced into the position of having the Federal Reserve Bank of New York broker a bail-out deal with financial firms who were at risk because of their financial dealings with Long-Term. This book explains what these very smart men did and how it all came crashing down. There are many lessons to be learned, one that comes to mind being: knowledge is limited regardless of how sophisticated the models.
Resonance: I have just finished reading your latest book, When Genius Failed: The Rise and Fall of Long-Term Capital Management. It is a very interesting book to read. I didn’t expect to find a book written as a novel, with protagonists and, in some eyes, villains and heroes. I enjoyed it very much.
Lowenstein: Villains may be the wrong word-nobody threw a baseball bat or went to jail, right? But the story has a natural dramatic tension and, hopefully, this builds with every page.
Resonance: If I understand the details accurately, the main thesis of your work is that the reason Long-Term Capital Management (LTCM) imploded was because it was allowed, by the rules, to buy options using essentially 100% borrowed moneys. Have the rules on leveraging and debt changed since the time you completed writing this book?
Lowenstein: Borrowed money or, alternatively, using derivatives, which requires “no money.” The latter are just side bets that in LTCM’s case required no money down. The rules haven’t changed. But banks have gotten a lot tougher, so credit availability has diminished.
Resonance: You mentioned that Meriweather (JM), the founder and head of LTCM, and some of his colleagues, have created a new and similar fund, since the collapse of LTCM. Do you follow their progress and do you know if their new funds are similar to the ones that collapsed? Are they a more stable and responsible fund, or are we all skating on thin ice again?
Lowenstein: Again, JM has let credit to work with this time, and as the book notes, his new fund is working with less leverage. I doubt very much that we will see a sequel.
Resonance: Are there many hidden risks in the markets today, any of which could bring down the markets precipitously?
Lowenstein: They aren’t hidden. The Internet stocks have been a bubble waiting to burst–of course, though in my opinion not all of the bursting has already been seen. The reason these fiascoes keep coming back is that speculation visits a different area every time.
Resonance: In your opinion, was it a mistake to bailout LTCM? Or would we have a more stable and less volatile system today if the fund and its investors were allowed to absorb all losses?
Lowenstein: Acknowledging that the Fed did not, of course, “bail out” LTCM–it invited private banks and tacitly encouraged them to do the job–I think the more proper course would have been to stay out completely. I do not think the system or markets would have been paralyzed, as some officials testified was their fear, and I think the resulting losses and even temporary confusion would have sent a needed dose of discipline to investors and, importantly, to creditors and banks.
Resonance: When I was reading about the collapse of LTCM, I started to feel sorry for the partners, not intellectually but emotionally. You wrote about their personal tragedies along the way down. Of course, they took many people and organizations down with them, and one could easily argue that they all deserved much worse than they received. But, is this an irrational reaction? Did you have similar thoughts?
Lowenstein: As a writer you try to imagine and convey to the reader what the people in the story are think about and feeling, or at least try to convey the pressures and feelings they are subjected to. But you try not to get wrapped up in the feelings yourself.
Resonance: How long did it take you to conceive, research and write When Genius Failed?
Lowenstein: About 18 months, including the editing process.
Resonance: Long-Term was populated with Ph.D.s from elite institutions, a couple of Nobel Prize winners in economics, and many other very “smart” people. How could they have been so wrong?
Lowenstein: Their intelligence helped lead to their downfall. It helped to spawn their overconfidence, which led to their levels of risk.
Resonance: On a very narrow level, the rise and fall of LTCM parallels the management of our involvement in Vietnam. Defense Secretary McNamara and company, also very smart people, believed they could approach the war using rational systems analysis techniques. But they were dealing with an enemy that wasn’t going to allow some equations to govern their behavior. This phenomenon of “very smart people going in very wrong directions” seems to happen not that rarely. Do you see this as well?
Lowenstein: It’s a good parallel. Buffett says there are many people who are smart enough and even smarter than necessary to succeed in investing and also other realm. People succeed or fail depending on how they apply their brains. Another Buffett-ism is knowing your limits. McNamara & Co. didn’t realize that all of their “systems analysis” etc. wouldn’t count for much in the lowland delta, etc. of Indochina. LTCM made a similar mistake.
Resonance: When did you start believing that your career would center about writing, and business/finance in particular? Did your family support you in your decision to become a writer?
Lowenstein: I often mused about writing, novels and so forth, as a kid, but my career started taking shape in college, when I worked (nearly round the clock) for my school paper, The Cornell Daily Sun. My folks let know they’d be happy no matter what I did as long as it was something that turned me on. They’re tickled pink now.
Resonance: Did you read the business pages as a youngster?
Lowenstein: Certainly not.
Resonance: What are some of your skills that permitted you to succeed as a writer?
Lowenstein: I hard work, I’m articulate, I have an ear for language, and I read a lot.
Resonance: Following up on the previous question, it is always interesting to learn about how a particular author goes about his writing. Is a computer used? What are the working habits? For example, is an outline first written? The general question is, what are the mechanics of the process?
Lowenstein: Yes, a laptop, and yes, I do make an outline. In the LTCM book it was relatively easy because the chronology more or less imposed itself on the story. However, I did switch the order of two chapters at the last minute-just before I sent them to the publisher-really on impulse! … When in the midst of a book I get to work as early as I can and write for as long as I can. In between books, such as now, the schedule is much more fluid. I’ll work hard -sometimes very hard- on an article and then have some time off. It’s a very flexible routine, which I like.
Resonance: You wrote in an article in The Wall Street Journal in November 1997 predicting disaster with stock options. Were there others also ringing the alarm bells? Why was it easy to ignore the warning signs? Do you see other warning signs today? (Are CDs the only place to be today?)
Lowenstein: Watch those tech stocks! Don’t go long on real estate in Silicon Valley. And watch the dollar (vs. the Euro) -this too shall pass!
Resonance: Speaking to a young person of about 13-14 years old, just entering High School, what advice would you offer?
Lowenstein: Read, write if the spirit moves you, and read. Always read.
Resonance: What do you do in your free time? Do you have a few favorite web sites?
Lowenstein: Read, hike, hang with the kids, run, ride my bicycle, cook, not in that order. Nix on web sites.
Resonance: If you could solve just one of this nation’s problems, which one would it be?
Lowenstein: Hmmm. I’d like to see people, especially young people, spending more time talking to each other, getting outside, reading books, and less time on-line or watching TV. I have no solution and doubt that one exists.